downhousing-your-home

Should You Downsize for Retirement?

Some retirees save a great deal of money by doing so; others do not.
Provided by Joe Occhipinti

 

You want to retire, and you own a large home that is nearly or fully paid off. The kids are gone, but the upkeep costs haven’t fallen. Should you retire and keep your home? Or sell your home and retire? Maybe it’s time to downsize.

Lower housing expenses could put more cash in your pocket. If your home isn’t paid off yet, have you considered how much money is going toward the home loan? When you took out your mortgage, your lender likely wanted your monthly payment to amount to no more than 28% of your total gross income, or no more than 36% of your total monthly debt repayments. Those are pretty standard metrics in the mortgage industry.1

What percentage of your gross income are you devoting to your mortgage payments today? Even if your home loan is 15 or 20 years old, you still may be devoting a significant part of your gross income to it. When you move to a smaller home, your mortgage expenses may lessen (or disappear) and your cash flow may greatly increase.

You might even be able to buy a smaller home with cash (if finances permit) and cut your tax liability. Optionally, that smaller home could be in a state or region with lower income taxes and a lower cost of living.

You could capitalize on some home equity. Why not convert some home equity into retirement income? If you were forced into early retirement by some corporate downsizing, you might have a sudden and pressing need for retirement capital, another reason to sell that home you bought decades ago and head for a smaller one.

The lifestyle reasons to downsize (or not). Maybe your home is too much to keep up, or maybe you don’t want to climb stairs anymore. Maybe a condo or an over-55 community appeals to you. Maybe you want to be where it seldom snows.

On the other hand, you may want and need the familiarity of your current home and your immediate neighborhood (not to mention the friends close by).

Sometimes retirees underestimate the cost of downsizing. Even the logistics can be expensive. As Kiplinger notes, just packing up and moving a two-bedroom condominium’s worth of furniture will cost about $1,500 if you are resettling locally. If you are sending it across the country, the journey could take $5,000 or more. If you can’t sell or move everything, the excess may go into storage, and the price tag on that may be well over $100 a month. In selling your home, you will probably pay commissions to both your agent and the buyer’s agent that add up to 6% of the sale price.2

Some people want to retire and then sell their home, but it may be wiser to sell a home and then retire if the real estate market slows. If you sell sooner instead of later, you can always rent until you find a smaller house that could save you thousands (or tens of thousands) of dollars over time.

Run the numbers as accurately as you think you can before you make a move. Downsizing always seems to have a hidden cost or two, but for many retirees, it can open a door to long-term savings. Other seniors may find it cheaper to age in place.

 

Joe Occhipinti may be reached at 714.823.3328 or Joe@warrenstreetwealth.com.

www.WarrenStreetWealth.com

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

Citations.

1 – nerdwallet.com/blog/mortgages/two-ways-to-determine-how-much-house-you-can-afford/ [2/3/16]
2 – kiplinger.com/article/retirement/T010-C022-S002-downsizing-costs-add-up.html [4/1/16]

 

Purple-100-Dollar-Money

Reduce your Tax Bill: ESPORTS & Streamer Edition

Co-Authored by:
Blake Street CFP® & Joe Occhipinti

 

The world of eSports has turned a hobby into a full time profession for many people around the world. Streamers, professional players, and YouTube stars have been able to take their specific talents and turn their passion into a career.

However, with this newly found cash flow comes a new liability in the form of taxes. The knock from Uncle Sam will only get louder as revenue streams, prize pools, and sponsorship deals increase.  Many eSports professionals find themselves scratching their heads come tax time, trying to sort through W2 wages, 1099 income, and even how to handle income from organizations that didn’t report it in the first place.

The burden remains on the the individual to accrue cash to pay taxes, keep their books, properly report income, and make sure they are in compliance with the IRS. The IRS, as always, does no favors in helping you make your tax bill small.

If you’re a streamer, influencer, or competitor there is a high likelihood that you yourself are considered a small business in the eyes of the IRS. This means you’re liable for the 15.3% payroll tax on your earnings that you might only otherwise be liable for half of as a W2 employee. In addition, you may have liabilities from your business activities and even employees or contractors you may hire to do work for you.  From what we’ve found thus far, few have addressed these variables with adequate intent.

 

How do you fix this problem?

 

1) Keep Good Books

First things first get setup to adequately track  business related expenses and any deductions that may reduce your tax burden.  This is the first and easiest thing to control. A good start is separate banking for your business efforts and a solid piece of accounting software.

2) Incorporation

Next, how are you incorporating your business? Sole proprietor? LLC? S-Corp? Each classification has its own nuances that will impact the bottom line dollars you keep and the liability you bare. It is important to look at not only the amount you make, but also the consistency of earnings, and the amount of liability your services or content generate before choosing a type of incorporation.

3) Build Cash Reserves

As money comes in the door, aside from saving for goals, you need to save for taxes. Companies should be withholding taxes on your W2 wages, but any other forms of income the burden is on you. Generally our clients set aside 20-30% of every dollar of revenue aside for potential taxes. The struggle is real!

4) Tax Deferral & Planning

Still have lots of profits left and nothing to spend it on? Why pay taxes on those dollars now? Consider opening a tax advantaged savings plan. Depending on your need, one might consider a Traditional IRA, ROTH IRA, SEP IRA, SIMPLE IRA, or Solo 401(k). All of these plans allow for tax deferred or tax advantaged savings and investing but each offers a different level of complexity and contribution limits.

5) Hire the Right People

Find folks with the expertise to guide you through the setup and management of each step we detailed above. This person or firm will need to network with their CPA’s and attorney’s or even your existing team to make the most of your new found success. The goal is to minimize your tax bill, grow your net worth, and protect you from some of the common financial pitfalls seen in both traditional and eSports.

 

More About Us

Warren Street Wealth Advisors was founded by a retired Counter-Strike: Source professional, and we are well aware of the challenges you face. We offer services that give streamers, professional esports players, and interactive media talent the ability to transform themselves from just a  revenue generating entity to a well rounded and tax efficient business. If you’d like to learn more, feel free to contact Blake Street or Joe Occhipinti directly.

 

Disclaimer
Blake Street and Joseph Occhipinti are Investment Advisor Representatives of Warren Street Wealth Advisors, a Registered Investment Advisor. The information posted here represents his opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional.  Nothing in this commentary is a solicitation to buy, or sell, any securities, or an attempt to furnish personal investment advice. We may hold securities referenced in the blog and due to the static nature of content, those securities held may change over time and trades may be contrary to outdated posts.

Could Social Security Really Go Away?

Just how gloomy does its future look?

Provided by Joe Occhipinti

 

Will Social Security run out of money in the 2030s? For years, Americans have been warned about that possibility. Those warnings, however, assume that no action will be taken to address Social Security’s financial challenges.

 

Social Security is being strained by a giant demographic shift. In 2030, more than 20% of the U.S. population will be 65 or older. In 2010, only 13% of the nation was that old. In 1970, less than 10% of Americans were in that age group.1

Demand for Social Security benefits has increased, and the ratio of retirees to working-age adults has changed. In 2010, the Census Bureau determined that there were about 21 seniors (people aged 65 or older) for every 100 workers. By 2030, the Bureau projects that there will be 35 seniors for every 100 workers.1

As payroll taxes fund Social Security, the program faces a major dilemma. Actually, it faces two.

 

Social Security maintains two trust funds. When you read a sentence stating that “Social Security could run out of money by 2035,” that statement refers to the projected shortfall of the Old Age, Survivors, and Disability Insurance (OASDI) Trust. The OASDI is the main reservoir of Social Security benefits, from which monthly payments are made to seniors. The latest Social Security Trustees report indeed concludes that the OASDI Trust could be exhausted by 2035 from years of cash outflows exceeding cash inflows.2,3

Congress just put a patch on Social Security’s other, arguably more pressing problem. Social Security’s Disability Insurance (SSDI) Trust Fund risked being unable to pay out 100% of scheduled benefits to SSDI recipients this year, but the Bipartisan Budget Act of 2015 directed a slightly greater proportion of payroll taxes funding Social Security into the DI trust for the short term. This should give the DI Trust enough revenue to pay out 100% of benefits through 2022. Funding it adequately after 2022 remains an issue.4

 

If the OASDI Trust is exhausted in 2035, what would happen to retirement benefits? They would decrease. Imagine Social Security payments shrinking 21%. If Congress does not act to remedy Social Security’s cash flow situation before then, Social Security Trustees forecast that a 21% cut may be necessary in 2035 to ensure payment of benefits through 2087.3

   

No one wants to see that happen, so what might Congress do to address the crisis? Three ideas in particular have gathered support.

 

*Raise the cap on Social Security taxes. Currently, employers and employees each pay a 6.2% payroll tax to fund Social Security (the self-employed pay 12.4% of their earnings into the program). The earnings cap on the tax in 2016 is $118,500, so any earned income above that level is not subject to payroll tax. Lifting (or even abolishing) that cap would bring Social Security more payroll tax revenue, specifically from higher-income Americans.3

 

*Adjust the full retirement age. Should it be raised to 68? How about 70? Some people see merit in this, as many baby boomers may work and live longer than their parents did. In theory, it could promote longer careers and shorter retirements, and thereby lessen demand for Social Security benefits. Healthier and wealthier baby boomers might find the idea acceptable, but poorer and less healthy boomers might not.3

 

*Calculate COLAs differently. Social Security uses the Consumer Price Index for Urban Wage Workers and Clerical Workers (CPI-W) in figuring cost-of-living adjustments. Many senior advocates argue that the Consumer Price Index for the Elderly (CPI-E) should be used instead. The CPI-E often gives more weight to health care expenses and housing costs than the CPI-W. Not only that, the CPI-E only considers the cost of living for people 62 and older. That last feature may also be its biggest drawback. Since it only includes some of the American population in its calculations, its detractors argue that it may not measure inflation as well as the broader CPI-W.3

 

Social Security could still face a shortfall even if all of these ideas were adopted. The Center for Retirement Research at Boston College estimates that if all of these “fixes” were put into play today, the OASDI Trust would still face a revenue shortage in 2035.3

In future decades, Social Security may not be able to offer retirees what it does now, unless dramatic moves are made on Capitol Hill. In the worst-case scenario, monthly benefits would be cut to keep the program solvent. A depressing thought, but one worth remembering as you plan for the future.

 

Joe Occhipinti may be reached at 714.823.3328 or Joe@WarrenStreetWealth.com.

www.WarrenStreetWealth.com

 

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations
1 – money.usnews.com/money/retirement/articles/2014/06/16/the-youngest-baby-boomers-turn-50 [6/16/14]
2 – fool.com/retirement/general/2016/03/20/the-most-important-social-security-chart-youll-eve.aspx [3/20/16]
3 – fool.com/retirement/general/2016/03/19/1-big-problem-with-the-3-most-popular-social-secur.aspx [3/19/16]
4 – marketwatch.com/story/crisis-in-social-security-disability-insurance-averted-but-not-gone-2015-11-30 [11/30/15]

are-we-done-yet

Are We Done Yet?

February 12, 2016 by Marcia Clark, CFA

On January 26, 2015, I wrote an article questioning the relationship between falling oil prices, slowing Chinese GDP, and the precipitous decline in the U.S. stock markets. I counseled readers to take a breath, that the stock market turmoil was overdone and the U.S. economy was secure.

Shortly after my article, the S&P 500 index rebounded from 1903.63 to 1949.24 as on January 29th the Bureau of Economic Analysis announced 4th quarter GDP growth at a modest 0.7%, slightly below analyst expectations of 0.8%.

U.S. Real Gross Domestic Product and Civilian Unemployment Rate

 U.S. Real Gross Domestic Product and Civilian Unemployment Rate

Stock Markets Stabilize with 4th Quarter GDP Report

Why did the stock market react so well to such modest GDP growth? Perhaps because, if you look deeper into the GDP components, the slow growth was primarily due to weak exports and low oil prices, while consumer spending and residential construction remained strong. When considered in light of positive trends in disposable income and job growth, investors seemed fairly content with the 4th GDP results. Concern about specific sectors of the economy are well-founded, however, as low oil prices are indeed causing an increasing number of shale oil drillers to default on their debt obligations. But lenders prepare for this type of risk by diversifying their investments, and there is little evidence that distress in the oil patch will spread throughout the broader economy.

S&P 500 Stock Market Index, February 2015 – February 2016

S&P 500 Stock Market Index, February 2015 - February 2016

http://www.msn.com/en-us/money/indexdetails/fi-33.10.!SPX?ocid=INSFIST10

Do Stock Markets Really Predict Economic Recessions?

To twist a common phrase, every silver lining has a cloud, and in the days following the GDP announcement oil prices continued their downward trend and talk of an economic slowdown began to circulate in the financial press. By February 11, the S&P 500 index had plummeted to a low of 1829.08, before recovering a bit to end the week at 1864.78. Clearly, the turmoil was not over!

But does a falling stock market really foretell an economic decline in the U.S.? Let’s take another look at the evidence. The Brookings Institute published an article by George L. Perry on February 2, 2016[i] reviewing the relationship between stock market declines and economic recessions. Mr. Perry concludes that significant stock market declines – say 20% or so – do indeed tend to precede economic downturns. However, more moderate declines in the stock market happen much more frequently than do recessions. And when such declines are accompanied by decent economic figures, the predictive power of the stock market is unreliable.

In fact, the most recent Conference Board Leading Economic Index published January 22 shows a strong positive trend, despite the U.S. stock market being a component of the index. It’s important to note, however, that the index fell slightly in December due to weaker growth in housing and manufacturing. Also of note, the latest Leading Indicator Index does not include January’s stock market decline.

Leading Economic Index as of December 2015

Leading Economic Index as of December 2015

So, Where Do We Go From Here?

As articulated by Fed Chairman Janet Yellen in her testimony to Congress on February 11, the U.S. economy remains on an upward trend at present, though the future is uncertain. On the positive side, employment gains, low interest rates, and falling oil prices provide consumers with more disposable income to support domestic businesses. On the negative side, slowing Chinese and commodity-based economies, combined with the strong dollar, continue to depress U.S. exports.

On balance, I reiterate my earlier advice. CaptionStay strong, hold on tight, and wait for smoother sailing ahead. Investors with a tolerance for volatility might even consider buying into the distressed oil and gas sector.  Be warned, however! A risky endeavor such as this requires an abundance of fundamental analysis and healthy skepticism when forecasting future earnings. Such a venture is best left to the boldest among us with the ability to withstand the choppy voyage ahead.

 

Marcia K. Clark, CFA

Warren Street Wealth Advisors

Senior Research Analyst, Wealth Advisor

marcia@warrenstreetwealth.com

[i] http://www.brookings.edu/research/opinions/2016/02/02-stocks-and-the-economy-perry

Are You Retiring Within the Next 5 Years?

are you retiring in the next five yearsAre You Retiring Within the Next 5 Years?

What should you focus on as the transition approaches?

Provided by: Warren Street Wealth Advisors

 

You can prepare for your retirement transition years before it occurs. In doing so, you can do your best to avoid the kind of financial surprises that tend to upset an unsuspecting new retiree.

 

How much monthly income will you need? Look at your monthly expenses and add them up. (Consider also the trips, adventures and pursuits you have in mind in the near term.) You may end up living on less; that may be acceptable, as your monthly expenses may decline. If your retirement income strategy was conceived a few years ago, revisit it to see if it needs adjusting. As a test, you can even try living on your projected monthly income for 2-3 months prior to retiring.

 

Should you try to go Roth? Many pre-retirees have amassed substantial retirement savings in tax-deferred retirement accounts such as 401(k)s, 403(b)s and traditional IRAs. Distributions from these accounts are taxed as ordinary income. This reality makes some pre-retirees weigh the pros and cons of a Roth IRA or Roth 401(k) conversion for some or all of those assets. You may want to consider the “Roth tradeoff” – being taxed on the amount of retirement savings you convert today in exchange for the ability to take tax-free withdrawals from the Roth IRA or 401(k) tomorrow. (You must be 59½ and have owned that Roth account for at least five years to take tax-free distributions.)1

 

Should you downsize or relocate? Moving to another state may lessen your tax burden. Moving into a smaller home may reduce your monthly expenses. In a perfect world, you would retire without any mortgage debt. If you will still be paying off your home loan in retirement, realize that your monthly income might be lower as you do so. You may want to investigate a refi, but consider that the cost of a refi can offset the potential savings down the line.

 

How conservative should your portfolio be? Even if your retirement savings are substantial, growth investing gives your portfolio the potential to keep pace with or keep ahead of rising consumer prices. Mere gradual inflation has the capability to erode your purchasing power over time. As an example, at 3% inflation what costs $10,000 today will cost more than $24,000 in 2045.2

 

In planning for retirement, the top priority is to build savings; within retirement, the top priority is generating consistent, sufficient income. With that in mind, portfolio assets may be adjusted or reallocated with respect to time: it may be wise to have some risk-averse investments that can provide income in the next few years as well as growth investments geared to income or savings objectives on the long-term horizon.

 

How will you live? There are people who wrap up their careers without much idea of what their day-to-day life will be like once they retire. Some picture an endless Saturday. Others wonder if they will lose their sense of purpose (and self) away from work. Remember that retirement is a beginning. Ask yourself what you would like to begin doing. Think about how to structure your days to do it, and how your day-to-day life could change for the better with the gift of more free time.

 

Many retirees find that their expenses “out of the gate” are larger than they anticipated – more travel and leisure means more money spent. Even so, no business owner or professional wants to enter retirement pinching pennies. If you want to live it up a little yet are worried about drawing down your retirement savings too fast, consider slimming transportation costs (car and gasoline expenses; maybe you could even live car-free), landscaping costs, or other monthly costs that amount to discretionary spending better suited to youth or mid-life.

 

How will you take care of yourself? What kind of health insurance do you have right now? If your company sponsors a group health plan, you may as well get the most out of it (in terms of doctor, dentist and optometrist visits) before you leave the office.

 

If you retire prior to age 65, Medicare will not be there for you. Check and see if your group health plan will extend certain benefits to you when you retire; it may or may not. If you can stay enrolled in it, great; if not, you may have to find new coverage at presumably higher premiums.

 

Even if you retire at 65 or later, Medicare is no panacea. Your out-of-pocket health care expenses could still be substantial with Medicare in place. Long term care is another consideration – if you think you (or your spouse) will need it, should it be funded through existing assets or some form of LTC insurance?

 

Give your retirement strategy a second look as the transition approaches. Review it in the company of the financial professional who helped you create and refine it. An adjustment or two before retirement may be necessary due to life or financial events.

 

Warren Street Wealth Advisors

190 S. Glassell St., Suite 209

Orange, CA 92866

714-876-6200 – office

 

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

   

Citations.

1 – turbotax.intuit.com/tax-tools/tax-tips/Retirement/The-Tax-Benefits-of-Your-401-k–Plan/INF22614.html [5/7/15]

2 – investopedia.com/articles/markets/042215/best-etfs-inflationary-worries.asp [4/22/15]

 

Why You Should Look for a Registered Investment Advisor

RIAWhy You Should Look for a Registered Investment Advisor

Standards matter, especially in wealth management.

Provided by: Warren Street Wealth Advisors

 

Who should manage significant wealth? In recent years, more and more high net worth households have found their answer to that question: a Registered Investment Advisor.

 

What is the RIA difference? RIAs have a fiduciary duty to act in your best interest. That is a legal obligation, and it is expressed in the investment recommendations the RIA and their representatives make and the advice and guidance they offer. If even the potential for a conflict of interest exists, it must be fully disclosed.1,2

 

Investment brokers are not asked to work by a fiduciary standard, only a suitability standard. Under a suitability standard, a broker is asked to recommend investment products that are “suitable” for a client – an investment that is regarded as appropriate for his or her objectives. An investment conveniently offered by his or her broker might meet that standard – one offered with little or no evaluation of other options, one that may have high fees and bring that broker a relatively large commission.1

 

In fact, the typical investment broker works on a commission basis – a percentage of his or her compensation depends on product sales. Just who ends up paying the broker those commissions? They may be paid by the investment companies involved – or the client. They may not even be mentioned until after the product sale.1

 

In contrast, many RIAs manage the assets of high net worth investors on a fee basis. The management fees usually represent a percentage of invested assets belonging to the client. Hourly or per-project fees may be charged for other services. These fees are disclosed up front. RIAs are not affiliated with brokerage firms, so the potential for brokerage directives coloring the advisor-client relationship is diminished.1,2

 

As the designation implies, an RIA is an investment advisor that has registered with either the Securities and Exchange Commission (SEC) or the securities authorities in the state(s) in which they operate. Technically speaking, an RIA is a financial firm. The individual advisors working for the RIA are IARs, or Investment Advisor Representatives – but the phrase “RIA” is often informally used to refer to both an IAR and the firm for which she or he works.1,2

 

The demand for RIAs is growing. Individuals, couples, families and institutions with sizable wealth management concerns often turn toward RIAs. From 2008-12, assets under management by RIAs increased an average of 8.8% annually, to the point where they were managing $1.5 trillion of invested assets in 2014. Additionally, the number of RIAs grew by 8% per year from 2008-12.3

 

Those statistics bear out an emerging truth: high net worth households want unbiased investment consulting, and see value in working with RIAs that are fee-based or even fee-only.

 

The typical RIA firm is built to address varied client priorities. An independent RIA firm is usually owned and operated by a highly experienced financial professional with prestigious designations (such as the Certified Financial Planner™ designation). That individual does not usually work alone. Often, the RIA firm employs or retains a “team” of professionals skilled in disciplines that may include portfolio management, tax planning, estate planning and retirement planning. These individuals are usually financial professionals who have spent significant time in the industry, and who have committed themselves to continuing education.2

 

Standards matter in life, and they especially matter in wealth management. As you want a wealth management with high standards, a Registered Investment Advisor is the clear choice.

 

Warren Street Wealth Advisors

190 S. Glassell St., Suite 209

Orange, CA 92866

714-876-6200 – office

 

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

   

Citations.

1 – sfchronicle.com/business/networth/article/Proposed-rule-would-lead-to-better-advice-on-6207776.php [4/17/15]

2 – nerdwallet.com/finance/question/what-s-the-difference-between-a-registered-investment-advisor-and-the-traditional-advisor-working-at-a-large-bank-or-brokerage-f-521 [8/13/13]

3 – forbes.com/sites/halahtouryalai/2014/04/16/still-booming-top-rias-keep-getting-bigger/ [4/16/14]

 

Major Risks to Family Wealth

major risks to family wealthWill your accumulated assets be threatened by them?

Provided by: Warren Street Wealth Advisors

                               

All too often, family wealth fails to last. One generation builds a business – or even a fortune – and it is lost in ensuing decades. Why does it happen, again and again?

 

It is because families fall prey to serious money blunders – old and new. Classic mistakes are made, and changing times aren’t recognized.

 

Procrastination. This isn’t simply a matter of failing to plan, but also of failing to respond to acknowledged financial weaknesses.

 

For example, let’s say we have a multimillionaire named Alan. The named beneficiary of Alan’s six-figure savings account is no longer alive. While Alan knows about this financial flaw, knowledge is one thing and action is another. He realizes he should name another beneficiary, but he never gets around to it. His schedule is busy, and it is an inconvenience.

 

Sadly, procrastination wins out in the end and as the account lacks a POD beneficiary, those assets end up subject to probate. Then his heirs find out about other lingering financial matters that should have been taken care of regarding his IRA … his real estate holdings … and more.1

 

Minimal or absent estate planning. Every year, multimillionaires die without any leaving any instructions for the distribution of their wealth – not just rock stars and actors, but also small business owners and entrepreneurs. A 2015 Caring.com survey found that only 56% of American parents have a will or living trust.2

 

A will may not be enough. Anyone reliant on a will alone risks handing the destiny of their wealth over to a probate judge. The multimillionaire who has a child with special needs, a family history of Alzheimer’s or Parkinson’s, or a former spouse or estranged children may need more rigorous estate planning. The same is true if he or she wants to endow charities or give grandkids a nice start in life. Is this person a business owner? That factor alone calls for coordinated estate and succession planning.

 

A finely crafted estate plan has the potential to perpetuate and enhance family wealth for decades, perhaps generations. Without it, heirs may have to deal with probate and a painful opportunity cost – the lost potential for tax-advantaged growth and compounding of those assets.

 

The lack of a “family office.” Decades ago, the wealthiest American households included offices: a staff of handpicked financial professionals worked within the mansion, supervising a family’s entire financial life. While the traditional “family office” has disappeared, the concept is as relevant as ever. Today, select wealth management firms emulate this model: in an ongoing relationship distinguished by personal and responsive service, they consult families about investments, provide reports and assist in decision-making. If your financial picture has become too complex to address on your own, this could be a wise choice for your family.

 

Technological flaws. Hackers can hijack email accounts and send phony messages to banks, brokerages and financial advisors greenlighting asset transfers. Social media can help you build your business, but it can also lend personal information to identity thieves who want access to digital and tangible assets.

 

Sometimes a business or family installs a security system that proves problematic – so much so that it is turned off half the time. Unscrupulous people have ways of learning about that. Maybe they are only one or two degrees separated from you.

 

No long-term strategy in place. When a family wants to sustain wealth for decades to come, heirs have to understand the how and why. All family members have to be on the same page, or at least read that page. If family communication about wealth tends to be more opaque than transparent, the mechanics and purpose of the strategy may never be adequately conveyed.

 

No decision-making process. In the typical high net worth family, financial decision-making is vertical and top-down. Parents or grandparents may make a decision in private, and it may be years before heirs learn about it or fully understand it. When heirs do become decision makers, it is usually upon the death of the elders.

 

Horizontal decision-making can help multiple generations understand and participate in the guidance of family wealth. Estate and succession planning professionals can help a family make these decisions with an awareness of different communication styles. In-depth conversations are essential; good estate planners recognize that silence does not necessarily mean agreement.

 

You may plan to reduce these risks (and others) in collaboration with financial and legal professionals who focus on estate planning and wealth transfer. It is never too early to begin.

 

Warren Street Wealth Advisors

190 S. Glassell St., Suite 209

Orange, CA 92866

714-876-6200 – office

www.warrenstreetwealth.com

 

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

Citations.

1 – nolo.com/legal-encyclopedia/free-books/avoid-probate-book/chapter1-5.html [5/5/15]

2 – caring.com/about/news-room/american-parents-wills.html [4/22/15]

Are Your Children Financially Literate?

New Approaches to a Changing Problem.

Provided by: Warren Street Wealth Advisors

 

How bad is financial illiteracy today? So bad that your children may be at risk of making some serious financial mistakes. Some are finding that talking to children about finances has become less about the nuts and bolts of money and more about putting money’s importance to our daily lives in the correct context.

Women at particular risk. The U.S. Department of Labor reports that only 45% of working women ages 21-64 have a retirement plan. The DOL also notes that more women work in part-time jobs, and are more likely to interrupt their careers to take care of family, whether that be raising children or looking after parents. Some of these patterns are just luck of the draw, but others may come from what parents teach children about money, and how they teach it.1

 

Start at a young age. New York Times money columnist Ron Lieber’s book The Opposite of Spoiled discusses ways to prepare children for dealing with financial issues. The title refers to the author’s search for an antonym to the word “spoiled” in the context of an entitled and demanding personality. Lieber suggests focusing on values like graciousness in communication, which can lead to more openness in discussing money. Money can be frightening or mysterious to many, even well into adulthood, and Lieber encourages approaching the topic with fewer facts and figures and more as an emotional issue. The reasoning for this is that money is, for children and adults, an emotional topic.2

 

The emotional toll of money issues. While most people have experienced money worries at one time or another, the science surrounding this phenomenon is compelling. Many mental health organizations have special literature dealing with the emotions that surround money troubles, including Duke University’s Personal Assistance Service. They cite an American Psychological Association survey asserting that 80% of Americans experience genuine stress related to money, and that half of Americans worry about their ability to provide for their family. While money is always an uncertain and fluid factor in our lives, how we deal with these stresses may be strengthened through early experiences and developing good emotional habits early on. Frank talk about these emotions may demystify money and, in the process, boost financial literacy.3

 

Education is still needed. Of course, money is far more than an emotional issue; being comfortable with a topic doesn’t guarantee proficiency, it merely makes it easier to learn.

 

In 2014, the Organization for Economic Cooperation and Development tested 29,000 students aged 15 from 18 member countries or economic regions. Students in top-scoring Shanghai had the highest average score at 605, while the lowest average score belonged to 15-year-olds from Colombia at 375; the average score for U.S. students was a mediocre 490.4

While a number of factors may contribute to the lower scores, there were few obvious indicators, beyond a simple lack of financial sophistication. For example, while those with better math and reading skills were more likely to demonstrate financial literacy, not all with high proficiencies were demonstrably better with money. However, those who indicated that they enjoyed solving complex problems earned higher scores. This may be key. U.S. Education Secretary Arne Duncan indicated that teens needed to be more financially proficient, and in ways that their parents and grandparents never had to be.4

 

Prescriptions in progress. There are a number of online sources for financial education, helpful to both teens and young adults. The Ad Council and the American Institute of Certified Public Accountants have a national campaign, Feed the Pig™, to try and correct this dilemma (learn more by visiting www.feedthepig.org). The National Council on Economic Education has also helped launch www.TheMint.org to acquaint young adults with vital financial principles.

 

Warren Street Wealth Advisors

190 S. Glassell St., Suite 209

Orange, CA 92866

714-876-6200 – office

714-876-6202 – fax

714-876-6284 – direct

 

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

Citations.

1 – dol.gov/ebsa/publications/women.html [2/26/15]

2 – wealthmanagement.com/careers/cobbler-s-kids-have-no-shoes [2/17/15]

3 – hr.duke.edu/pas/money_emotion.html [2/26/15]

4 – pbs.org/newshour/making-sense/u-s-teens-rank-between-latvia-and-russia-on-financial-literacy-far-below-shanghai/ [7/10/14]

 

4 Money Blunders That Could Leave You Poorer

Not to do listA “not-to-do” list for the new year & years to follow.

Provided by: Warren Street Wealth Advisors

   

How are your money habits? Are you getting ahead financially, or does it feel like you are running in place?

 

It may come down to behavior. Some financial behaviors promote wealth creation, while others lead to frustration. Certainly other factors come into play when determining a household’s financial situation, but behavior and attitudes toward money rank pretty high on the list.

 

How many households are focusing on the fundamentals? Late in 2014, the Denver-based National Endowment for Financial Education (NEFE) surveyed 2,000 adults from the 10 largest U.S. metro areas and found that 64% wanted to make at least one financial resolution for 2015. The top three financial goals for the new year: building retirement savings, setting a budget, and creating a plan to pay off debt.1

 

All well and good, but the respondents didn’t feel so good about their financial situations. About one-third of them said the quality of their financial life was “worse than they expected it to be.” In fact, 48% told NEFE they were living paycheck-to-paycheck and 63% reported facing a sudden and major expense last year.1

 

Fate and lackluster wage growth aside, good money habits might help to reduce those percentages in 2015. There are certain habits that tend to improve household finances, and other habits that tend to harm them. As a cautionary note for 2015, here is a “not-to-do” list – a list of key money blunders that could make you much poorer if repeated over time.

 

Money Blunder #1: Spend every dollar that comes through your hands. Maybe we should ban the phrase “disposable income.” Too many households are disposing of money that they could save or invest. Or, they are spending money that they don’t actually have (through credit cards).

 

You have to have creature comforts, and you can’t live on pocket change. Even so, you can vow to put aside a certain number of dollars per month to spend on something really important: YOU. That 24-hour sale where everything is 50% off? It probably isn’t a “once in a lifetime” event; for all you know, it may happen again next weekend. It is nothing special compared to your future.

 

Money Blunder #2: Pay others before you pay yourself. Our economy is consumer-driven and service-oriented. Every day brings us chances to take on additional consumer debt. That works against wealth. How many bills do you pay a month, and how much money is left when you are done? Less debt equals more money to pay yourself with – money that you can save or invest on behalf of your future and your dreams and priorities.

     

Money Blunder #3: Don’t save anything. Paying yourself first also means building an emergency fund and a strong cash position. With the middle class making very little economic progress in this generation (at least based on wages versus inflation), this may seem hard to accomplish. It may very well be, but it will be even harder to face an unexpected financial burden with minimal cash on hand.

 

The U.S. personal savings rate has averaged about 5% recently. Not great, but better than the low of 2.6% measured in 2007. Saving 5% of your disposable income may seem like a challenge, but the challenge is relative: the personal savings rate in China is 50%.2

 

Money Blunder #4: Invest impulsively. Buying what’s hot, chasing the return, investing in what you don’t fully understand – these are all variations of the same bad habit, which is investing emotionally and trying to time the market. The impulse is to “make money,” with too little attention paid to diversification, risk tolerance and other critical factors along the way. Money may be made, but it may not be retained.

 

Make 2015 the year of good money habits. You may be doing all the right things right now and if so, you may be making financial strides. If you find yourself doing things that are halting your financial progress, remember the old saying: change is good. A change in financial behavior may be rewarding.

     

Warren Street Wealth Advisors

190 S. Glassell St., Suite 209

Orange, CA 92866

714-876-6200 – office

 

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

    

Citations.

1 – denverpost.com/smart/ci_27275294/financial-resolutions-2015-four-ways-help-yourself-keep [1/7/15]

2 – tennessean.com/story/money/2014/12/31/tips-getting-financially-fit/21119049/ [12/31/14]