Category: Everyday Finance

Dealing With Loss and Having a Plan

As a financial planner, I’ve seen grief come from a variety of situations: the death of a loved one, separation from a spouse, loss of a job, changing jobs, a serious illness, and even the death of a pet.

When dealing with the death of a spouse specifically, the grieving process takes time and there is no “normal” time frame for grieving.

Whatever your grief experience, it’s important to be patient with yourself and allow the process to happen naturally. And while there is no right or wrong way to grieve, there are healthy ways to cope with the challenges of the loss.

Get support and take care of yourself

One of the most important factors in recovering from the loss of a spouse is having the support of other people.

You should lean on the people who care about you, even if you take pride in being strong and self-sufficient. Embrace loved ones, rather than avoiding them, and accept the assistance that’s offered.

When you’re grieving, it’s more important than ever to take care of yourself. Combat stress and fatigue by getting enough sleep, eating right, and exercising.

You can try to suppress your grief, but you can’t avoid it forever. In order to heal, you have to acknowledge the pain. Trying to avoid feelings of sadness and loss only prolongs the grieving process.

If you find yourself turning to unhealthy ways to cope with the pain, you should contact a therapist for professional help.

Have a plan

I have found that having a plan in place greatly reduces the amount of stress in the event of a loss of a loved one, resulting in more time available to grieve and less time worrying about stressful decisions.

My goal as a financial planner is to develop a comprehensive financial plan that covers all aspects of a client’s life, and I make sure that they are prepared for a sudden life-changing event such as the loss of a spouse.

If you don’t have an expert to assist in creating a plan, you will want to make sure you have at least the basics in place before the death of yourself or a loved one.

Below are some common things you will want to consider before and after a loss.

Before:

  • Use a password management system – Begin using a secure password system to manage your various online accounts, email, and other online services. A summary of these services can be accessed at this link: Password Managers.
    If you are not comfortable with online technology tools, ensure your various passwords are complex, secured, and accessible to family members. This will also help ensure that you or your family is not locked out of access to important accounts and services online in the event of death or disability. 
  • Create an estate plan – Contact a trusted estate-planning attorney to help you draft the documents needed to ensure your wishes are carried out in the event of your death, and that you are well cared for in the event of your disability. 
  • Plan your funeral – Your family will be in a fragile state emotionally when you pass away. It may be difficult for them to negotiate funeral costs at that time. Solve this issue by planning your funeral today. You can even prepay for your funeral if you want. Visit a local funeral home to discuss it.

After:

  • Get multiple copies of the death certificate – You should go to the city clerk’s office and get certified copies of the death certificate. It is best practice to get numerous copies because of the various institutions that require them in order to release funds or close accounts.
  • Decide what to do with life insurance proceeds – If you work with a Certified Financial Planner (CFP), you should have a general idea of what you will use the money for and where to hold it. But many times it can be overwhelming to receive a large check in the mail. You could deposit it in a checking or savings account, but remember, your FDIC coverage is now only $250,000 per institution.
  • Notify Social Security –  The agency can put the deceased person on the Social Security Master Death Index. This prevents would-be fraudsters from collecting the loved one’s Social Security payments. It also helps stop identity thieves from opening accounts in the name of the deceased individual, because the person’s credit reports will be flagged.
  • Transfer accounts – You’ll want to transfer accounts from your loved one’s name into your own. This not only covers bills such as the power, electricity, and water, but also financial accounts such as bank accounts, IRAs, 401(k)s, etc. Since every state has different mandates, be sure to check what type of legal filings, if any, are necessary in the state in which a family member has died, as well as any state where the individual owned property. Your CFP and estate attorney will be incredibly valuable during this transition.

Are your spending habits making you happy?

It is safe to say that most of you are familiar with the concept of “keeping up with the Joneses”. If you haven’t, here is how one source eloquently puts it:

“Keeping up with the Joneses” is an idiom in many parts of the English-speaking world referring to the comparison to one’s neighbor as a benchmark for social class or the accumulation of material goods. To fail to “keep up with the Joneses” is perceived as demonstrating socio-economic or cultural inferiority.

The desire to compare ourselves to our peers is part of human nature — we wouldn’t have sports, corporate ladders, or eating contests if it weren’t.

But measuring our own financial success against that of our peers and letting their spending behavior influence our own can spell major trouble for our finances. And the amount of consumer debt in our society is evidence of this fact.

It seems as though more and more of us are willing to pull out the plastic without regard to our budget. As Will Rogers said, “Too many people spend money they haven’t earned to buy things they don’t want to impress people they don’t like”.

So what can we do to pay less attention to how the Joneses are doing and focus instead on our own financial health and the things in life that will truly make us happy?

Stop comparing yourself to others

Since we never know what anyone else’s financial picture really looks like, it’s important not to see their apparent success as our own failure.

Remember, we don’t know their story and it’s highly possible that our peers are living beyond their means.

Learn to live within your means

Regardless of our income, without a little discipline, it is easy to spend all of it on frivolous things. And if you haven’t built financial margin into your life, one little hiccup in income could result in losing those things and possibly more.

Nearly eight out of ten families in the United States are living paycheck to paycheck. That means one missed paycheck and the bills are going unpaid.

I am willing to go out on a branch to say that the Joneses are likely living paycheck to paycheck and are financing their lifestyle in a way that puts them in danger of losing everything. In turn, the Joneses are likely just as stressed about money as we are.

To relieve some stress, start by tracking spending habits to figure out where money is going. You might be surprised at what you find. Then take action to improve your situation.

Find your own happiness

Don’t let anyone else dictate what should make you happy. Material possessions cannot fill an empty heart.

Instead of spending mindlessly, put your energy into your family and your relationships. That’s where the real value is.

Pension Benefit vs Lump-Sum

If you are fortunate to have an employer guaranteed retirement benefit in a post-pension era, it’s likely you have been offered the option of a lump-sum payment or monthly benefit.

You may like the peace of mind that comes with the payments since you are assured a monthly income for life, but the lump-sum option gives you the opportunity to invest your own retirement funds, can be withdrawn on your own schedule, and can be left to your heirs after your death.

Should you take the pension or accept the buyout? The answer to this question depends on a number of factors that we’ll explore below.

Pension and Lump-Sum Example

To help illustrate the point, let’s assume you are currently a 45-year-old female and your employer is offering to pay you $2,045 per month as a single life annuity starting at age 65 through the remainder of your lifetime (your official life expectancy is around age 88). Or they are offering to pay you $145,000 in a lump-sum today.

What the Math Says

The first step is to calculate the rate of return that would make the two options equal to each other. You’ll need to use an internal rate of return (IRR) calculator to do this.

I’ll spare you the mathematical details and skip straight to the good stuff. The calculation shows that the internal rate of return is 4.72% at life expectancy. This essentially means that $145,000 growing at 4.72% per year while withdrawing $2,045 per month starting at age 65 would last for 23 years, with nothing left over — the equivalent of the monthly pension.

The longer you live, the more pension payments there are and the higher your investment return would have to be to match the pension by investing the $145,000 lump sum. Conversely, if you don’t live very long, even a return of 0% or less would be better than taking the monthly pension.

The rate of return needed on the lump sum to match the monthly pension

As you can see in the chart above, the required rates of return to replicate what the pension provides is fairly modest in this scenario.

To secure the pension payments to age 100, you would need your lump-sum portfolio to generate an average annual growth rate of around 5.30% — which is certainly achievable with the right portfolio.

If it would take an 8% to 10% rate of return on the lump sum to give you a cash flow equal to the pension payments at your life expectancy, then the pension might be a better option.

On the other hand, if a low rate of return could provide that same cash flow, you might want to go with the lump sum.

You’ll have to determine if the rate of return in your particular situation is attainable given your tolerance for market risk and other investing factors. This is something a financial advisor can help you figure out.

Other Things to Consider

While the pension payments offer some nice longevity insurance if you live past life expectancy, you’ll also need to consider the impact of inflation on the $2,045 per month payments.

Using a simple inflation-adjustment calculation, the pension payments may only equate to $977 in today’s dollars 20 years from now with 3.76% inflation, and will quickly degrade from there. This simply means that your money won’t go as far to purchase goods and services.

Value of the monthly pension after inflation

You’ll also want to keep your beneficiaries in mind when deciding between the two options. With the pension, there may not be any money that passes to your chosen beneficiaries. The lump-sum offers a little more flexibility when it comes to how the money flows to your heirs.

Another thing to consider is the financial health of your employer. If you have any concerns about the longevity of the company — or their ability to manage the pension funds — you may put more weight into taking the lump-sum now.

Finally, you’ll need to do some self-reflection and determine if you have the discipline it takes to actually make the money last throughout your retirement.

If you’re the kind of person that will use the lump-sum to take a vacation, maybe taking the monthly payments makes the most sense from a behavioral standpoint.

The pension payments provide consistent cash flow that will help with budgeting decisions and eliminates the possibility of using up that portion of your wealth while you living.

There is no one-size-fits-all solution for everyone. The specific terms of the deal and your individual situation both play a role in whether you should accept the lump-sum or wait for a monthly pension check at retirement.

Before deciding which option is right for you, be sure to work with an advisor who will provide you with the facts you’ll need to make an informed decision.

Should I Get Pet Insurance?

To many folks, pets are an important member of their family. As such, they would do anything for them.

But when the family pet gets sick with a life-threatening illness, you could be faced with expensive veterinary care that you haven’t quite budgeted for and be put in a tight financial spot.

Take for example some real-life costs of typical surgical procedures: gastric dilation volvulus (bloat), $3,525; foreign-body ingestion, $2,964; cancer, $5,351; hit by a car with a fractured pelvis, $3,717. Here is a link to the source of the information with other examples.

It’s situations like these that pet insurance can be as valuable as people health insurance.

does it make sense to buy?

Whether you choose to purchase insurance or self-insure, you’ll need to weigh what you can afford over your pet’s expected life span.

For example, as your pet ages, the more you’ll pay to insure them and the less the insurance company will likely cover. At some point, it makes sense drop the insurance and purely pay out of pocket.

You can choose to self-insure (paying for medical care with your own accumulated funds) for the entire lifetime of your pet. If you’re going to self-insure, it is smart to set up a designated account exclusively for your pet’s care. That way the funds aren’t comingled with other emergency reserves and used for another purpose.

Having the foundation in place to care for your pet — without going into a financial strait — will avoid putting you in the situation of having to decide to put them to sleep because of money.

Before you buy

Okay, you’ve made the decision to purchase the insurance. There are few things you need to do before handing any money over to the insurance company.

  • Read the policy very carefully. As with anything, you need to look at the terms of the coverage. Some companies apply the deductible per incident, others per year. Make sure you know what you are buying.
  • Understand co-pays, deductibles, and caps. Pet insurance works differently than human health insurance. Know how much you’ll be responsible for paying and how you’ll be reimbursed by the insurance company.
  • Know what is excluded. Generally, you won’t be reimbursed for anything preventable and many times there are breed-specific exclusions.

Pet insurance is more about peace of mind than anything. Having the coverage may give you the freedom to make medical decisions for you pets based on their quality of life, and not because of finances.

A Complete Rollover Guide

As a financial advisor, I help clients navigate rolling over old 401(k)s to IRAs all the time. But what about people who don’t have a financial expert to rely on? They’ll most likely look to the internet for advice. 

I noticed something recently though. The articles and blogs online only give guidance on the first step of a rollover, which is how to initiate one.

I couldn’t find an article that explained what happens after the rollover takes place, which is when some of the most important work actually begins.

That’s because rolling over a retirement plan to another retirement plan is considered a tax-free event. However, if you don’t report the rollover properly, you could be surprised with a tax deficiency letter from the IRS and possibly many hours spent resolving the issue.

Fear not! This is your complete rollover guide — from start to finish — so you’ll never miss a step in the process. 

Before Starting a Rollover

Before actually beginning the rollover process, you’ll need to decide where you want your money to go. 

If you have an old employer retirement plan — like a 401(k), 403(b), etc. — there aren’t very many reasons you’d want to leave it there.

Having multiple accounts at different custodians (the financial institution that holds your money) makes it really difficult to keep track of your finances. By simply rolling over an old retirement plan to another one you will greatly simplify your account structure.

Rolling over old employer retirement plans into an IRA can significantly reduce the amount of outstanding accounts.

Does your new employer retirement plan accept rollovers? If so, are you comfortable with putting your money there? If you already have an Individual Retirement Account (IRA), would you rather put it there?

Here is a nifty guidethe IRS provides that can help you choose which type of retirement plan you can roll in to. 

Rollover Initiated

Once you’ve decided where the money will be going, you’re going to begin the actual rollover process.

There are a few ways I usually see rollovers initiated:

  • With a rollover form that the old custodian will give you
  • With a phone call to the old custodian
  • With transfer paperwork from your new custodian

It’s at this point that your first major decision takes place because you’ll have two ways the money can be delivered.

Option 1. Have the money sent directly to your new custodian. This is the simplest type of rollover since the money goes from one account to the other, with no involvement or responsibility on your part. This is known as a direct rollover, or trustee-to-trustee transfer.

Option 2. Have the money sent to you and then you forward that money to the new custodian. This is known as an indirect rollover. 

With an indirect rollover, the day you take possession of the money you have 60 days to turn around and put that money into another retirement account. Even if you’re one day late, the entire distribution will become subject to income taxes and the 10% early withdrawal penalty if you’re under the age of 59 1/2.

Outside of some advanced planning strategies, I would generally avoid indirect rollover at all costs because they can be difficult to manage.

After the Rollover Occurs

Okay, the money is in your retirement account but you’re not done yet!

Even though you aren’t required to pay tax on this type of activity, you still must report it to the Internal Revenue Service.

At the end of the year — or early the following year — that your rollover took place, you will receive a Form 1099-R from the custodian who sent the money. The IRS will also be receiving one. That’s because your rollover is reported as a distribution, even when it’s rolled into another eligible retirement account. 

It’s up to you to properly report the rollover on your tax return to avoid paying taxes. To do this, you’ll need to write in the amount shown on the 1099-R on line 4a and a zero on the taxable amount on line 4b. Write “rollover” or “R/O” in the blank space beside it. This will explain to the IRS why the distribution amount shown on line 4a is more than the taxable amount shown on line 4b.

This is not tax advice. This is my understanding of how to report a rollover based on personal experience.

And thats it! After your taxes are filed and the rollover has been reported, you are finally done!

Incorrect Reporting

Keep in mind that when a rollover isn’t reported properly, you’ll receive Notice CP2000 from the IRS asking for the taxes you owe them. I know because it’s happened to me!

If the rollover went into your IRA, you’ll receive Form 5498 from your custodian that can be used to substantiate your case. Make sure you keep these in your tax file.

If the money is sent to an employer retirement plan (401k, 403b, etc.) you won’t receive Form 5498 and it will require a little more work on your end to show the IRS that it was, in fact, a rollover.