Your Financial Future

Your Financial Future

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  YOUR FINANCIAL FUTURE YourGuide to Life Planning December 2015 We thought of you when we reviewed this article and hope you find it interesting. Please call if you have any questions and we hope all is well! Christian Phillips Phillips Financial LPL Registered Principal 1920 Tienda Drive Suite 202 Lodi, CA 95242 209-367-0868 Fax: 209-367-0811 [email protected] om http://lpladvisorweb.com /PhillipsFinancial/ CA Insurance Lic# 0A20651 In This Issue Common Estate Planning Mistakes -- and How to Avoid Them Estate planning can be as simple as drafting a will -- or as complex as setting up specialized trusts. When you are ready to create your own plan, it's wise to enlist the help of a qualified, experienced estate planning expert. When Changing Jobs, It Pays to Keep Track of Your 401(k) Indecision or lack of communication on your part may mean that the money sitting in a retirement plan when you leave a job could be transferred to an IRA -- or cashed out -- without your consent. How Taxes and Inflation May Affect Your Retirement Portfolio Inflation and taxes are two factors that can have a major impact on your retirement assets, but they are easy to forget when planning a retirement income strategy. Planning for Known -- and Unknown -- Health Care Costs in Retirement An EBRI study sheds light on different types of health care costs to consider in retirement. Rising Longevity and Your Retirement New research indicates that Americans are living, on average, two years longer than previously estimated. How might those extra years impact your retirement plans?
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  2 Your Guideto Life Planning Whether drafting a basic will or crafting an elaborate strategy involving trusts and tax planning, an estate plan can help reduce estate taxes, save on estate administrative costs, and specify how your assets are to be distributed. Common Estate Planning Mistakes -- and How to Avoid Them Estate planning can be a minefield of potential missteps, some of which could have far-reaching consequences. Many of the poor choices individuals make when planning for their own future or passing assets to their families are caused by "one-size-fits-all" planning strategies or well-intended advice from family or friends. Following are some common and potentially costly mistakes along with suggestions for avoiding them. Failing to plan. Whether drafting a basic will or crafting an elaborate strategy involving trusts and tax planning, an estate plan can help reduce estate taxes, save on estate administrative costs and specify how your assets are to be distributed. Today, the majority of Americans have no will. If you die without one, your estate will be divided according to the intestacy laws of your state -- not according to your wishes. This could create problems if your intended beneficiary is a minor child, a child with special needs, a favorite charity, or a combination of the above. In these cases, you need a will that details each contingency and a trust or multiple trusts to accomplish your goals. Not maximizing your marital estate exemptions. Perhaps one of the most important pieces of tax legislation passed recently is referred to as the "portability" provision. This means that if one spouse dies without using up his or her federal estate tax exemption -- $5.43 million in 2015 -- the unused portion may be transferred to the surviving spouse without incurring any federal estate tax. How might the portability provision work in a real life situation? Consider the following scenario involving the hypothetical $8 million estate of Jim and Helen: If Jim dies in 2015, the executor of his estate can elect to use the unlimited spousal exemption and can also transfer Jim's unused $5.43 million federal estate tax exemption to Helen. If Helen dies in 2015 with $8 million in assets, her estate will have a total of $10.86 million in federal estate-tax exemptions: the $5.43 million exclusion transferred from Jim and her own $5.43 million exclusion. As a result, none of Jim and Helen's $8 million estate would be subject to federal estate tax. As welcome as the portability provision may be, it still does not account for future appreciation of assets from the first spouse's estate. Nor does portability offer protection from creditors and others aiming to lay claim on an estate's assets. Traditional strategies like credit shelter trusts and bypass trusts do provide these benefits and therefore are still essential planning instruments for married couples. Naming a family member as executor. Your executor is the person who will be responsible for administering your estate after death. The responsibilities of an executor are serious, and you will want someone who will take them seriously. There are many important reasons to choose a paid executor -- a bank or trust company, for instance -- along with (or instead of) a spouse or family member. A professional executor is familiar with the probate process and may actually save the family money, keeping expenses under control. This will undoubtedly be an emotional time for your loved ones, and a family member may find it difficult to focus on the details involved with settling an estate. In addition, when you name a family member, especially a beneficiary as executor, you introduce the potential for conflict of interest. The larger the estate, the more likely those conflicts become. Relying on advice from family or friends. Would you go to a friend or relative for surgery or to fix your car if he or she was not a skilled surgeon or auto mechanic? Why would you take their advice about estate planning issues if they are not professional planners? When seeking a professional, look for a specialist -- someone who knows trusts, estate tax law, and probate issues. A specialist will have more experience and skill in his/her chosen area -- and that will translate into higher quality services provided in the most cost effective manner. No set of rules or advice can apply in all cases, but a sure way to avoid these and other problems is to rely on a trusted team of tax and legal professionals led by your financial advisor. This communication is not intended to be tax and/or legal advice and should not be treated as such. Each individual's situation is different. You should contact your tax/legal professional to discuss your personal situation. © 2015 Wealth Management Systems Inc. All rights reserved. 1-436522
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  3 Your Guideto Life Planning Make your wishes known -- an employer can only roll your account balance into a forced-transfer IRA if you provide no instructions as to what you would like to happen to your account balance. When Changing Jobs, It Pays to Keep Track of Your 401(k) Americans are on the move, not only in their leisure pursuits, but in their jobs as well. According to the Bureau of Labor Statistics, about 38% of U.S. workers change jobs every year. If your employment situation changes, do you know what your choices are for managing the money in your 401(k) account? Generally, workers have four options available to them: leave the money in their former employer's plan, transfer the money into their new employer's 401(k) (if allowed), roll the money into an IRA, or take a cash distribution. What many individuals don't realize is that if they fail to choose one of those options -- and their account balance is small enough -- the decision can be made for them. Specifically, current law allows employers to force participants with vested balances of $5,000 or less out of their 401(k) plans into an IRA without their consent. Further, if the account balance is less than $1,000 when the participant separates from the employer, the plan is allowed to cash out the account, triggering taxes and penalties if the participant does not take action in a timely manner to redeposit the money in another retirement account. How prevalent are these practices? According to the Plan Sponsor Council of America, more than half (57%) of 401(k) plans transfer account balances of between $1,000 and $5,000 to an IRA when a participant leaves the company and/or cash out those accounts with balances of less than $1,000.1 High Fees, Low Returns According to one study conducted by the Government Accountability Office (GAO), the trouble with these so-called "forced-transfer" IRAs is that most balances decreased over time if not transferred out and reinvested, due to the fees charged and the low returns earned by the conservative investments they are required to invest in.2 Specifically, the GAO studied 10 forced-transfer IRA providers, including information about the fees they charged, the default investments they used, and the returns earned. The typical investment return (prior to fees) ranged from 0.01% to 2.05%. That coupled with account initiation fees ranging from $0 to $100 and subsequent annual fees of $0 to $115 "can steadily decrease a comparatively small stagnant balance," the study found. Further, when projecting these effects on a $1,000 balance over time, the GAO found that 13 of 19 balances decreased to $0 within 30 years.2 Given these circumstances, it is easy to see how a worker who changes jobs frequently and accumulates several forced-transfer IRAs could be putting his or her retirement savings in jeopardy. Consider the following tips to help keep your savings growing, not stagnating. Make your wishes known -- an employer can only roll your account balance into a forced-transfer IRA if you provide no instructions as to what you would like to happen to your account balance. Keep contact information current -- when leaving one job for another, be sure you provide up-to-date contact information to the 401(k) plan administrator. Save more -- forced transfers only apply to low-balance accounts. By keeping your account above the $5,000 mark you ensure that it stays protected from any unintended or unwanted actions. , "How to Avoid Being Forced Out of Your 401(k)," January 13, 2015.1U.S. News 2United States Government Accountability Office, "401(k) Plans: Greater Protections Needed for Forced Transfers and Inactive Accounts," November 2014. © 2015 Wealth Management Systems Inc. All rights reserved. 1-436534
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  4 Your Guideto Life Planning It is critical to understand the effects of inflation on a retirement portfolio, because a retirement account in the future probably won't have the same purchasing power that it has today. How Taxes and Inflation May Affect Your Retirement Portfolio Benjamin Franklin famously stated that the only two certainties in life are death and taxes. But there's at least one more that could probably be added to the list: inflation. Inflation is the sustained, ongoing increase in the general level of prices for goods and services. As prices rise over time, the purchasing power of every dollar goes down. Due to inflation, one dollar in ten years will likely purchase less than the same dollar would today. How Inflation Is Measured The rate of inflation in the United States is measured by the Consumer Price Index (CPI), which calculates monthly changes in the prices paid for a representative basket of goods and services. Over the past three decades, inflation in the United States has risen at an annualized rate of 2.69%. This has shrunk the1 purchasing power of $1 in 1985 to just $0.45 today.2 It is critical to understand the effects of inflation on a retirement portfolio, because a retirement account in the future probably won't have the same purchasing power that it has today. For example, a $1 million portfolio today would need to grow to $1.7 million in 20 years to have the same purchasing power.2 But inflation is not the only potential hazard to the long-term purchasing power of your retirement nest egg. The Tax Man Cometh Let's go back to Mr. Franklin, because taxes may also impact how much money you actually get to put in your pocket when you begin taking distributions from your retirement account in the future. Many retirement plans allow participants to save money on a tax-deferred basis, but this isn't the same thing as saving on a tax-free basis. When you contribute money to a traditional IRA or 401(k), for example, your contributions are excluded from your current taxable income. In other words, you don't have to pay tax on the money today, but instead are deferring this tax until you begin taking distributions from the account typically during retirement. In comparison, contributions to a Roth IRA or 401(k) are included in your current taxable income. And since you are paying taxes on the money now, you don't have to pay taxes again when you withdraw the funds during retirement.3 Pay Me Now, or Pay Me Later One of the decisions you must make as part of your retirement strategy is whether to invest on a tax-deferred basis, and pay taxes when you withdraw the money, or invest tax free and pay the taxes now? No one has a crystal ball to predict whether tax rates will be higher or lower in the future. That is why it is important to work with a financial planning expert who, using sophisticated retirement planning tools and software -- and taking your individual circumstances, risk tolerance, and goals into consideration -- can help you work through various inflation and tax scenarios to determine the most appropriate strategies for you. This communication is not intended to be tax advice and should not be treated as such. Each individual's tax situation is different. You should contact your tax professional to discuss your personal situation. United States Department of Labor -- Bureau of Labor Statistics. For the 30-year period ended June 30,1 2015. Wealth Management Systems Inc. based on price inflation for the 30-year period ended June 30, 2015.2 Withdrawals from qualified plans taken before age 59½ are generally subject to a 10% additional federal3 tax -- on top of any regular income taxes owed -- although there are a few exceptions to this rule. © 2015 Wealth Management Systems Inc. All rights reserved. 1-425693
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  5 Your Guideto Life Planning Financial advisors often recommend taking a holistic approach to calculating income needs in retirement, factoring in such costs as taxes and debt payments along with other typical expenses including health care. Planning for Known -- and Unknown -- Health Care Costs in Retirement The issue of health care costs in retirement -- and planning for them well in advance of retirement -- is becoming a centerpiece of any retirement planning discussion. A recent study by Employee Benefit Research Institute (EBRI) projected that in 2014, men and women who wanted a 90% chance of having enough money to cover out-of-pocket health care expenses in retirement would need to have saved $116,000 and $131,000 respectively by age 65. This is a sobering goal when you1 consider that just 42% of workers in their 50s and 60s report total savings and investments in excess of $100,000.2 Part of the problem with putting a price tag on retiree health care expenses is that every situation will vary depending on an individual's health, the type of health care coverage they carry, and when they hope to retire. That said, EBRI has identified some "recurring expenses," or standard elements of cost that can be estimated and planned for in advance as well as "non-recurring" expenses that are less predictable but tend to increase with age. Recurring vs. Non-Recurring Expenses Using data gleaned from the Health and Retirement Study (HRS) -- a longstanding, highly respected study of representative U.S. households with individuals over age 50 -- EBRI was able to categorize utilization patterns and expenses for two separate types of health care services: Recurring services -- include doctor visits, prescription drug usage, and dentist services. Since these services tend to remain stable throughout retirement, it is possible to calculate an average out-of-pocket expense among individuals age 65 and older of $1,885 annually. Projecting forward, and3 factoring in the following assumptions: a 2% inflation rate, a 3% rate of return on investments, and a life expectancy of 90 years, EBRI estimates that one would need $40,798 at age 65 to cover the average out-of-pocket expenses for recurring health care needs throughout retirement. It should be noted that this calculation does not include expenses for any insurance premiums or over-the-counter medications. Non-recurring expenses -- include overnight hospital stays, overnight nursing home stays, home health care, outpatient surgery, and special facilities. Unlike recurring expenses, the cost of most non-recurring services increases with age. For example, average annual out-of-pocket expenses for nursing home stays are estimated at $8,902 for those in the 65 to 74 age group, $16,948 for those aged 75 to 84, and $24,185 for individuals aged 85 and up.3 Yet because the likelihood of utilizing these services and the degree to which they will be needed is largely unknown, projecting the savings needed to cover these costs throughout retirement is an elusive exercise. However, by thinking about the total out-of-pocket savings goals of $116,000 for men and $131,000 for women cited earlier in terms of recurring and non-recurring costs may help retirees and those nearing retirement in their planning efforts. Bigger Picture Planning Financial advisors often recommend taking a holistic approach to calculating income needs in retirement, factoring in such costs as taxes and debt payments along with other typical expenses including health care. In addition to the out-of-pocket health care calculations discussed above, consider what you think you might have to pay in annual premiums if you were to apply for health insurance today. Lastly, and perhaps most important, add in an allowance for inflation -- both general and health care inflation. Your financial planner can help get the retirement income planning discussion started and -- as part of that exercise -- can work with you to put some numbers around your health care planning needs. This article offers only an outline; it is not a definitive guide to all possible consequences and implications of any specific saving or investment strategy. For this reason, be sure to seek advice from knowledgeable professionals. Employee Benefit Research Institute, news release, "Needed Savings for Health Care in Retirement Continue1 to Fall," October 28, 2014. Employee Benefit Research Institute, , March 2014. (Not including the2 2014 Retirement Confidence Survey value of a primary residence or defined benefit plans.)
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  6 Your Guideto Life Planning 3Employee Benefit Research Institute, "Utilization Patterns and Out-of-Pocket Expenses for Different Health Care Services Among American Retirees," February 2015. © 2015 Wealth Management Systems Inc. All rights reserved. 1-375580
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  7 Your Guideto Life Planning Individuals who are already retired might need to scale back their annual withdrawal amounts in order to create reserves for those extra two years. Rising Longevity and Your Retirement New research conducted by the Society of Actuaries (SOA), a leading membership-based organization for actuaries in the United States and Canada, revealed that older Americans are living longer than previously estimated. Specifically, SOA's data showed that since its last report published in 2000 the life expectancy of men age 65 has risen two years from age 84.6 to age 86.6 in 2014. Similarly, among 65-year-old women, longevity rose 2.4 years, from age 86.4 in 2000 to age 88.8 in 2014.1 Commenting on the findings, Dale Hall, managing director of research for the SOA stated, "The purpose of the new reports is to provide reliable data that actuaries can use to assist plan sponsors and policy makers in assessing the financial implications of longer lives."1 What about individuals? How might this news affect the financial lives of retirees and/or the retirement planning strategies of those nearing retirement age? Those additional two years could mean that the time the typical person might expect to spend in retirement could increase by 10% or more than he or she originally anticipated. As a result, the values associated with a retirement accumulation and/or distribution plan may need to be adjusted accordingly. For example, individuals still accumulating retirement assets who had previously determined they needed a $1 million nest egg, would now need $1.1 million to finance those two added years. For someone who is in mid-stream on a retirement savings plan, increased longevity could mean boosting contributions by 20% or more to catch up. Similarly, individuals who are already retired might need to scale back their annual withdrawal amounts in order to create reserves for those extra two years. Making Your Money Last Because of increased longevity, managing cash flow in retirement is more critical than ever. As a starting point you will need to clarify your current financial situation, as well as any significant changes you expect. Two sources will provide this information: A net-worth statement, which provides a snapshot of your assets, debt, and cash reserves. Your monthly or annual budget, with itemized breakdowns of your income and expenses. If you haven't retired yet, it's a good idea to prepare a projected budget of your retirement income and expenses. Even with reasonable assumptions about investment returns, inflation, and retirement living costs, it is likely you will encounter numerous changes to your cash flow over time. Experts often recommend a monthly review of your budget, as well as a comprehensive annual review of your financial situation and goals. As you monitor your finances keep the following factors in mind, as any one of them could affect your cash flow and necessitate adjustments to your plan. Interest rate trends and market moves may result in an increase or decrease in income from your savings and investments. Changes in federal, state, and local tax rates and regulations. Changes in Social Security or Medicare benefits or eligibility, as well as new rules affecting employer-sponsored retirement benefits and private insurance coverage. Inflation and health care costs. Life events such as marriage, the death of a spouse, or the addition or loss of a dependent may also affect your cash flow. It is worth paying close attention to cash flow, making sure you budget carefully, monitor income and expenses frequently, and take action whenever you believe that significant changes may be necessary. Society of Actuaries, press release, "Society of Actuaries Releases New Mortality Tables and an Updated1 Mortality Improvement Scale to Improve Accuracy of Private Pension Plan Estimates," October 27, 2014. The calculations presented are based on public mortality tables, which were developed with certain populations in mind, and reflect probabilities based on averages in large populations. © 2015 Wealth Management Systems Inc. All rights reserved. 1-345377
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  The opinions voicedin this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. The financial consultants of Phillips Financial are registered representatives with and Securities are offered through LPL Financial. Member FINRA/SIPC. Insurance products offered through LPL Financial or its licensed affiliates. Not FDIC/NCUA Insured Not Bank/Credit Union Guaranteed May Lose Value Not Insured by any Federal Government Agency Not a Bank Deposit This newsletter was created using , powered by Wealth Management Systems Inc.Newsletter OnDemand