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Is It Smarter to Buy or Rent a Second Home?

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As summer winds down, your thoughts may drift toward a final escape. Whether your idea of a perfect getaway is one last trip to a pristine beach, fishing in a mountain lake, or playing the back nine between pickleball matches, many of our clients have come to us over the years with the same question—should I buy a vacation home or just continue to rent?

As financial professionals, our answer is, “It depends.”

Renting a house for a week or two can be less expensive and time-consuming than buying a vacation property. Renting is a short-term commitment, while buying a second home often requires an ongoing investment of time and money. Renting allows you to choose different vacation destinations every year without maintenance and upkeep concerns. However, buyers can decide to rent out the property when they’re not there.

We caution our clients to consider the pros and cons before making decisions. While we aren’t real estate experts, we’ve compiled some information that you may find helpful.

Buying A Vacation Home

  • Non-Financial Considerations
    Many financial considerations must be pondered with a vacation property. Will you buy it outright or take out a mortgage? Are you interested in renting it when you’re not there? Will it impact your cash flow? There are also many nonfinancial issues you may want to consider, the most important being how a second home will affect your lifestyle.

Here are a few more aspects to consider before signing on the dotted line:

  • How Much Time Will You Spend There?1
    If you only intend to spend a few weeks a year there, is renting a better choice? The expense and hassle of owning a second home may not be worth it unless you stay a few months each year to enjoy the place. Over time, you can develop friendships and become part of the community, making your second house more of a home.
  • How Does a Second Home Fit Into Your Travel Patterns?1
    By owning a vacation home, you may spend less time traveling to other locations. Consider whether focusing vacation time on one location fits your desired travel patterns. For example, if you believe you’ll be happy spending all your free time in Florida, then buying may be right for you. However, you may feel tied down to one place if you like to travel the world.
  • Will a Second Home Increase Your Stress?1
    Before buying, be aware of the potential stress of owning a second home. Like your primary residence, you’ll need to deal with utilities, maintenance, repairs, and other considerations. While you may find these issues worth the benefits of owning a vacation home, you should enter ownership with your eyes wide open.
  • Will Purchasing a Vacation Home Enhance Your Experiences and Relationships?1
    If your vacation home becomes a hub for family and friends to visit and for you to engage in social activities and adventures with them, owning a second home can increase your happiness. Clients who enjoy their vacation homes the most tend to create memories through experiences with family and friends at their second homes. On the other hand, buying a vacation home primarily as a relaxing retreat may not add much to your overall happiness—despite the weather and scenery.
  • What Are the Potential Advantages of Buying a Vacation Property2
    There are many good reasons to buy a vacation home. After considering the aforementioned nonfinancial factors, it may be the right course of action for you and your family. Here are some potential benefits:
    • Possible Real Estate Appreciation: One potential advantage to buying a vacation property is that the value of the real estate may increase over time. Of course, there are no guarantees, and your property could lose value.
    • Renting Costs for Your Vacation: Owning a property in a vacation spot means you won’t need to pay for weekly accommodations.
    • Perhaps Generate Rental Income: Another benefit to buying a vacation property is the opportunity to generate rental income. If you choose a vacation home in a bustling short-term rental market, you may have the chance to rent out your place when you’re not in town.
    • Convenience: Owning a vacation home can be more convenient than arranging short-term rentals. It’s also more familiar, comfortable, and allows you to host friends and family.
    • Retirement: A vacation home can be part of your retirement strategy. Some clients have used their second homes in later life and moved in permanently.

Potential Disadvantages of Buying a Vacation Property

Of course, where there are pros, there are cons. While we don’t want to rain on anyone’s parade, as financial professionals, we strive to provide a fair and balanced view. So, here are some of the potential downsides of buying a vacation property:

  • Money Management: Buying a property can be costly, especially a second home in an expensive vacation area. In addition to initial costs, there are also ongoing maintenance and other costs. If money is an issue, buying another house may not be your best choice.2
  • Financing: If you cannot self-finance your purchase, financing a vacation home can be challenging because of different mortgage requirements. A higher credit score and a larger down payment are often required to qualify for a mortgage. So, if you are not paying in cash, expect a more complicated financing experience than purchasing a primary residence.2
  • Property Management: If you plan to generate rental income when you’re not using your vacation home, you may want to hire a property manager to find renters, collect rent, and clean the place. This could add up to 15% of the rental income.2
  • Inconsistent Rental Income: Rental income often depends on the season or certain times of the year. There are usually seasonal periods when no one might rent. Vacation property rental income is impacted directly by the destination and its popular times, which can affect income.2
  • Lack of Disaster Aid: FEMA disaster assistance is limited to your primary home, i.e., where you live for more than six months out of the year. Second homes or vacation homes used as vacation rentals don’t qualify for FEMA assistance. Thus, if hurricanes, wildfires, or floods destroy or damage your second home, you must rely on other options.3

Markets for Luxury Second Homes

While demand for luxury second homes rose during the pandemic, you may think that today’s relatively high interest rates, tight inventory, and uncertain economic environment would’ve damaged the market. They haven’t.4

Despite the numerous challenges hitting residential real estate, the luxury housing market has remained strong. According to The Agency’s 2025 Red Paper, the number of U.S. homes selling for $1 million-plus increased by 5.2% in the first half of 2024, while the median price for high-end properties rose by 14.2%. Compared with the broader market, in which overall home sales fell by 12.9%, the median price increased by just 5% over the same period.4

With more cash on hand and fewer financial constraints, wealthy homebuyers are often less reliant on loans. According to The Agency’s report, homebuyers paid cash for nearly half of all luxury homes sold in the first quarter of 2024.4 So, if you’re in the market for a high-end second home, you’re in good company.

Real estate company Pacaso analyzed the markets with the most significant year-over-year growth in luxury second-home transactions from 2023 to 2024 and average prices for second homes. They believe these second-home destinations could see more growth this year.4

As you’ll see in the chart below, Cape May County, New Jersey, with its Victorian charm and sandy beaches, ranked as the top spot for second home purchases in 2025, with Gulf County, Florida, coming in as a distant runner-up.4

Suppose you’re looking for a second home selling at under $1 million. Washington County, Utah, near Zion National Park; Coconino County, Arizona, near Flagstaff; and Cumberland County in south-central Maine along the coast are popular locations.4

Insurance Considerations for Second Homes

Unless you have the resources to “self-insure,” you might want to consider homeowners insurance to protect your real estate purchase. Second home insurance is a specialized policy designed to cover properties that are not your primary residence. Policies differ because a second home may have additional risks not associated with your primary residence.

Standard homeowners’ insurance for a full-time residence costs an average of $1,754 per year, but you might pay more for a second home insurance policy. For example, American Family estimates that vacation home policies are typically two to three times more expensive than home insurance for a full-time residence.5

The additional risks that cause second home insurance to be higher include:6

  • Vacancy Periods: Unoccupied homes are more vulnerable to theft or damage.
  • Location-Based Risks: Coastal or mountainous properties may face specific hazards like hurricanes, floods, or wildfires.
  • Higher-End Property: If your second home is a luxury property, consider high-value property insurance.
  • Rental Use: If you rent to others, you may face additional liability concerns, such as tenant-caused damages and liability for injuries sustained by renters or their guests.

Banks will require that your second home be insured if you take out a mortgage. If you are paying cash, the insurance coverage you want, if any, is up to you. If you seek coverage, you should evaluate risks, compare providers, and determine if the policy aligns with your needs and property usage.

Including a Vacation Home in Your Estate

If you buy a vacation home, consider what happens to the property after you’re gone. If a family vacation home is part of your estate, you should put the time and effort into outlining your intentions for the next generation. Your heirs should know what they’re getting and the time, effort, and resources they’ll need to put into the property to keep it functioning well. You know your family’s dynamics and that not all of your heirs will have that same level of interest or involvement in the family vacation home. Thus, be mindful of this and flexible when creating your strategy.7

Consider working with your financial professional and estate team to determine the best way to transfer your vacation home based on your situation. Here are a few choices you may want to evaluate:7

  • Sell the house outright or gift it to one or more of your children.
  • Establish a trust in which one or more trustees are responsible for owning and maintaining the property. Using a trust involves a complex set of tax rules and regulations. Before moving forward with a trust, consider working with a professional familiar with the relevant rules and regulations.
  • Form an LLC or other legal entity where your heirs will be owners and follow specific governance rules and operating agreements in how the property is used.

As financial professionals, we can offer insights into how your vacation house may contribute to your overall estate strategy.

Tax Implications of Owning a Second Home

As we mentioned before, we’re not tax experts, but we work with people who are. We’re outlining some general information, but it’s not a replacement for real-life advice. Consult your tax, legal, and accounting professionals for more specifics regarding your second home.

If your second home is a residential home, you may be able to deduct mortgage interest up to $750,000 as long as the second home is the one that secures the loan. If your mortgage on your second home originated before Dec. 16, 2017, you can deduct up to $1 million in mortgage interest. You also can deduct state and local property taxes––up to $10,000 combined for all real estate taxes between your homes.8

If you rent your property for 14 days or less during the year, you may not need to report this as income to the IRS.8

If you rent your second home for more than 14 days a year, the IRS considers it an investment property. If your second home is an investment property, you might be able to deduct mortgage interest or real estate taxes on your personal income tax return. Still, you may be able to deduct those costs against your rental business income.8

When you sell your second home, you must be aware that you may not receive the same capital gains tax deduction when selling your primary residence – $250,000 for single filers and $500,000 for married.8

Renting a Vacation Home

If you have gone through all the pros and cons of buying a vacation home and are leaning toward renting, this approach also has two sides. Let’s start with the positives.

Potential advantages of renting a vacation home2

  • Little Responsibility: If you choose to rent a vacation home, your only responsibility is to leave the house the same way you found it. None of the property maintenance or utilities fall onto a short-term renter to take care of, which means you can enjoy your holiday and then dump your garbage on the way out, turn out the lights, and lock the door behind you.
  • Variety of Options: Renting vacation homes means renting a different home anywhere you go. You won’t be limited to revisiting the same place over and over. Instead, you can change locations each time you go on vacation and experiment with the type of property to see what you enjoy best – in town or out, kid-friendly or over 55, nightlife or peace and quiet, etc.
  • Cost Considerations: Renting a vacation home can be a more affordable way to go on various vacations in many areas. After all, you will not pay a mortgage, maintenance fees, or other charges.

Disadvantages of Renting a Vacation Home

Anyone who has rented a vacation home knows that there are some downsides. Here are a few of them:

  • Cost: In 2024, the expected average daily rate for U.S. vacation rentals is $326.9 This number will fluctuate based on the type of home you rent. A luxury rental could be significantly higher.
  • Not Your Space: When renting a vacation property, you live in someone else’s home. For many people, it’s never as comfortable as staying in a place you own. You may find problems with the house, it may not have all the features you are accustomed to, and you may need a learning curve to figure out how to use everything from the TV to the thermostat.2
  • Availability: You may need to book your vacation homes well in advance during peak seasons. Chances are you want to go away at the same time of year, but others have the same idea. Availability can be problematic if you book too late or the area is extremely popular.2
  • Inconvenient: Renting a vacation home can be a hassle. You have to choose the home, make sure it’s available when you want, and then go through the booking process with the owner, the property manager, or a third-party website. If anything accidentally breaks during your stay, you’ll also be liable to cover it. There can also be unexpected fees that drive up the price.2 

Make Your Decision Carefully

I’m sure you’ve gone on vacation to a terrific location and fallen in love with it. The experience might have been so wonderful that you thought about buying a home to spend more time there. That’s how the time-share industry became so popular in the 1970s and 80s—catering to impulse buyers.

However, it’s important to remember that while you might be swayed by the most enjoyable aspects of your vacation, you should consider the negative factors that owning a second home can bring. Between costs, extra work of taking care of another property, and the impact on your other travel habits, owning a vacation home can have drawbacks. You also may want to factor in how being away could impact your relationships back home.

Before you commit to buying a vacation property, you might want to consider living there for a month or two first. Spending an extended amount of time in a rental property at your intended vacation home location may provide you with a more realistic view of the area.

There is no right or wrong answer on whether to buy or rent a vacation home. Please take the time to weigh the pros and cons thoroughly before deciding. Please do not hesitate to contact us if we can help or just be an impartial sounding board.

Veronica Cabral

Wealth Advisor, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents 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 document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

Sources:

1. Forbes, May 31, 2024. https://www.forbes.com/sites/johnjennings/2024/05/31/is-a-vacation-home-right-for-you-key-factors-to-consider-before-you-buy/

2. New Silver, January 25, 2024. https://newsilver.com/the-lender/buy-a-vacation-home-or-rent/

3. FEMA, August 30, 2024. https://www.fema.gov/fact-sheet/questions-and-answers-federal-assistance

4. CRE Daily, February 21, 2025. https://www.credaily.com/briefs/the-top-luxury-second-home-markets-to-watch-in-2025/

5. Policygenius.com, May 7, 2024. https://www.policygenius.com/homeowners-insurance/second-home-insurance/#how-much-does-second-home-insurance-cost

6. Coughlin Insurance Services, January 2, 2025. https://coughlinis.com/second-home-insurance-what-you-need-to-know/

7. U.S. Bank, February 2025. https://www.usbank.com/wealth-management/financial-perspectives/trust-and-estate-planning/estate-planning-for-vacation-homes.html

8. MSN, January 3, 2025. https://www.msn.com/en-us/money/realestate/second-home-taxes-explained-what-owners-need-to-know-in-2025/ar-BB1k1mJF

9. PhotoAiD, February 14, 2025. https://photoaid.com/blog/vacation-rental-statistics/

The “Big Beautiful Bill”: What It Means for Your Finances

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The “One Big Beautiful Bill Act” (OBBBA), signed July 4, 2025, is poised to significantly impact nearly every aspect of your financial life. From your tax bill to your healthcare and your children’s future savings, understanding the nuances of this bill is crucial for effective financial planning.

Here’s a breakdown of what the OBBB means for you:

Tax Planning: More in Your Pocket, But Mind the Details

The OBBB makes permanent many of the individual income tax rates and brackets from the 2017 Tax Cuts and Jobs Act (TCJA), providing long-term clarity. But there’s more:

  • Expanded Standard Deduction: The standard deduction sees a permanent expansion, making tax filing simpler for many and potentially reducing the need to itemize.
  • Temporary Deductions (2025-2028): Get ready for some new, but temporary, tax breaks.
    • No Tax on Tips/Overtime: If you earn qualified tip income (up to $25,000) or overtime premium pay (up to $12,500 for individuals, $25,000 for joint filers), you may be able to deduct it. Keep an eye on income phase-outs.
    • Senior Tax Deduction: Individuals 65 and older meeting income thresholds ($75,000 single, $150,000 joint) can claim an additional $6,000 deduction, aiming to offset federal taxes on Social Security.
    • Auto Loan Interest Deduction: A temporary deduction of up to $10,000 for interest on loans for U.S.-assembled vehicles is available, subject to income phase-outs.
  • Increased SALT Deduction Cap: For five years, the State and Local Tax (SALT) deduction cap temporarily increases to $40,000 (from $10,000), with income-based phase-outs. This is a win for residents of high-tax states.
  • Enhanced Child Tax Credit: The Child Tax Credit permanently increases to $2,200 per child and will be indexed for inflation.
  • Business Tax Incentives: Businesses will see the reinstatement of 100% bonus depreciation and permanent Section 199A (Qualified Business Income) deduction, encouraging investment.
  • Estate and Gift Tax Relief: The unified credit and Generation-Skipping Transfer Tax (GSTT) exemption thresholds are permanently increased to $15 million per individual, offering substantial relief for high-net-worth individuals.

Your Action Plan: Review your current tax strategies with a financial advisor to maximize these new permanent and temporary provisions. Consider whether itemizing still makes sense for you.

Healthcare & Social Programs: A Shifting Landscape

The OBBB includes significant cuts to federal funding for vital social programs:

  • Medicaid Changes: Expect cuts to Medicaid funding and new work requirements for many adult beneficiaries. If you or your loved ones rely on Medicaid, be aware of potential reduced coverage or new eligibility hurdles.
  • SNAP (Food Assistance) Adjustments: The Supplemental Nutrition Assistance Program (SNAP) also faces federal funding cuts and expanded work requirements.
  • Affordable Care Act (ACA) Implications: New eligibility verification requirements are imposed for ACA marketplace coverage, and enhanced tax credits for ACA coverage are set to expire. This could lead to higher out-of-pocket premium payments for many, particularly older adults. The CBO estimates these changes could lead to a significant increase in the uninsured population.

Your Action Plan: Reassess your healthcare and benefits planning. Explore alternative options if you’re impacted by changes to Medicaid or ACA, and adjust your budget accordingly.

Retirement & Savings: New Avenues and Program Shifts

The bill introduces both opportunities and challenges for your long-term financial goals:

  • “Trump Accounts” for Children: A brand-new savings option for newborns. These “Trump Accounts” receive an initial federal contribution of $1,000, with parents able to contribute up to $5,000 annually. Classified as IRAs, gains are tax-deferred until age 18. This is a new consideration for long-term savings for your children.
  • Student Loan Program Overhaul: Federal student loan programs are undergoing significant alterations, potentially ending subsidized and income-driven repayment options. Limits are also placed on Pell Grant eligibility. Current and future students will need to adjust their education financial planning.
  • HSA and 529 Expansion: Good news for healthcare and education savings. Eligible uses for Health Savings Accounts (HSAs) and 529 education savings plans are expanded, offering more flexibility.
  • Social Security Outlook: While the bill provides some temporary tax relief for seniors, its overall impact on the national debt could accelerate the insolvency of Social Security. This is a long-term consideration for retirement planning.

Your Action Plan: Evaluate “Trump Accounts” alongside existing savings vehicles like 529 plans. If you have student loans or are planning for higher education, understand the new repayment and eligibility rules. Review how you leverage your HSA and 529 plans for maximum benefit.

Investment & Business Considerations: Adapting to Policy Shifts

The OBBB also brings changes that could influence your investment portfolio:

  • Clean Energy Tax Credits: Many clean energy tax credits from the Inflation Reduction Act are being phased out, which may impact investments in renewable energy and electric vehicles.
  • Fossil Fuel Promotion: The bill promotes increased domestic oil and gas production, which could influence investment strategies in the energy sector.

Your Action Plan: Consider how these policy shifts might affect your investment portfolio. Diversification and a long-term perspective remain key.

Overall Financial Planning Implications: A Holistic Approach

The “Big Beautiful Bill” is a game-changer. It necessitates a comprehensive review of your financial strategy.

  • Review Tax Strategies: Don’t miss out on new deductions!
  • Reassess Healthcare and Benefits Planning: Understand potential impacts on coverage and eligibility.
  • Evaluate Savings Options: Explore new opportunities like “Trump Accounts” and expanded HSA/529 uses.
  • Update Estate Plans: High-net-worth individuals should revisit their estate plans due to increased exemptions.
  • Adjust Investment Portfolios: Align your investments with the new economic realities. If you’re a client of ours, we’ve already done this for you.

The “One Big Beautiful Bill” is far-reaching. Given its complexity, consulting with a qualified financial advisor and tax professional is highly recommended to understand how these provisions specifically impact your unique financial situation and to adjust your plans accordingly. Schedule time with a Warren Street advisor today. .

Justin D. Rucci, CFP®

Wealth Advisor, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents 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 document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

Sources:

https://www.whitehouse.gov/wp-content/uploads/2025/03/The-One-Big-Beautiful-Bill-Legislation-for-Historic-Prosperity-and-Deficit-Reduction-1.pdf

https://apnews.com/article/what-is-republican-trump-tax-bill-f65be44e1050431a601320197322551b

https://dart.deloitte.com/USDART/home/news/all-news/2025/jul/obbb-signed

https://www.bairdwealth.com/insights/wealth-management-perspectives/2025/10/the-one-big-beautiful-bill-act-how-it-may-impact-you

https://www.lathropgpm.com/insights/tax-update-one-big-beautiful-bill-act-signed-into-law-what-does-it-mean-for-you

https://www.loeb.com/en/insights/publications/2025/07/the-one-big-beautiful-bill-act-breaking-down-key-changes-in-the-new-tax-legislation

https://blog.zencare.co/obbba-bill-medicaid-therapy-cuts

https://www.investopedia.com/parents-and-the-big-beautiful-bill-11767091

https://www.crfb.org/blogs/obbba-would-accelerate-social-security-medicare-insolvency

https://www.americanprogress.org/article/what-trumps-anti-environment-one-big-beautiful-bill-act-means-for-your-wallet-health-and-safety

https://budgetlab.yale.edu/research/long-term-impacts-one-big-beautiful-bill-act

Safeguarding Your Identity: Essential Tips to Consider

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Statistics show that nearly 33% of Americans have faced some identity theft attempts in their lives, and experts estimate there is a new case of identity theft every 22 seconds. As financial professionals, one of our primary goals is to help our clients create a financial strategy and protect their wealth. In today’s digital age, identity theft threatens your finances, so it’s crucial to understand the risks and take proactive measures.1

This blog aims to equip you with practical strategies for protecting your personal and financial information with the goal of maintaining your financial well-being.

The most common types of identity theft are1:

  •  Credit card fraud
  •  Government documents or benefits fraud
  •  Loan or lease fraud

How Identity Theft Impacts Your Finances

The financial hardships caused by identity theft can last for months or even years after your personal information is exposed. Depending on the type of data identity thieves obtain, the recovery process can involve several hurdles. Victims often need to dispute fraudulent activities in their credit files and work to restore their good credit. This may include cleaning up and making changes to compromised bank accounts.2

If an identity thief uses your Social Security number to obtain employment, you may need to work with the Social Security Administration. Similarly, if you become a victim of tax refund identity theft or an identity thief’s income makes it appear you are under-reporting your income, you may need to work with the IRS.2

Identity theft involving sensitive, personally identifiable information like your Social Security number can have long-lasting effects. Thieves may wait months or even years to use your information, or they might sell it on the dark web, requiring you to stay vigilant indefinitely. Legal fees and other costs could add to the financial impact if your identity theft issue is complex. Some victims even need to seek government assistance during recovery, highlighting the potential magnitude of identity theft hardships.2

Steps You Can Take to Help Protect Yourself

It can be difficult for victims to deal with identity security issues because bad actors are becoming more sophisticated all the time. You can use technology-enabled safeguards to help protect your identity and personal data, such as antivirus protection software, password managers, identity theft protection, virtual personal networks, and two-factor authentication on devices and accounts. There are also other actions you can take to help manage the risk of becoming a victim, including:

1. Check your mail often.

A low-tech way criminals can steal your identity is to simply take bank or credit card statements, utility bills, health care or tax forms, or pre-approved credit card offers out of your mailbox. So, don’t let your mail sit uncollected too long. Also, if you are going away, have a trusted neighbor bring in your mail or put your mail on hold with the post office.3

2. Review credit card and bank statements regularly.

By reviewing your credit card and bank statements, you may be able to spot any suspicious activity. Thieves with your credit card number or bank account information could make small purchases to see if they can get away with it. These transactions can go unnoticed. Thieves may try to make large purchases if they get away with minor ones.3

3. Freeze your credit.

In some cases, you may want to consider freezing your credit file so no one can look at or request your credit report. That means no one can open an account, apply for a loan, or get a new credit card while your credit is frozen. Remember, a credit freeze applies to you as well. To get started, contact each of the three major credit reporting agencies. In some instances, credit freezes are free and won’t impact your credit score.3

4. Don’t use the same password twice.

According to the Federal Trade Commission (FTC), secure passwords are longer, more complex, and unique. Many people use the same password for multiple accounts, which could be problematic. You should consider creating different passwords for various accounts and avoid using information related to your identity, such as the last four digits of your Social Security number, your birthday, your initials, or parts of your name.3

The FBI and the National Institute of Standards and Technology have issued guidelines stating that passwords should consist of at least 15 characters because these are more difficult for a computer program or hacker to crack. Regarding security questions, the FTC’s guidelines suggest questions that only you can answer; avoid information that could be available online, such as your ZIP code, city of birth, or mother’s maiden name.3

5. Consider shredding documents with personal information.

As stated earlier, not all identity theft is high-tech. Old-fashioned dumpster diving might sound like a thing of the past, but it still happens. Consider buying a household shredder and destroying sensitive paperwork, such as credit card and bank statements, utility bills, and other documents containing personally identifiable information.3 

6. Opt out of prescreened credit card offers.

Credit card companies often send prescreened offers to open new accounts, and criminals can intercept these mailed or emailed offers and open accounts in your name. One way to help avoid a potential identity theft issue is to opt out of receiving these offers.2

Day-to-Day Security Best Practices

Small steps can make a big difference when it comes to keeping your information safe. Here are a few suggestions, starting with cleaning out your wallet.

1. Keep your Social Security card at home in a safe location—not in your wallet.

Those nine digits can help an identity thief to obtain loans or credit card accounts in your name. A bad actor could also use your Social Security number with the IRS.

2. Leave checks and deposit slips at home.

Consider leaving checks and deposit slips at home. These items may contain more information than you think, including your name, address, bank name, routing number, and account number.

3. Shred and trash any password cheat sheets.

Scraps of paper with sensitive information, such as PINs and passwords, can be risky, so dispose of any you have in your wallet after noting them in a password manager at home

4. Limit the number of credit cards in your wallet.

It may be best to limit the number of credit cards in your wallet. The same goes for excess cash and gift cards.

5. Bypass the PIN at the gas pump.5

One of the most common schemes is when criminals install a skimming device directly over the credit card slot at a gas pump. These skimmers capture and store your card data when you insert or swipe your card. If something looks off, don’t use that pump. Also, if you use a debit card to pay for your gas, bypass the PIN if possible and use your zip code instead. That may prevent someone from stealing your PIN using a pinhole camera.

Dispose of Old Devices Safely

Improper disposal of old digital devices is a key but often overlooked aspect of identity theft. Simply deleting files may not be enough on some digital devices, as thieves may be able to recover the data. Therefore, safe disposal is critical. Many communities have secure electronics recycling events where devices can be disposed of. However, it’s important to note that different devices and storage media types may require different disposal methods.

Identity Theft Protection Services

Identity theft protection services offer a range of features designed to detect identity theft, alert you to identity theft, and help you recover from identity theft. These services typically monitor credit reports, dark web activity, and public records for signs of fraudulent use of personal information. When suspicious activity is detected, they alert the user and provide next steps. While these services can be helpful, their effectiveness can vary. However, these services can be a valuable first step for those who lack the time or expertise to monitor their credit and personal information.

What to Do if Your Identity Has Been Stolen

You may not know that you have been a victim of identity theft immediately when it happens, but there are warning signs you can look out for, such as:6

  • Bills for items you did not buy
  • Debt collection calls for accounts you did not open
  • Information on your credit report for accounts you did not open
  • Denials of loan applications
  • Mail stops coming to or is missing from your mailbox

If you are a victim of identity theft, you may want to place fraud alerts or security freezes on your credit reports. A fraud alert requires creditors to verify your identity before opening a new account, issuing an additional card, or increasing the credit limit on an existing account based on a consumer’s request.

Pro tip: When you place a fraud alert on your credit report at one of the nationwide credit reporting companies, it must notify the others.7

Protecting your identity is an integral part of maintaining your overall financial health. As financial professionals, we believe safeguarding your personal information can be as crucial as making sound investment decisions. By implementing these preventive measures and staying vigilant, you can help manage the risk of becoming a victim of identity theft. Remember, your financial security encompasses every aspect of your financial life.

If you have any concerns about identity theft or would like to discuss how it fits into your broader financial strategy, don’t hesitate to contact us. We’re here to help provide you with information that can help improve your personal finances.

Emily Balmages, CFP®

Director of Financial Planning, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents 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 document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

This blog is for informational purposes only and is not a replacement for real-life advice. We encourage you to consult your tax, legal, and accounting professionals if you believe identity theft involves using your tax records.2

Sources: 

1. IdentityTheft.org, 2024  
https://identitytheft.org/statistics/

2. Lifelock.Norton.com, February 4, 2021
https://lifelock.norton.com/learn/identity-theft-resources/lasting-effects-of-identity-theft

3. U.S. News & World Report, May 4, 2024
https://www.usnews.com/360-reviews/privacy/identity-theft-protection/10-ways-to-prevent-identity-theft

4. Discover, May 23, 2023
https://www.discover.com/online-banking/banking-topics/7-things-you-should-never-carry-in-your-wallet/ 

5. YahooFinance.com, April 9, 2024
https://finance.yahoo.com/news/9-ways-protect-yourself-credit-110028832.html?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuYmluZy5jb20v&guce_referrer_sig=AQAAAD-gSiSE0XJ4TWsBMPswXbQ5dvIqZd65QlTQ7IXt-m1XzrWMsaa_1MJICs9I8f3JbANzT4n7V2tWEAP1dx0qWGul0i5wMwqthwwMKxqL0N6wGUqqXW4I_mvPqqTUNIbzHK15PB-7gsKpc3nXnYuSeR_Jup4_lqpxahaoyv7L-nW

6. USAGove.com, July 28, 2024
https://www.usa.gov/identity-theft#:~:text=Identity%20theft%20happens

7. Consumer Financial Protection Board, February 27, 2024
https://www.consumerfinance.gov/ask-cfpb/what-do-i-do-if-i-think-i-have-been-a-victim-of-identity-theft-en-31/

I’ve Got a Lump Sum in Cash, Should I Invest It Right Away?

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What should you do if you’ve just received a big bonus at work, inherited some money, sold a business, or come into a financial windfall? Should you invest it all at once, even if the market feels high or low, or take a gradual approach by investing in smaller increments over time?

This is a common question we hear from clients and investors alike. It’s no surprise—deciding how to invest a significant sum of money can feel overwhelming. What if you invest it now and the market drops? Or, what if you wait and the market takes off? It’s natural to worry about making the wrong choice or missing out on potential gains.

Both investing a lump sum immediately and spreading it out over time come with their pros and cons. Let’s explore some key factors to help guide your decision.

Start with Your Goals

Before making any investment decisions, consider your financial goals.

If you need the money for short-term purposes, like upcoming college tuition, the market’s volatility could be a concern. In this case, conservative options like short-term bonds, bond funds, or CDs might be better suited to protect your funds.

For long-term goals, such as retirement, investing in the stock market may be a better choice. Despite short-term fluctuations, the market has historically trended upward over time.

Compare Lump-Sum Investing vs. Dollar-Cost Averaging

Investing a lump sum means your money is fully exposed to the market immediately, allowing you to benefit from any immediate gains if the market is rising. However, since markets are unpredictable, a downturn could occur soon after you invest.

If the risk of short-term losses makes you uneasy, dollar-cost averaging (DCA)—where you invest a fixed amount at regular intervals—might be a more comfortable approach. For instance, you could invest $12,000 by putting in $1,000 monthly over a year. This way, you buy more shares when prices are low and fewer when they’re high, helping you manage the average cost over time.

Keep in mind, though, that research shows lump-sum investing outperforms DCA 68% of the time. If maximizing returns is your main goal, lump-sum investing could be the better option. However, if you’re worried about losses and potential emotional reactions, DCA may be worth the slight reduction in expected returns.

Don’t Wait to Invest

Historically, stocks and bonds outperform cash over the long term, so it’s important to start investing as soon as possible. Holding off is essentially an attempt to time the market, which is notoriously difficult. In 2023, equity fund investor returns trailed the S&P 500 by 5.5%, largely due to market timing efforts.

Both lump-sum investing and DCA help you avoid this pitfall, letting you benefit from the market’s long-term growth. The key is choosing the strategy that aligns with your risk tolerance and long-term plan.

If you’re unsure which strategy is best for you, reach out—we’d be happy to help you decide.

Justin D. Rucci, CFP®

Wealth Advisor, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents 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 document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

Financial Readiness: Preparing Yourself Before Disaster Strikes

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These past two weeks, wildfires swept through Southern California, devastating communities and forcing thousands to evacuate. The fires have been described as some of the worst in California’s history, fueled by dry conditions and powerful winds. At least 29 people have died in the fires across the Los Angeles area and more than 15,000 structures have burned across 40,500 acres.s. Our hearts go out to all who have been affected during this challenging time.

Extreme weather events like these seem to be becoming more frequent. While we can’t control disasters, we can prepare. 

With that in mind, let’s consider a few time-tested steps to help you proactively safeguard your financial affairs.

1. Organize Your Financial Information

In the event of a disaster, access to your financial information will help you work with insurance companies, apply for disaster relief, and keep up with everyday bills.  

Store important documents in a waterproof safe, a safety deposit box, or in the cloud for easy access during a disaster. Incidentally, make sure you aren’t the only person who knows where the information is. 

Ensure you have access to the following:

  • Tax statements, which you’ll need to apply for FEMA disaster assistance    
  • Insurance policies
  • Proof of income, such as pay stubs
  • Housing payments

For a more detailed list, check out the financial preparedness checklists available from FEMA.  

2. Keep Cash on Hand for a Crisis 

If you don’t already have an emergency savings account, consider starting one you can tap into in a crisis. Aim to save three to six months’ worth of expenses. Still,  during a disaster, it may be difficult—or even impossible—to take a quick trip to the bank. So keep a small amount of cash at home in case credit cards and local ATMs don’t work in an emergency and you need to buy food, fuel, or other supplies. 

3. Have the Right Insurance

Make sure you have appropriate homeowner’s or renter’s insurance. 

A homeowner’s policy generally covers your dwelling and other structures, personal property, personal liability, and medical protection. It also typically offers loss-of-use compensation if you need to relocate temporarily. Renter’s insurance should provide roughly the same coverage except for protection for structures, which is a landlord’s responsibility.  

If you are a business owner, make sure to have business insurance to protect your business property and employees. 

Importantly, neither homeowner’s nor business insurance cover flooding or earthquakes. If either are a possibility in your area, consider purchasing separate policies to cover each if such policies are available. (In some particularly risky areas, earthquake and flood damage coverage may be cost-prohibitive or otherwise unavailable.)  

4. Inventory Your Property

Maintain a detailed inventory of your house to help you prove the value of items you own that may be lost or damaged during a disaster. An up-to-date inventory can help you determine how much insurance to purchase, and it can speed the insurance claim process. It can also provide the documentation needed to deduct losses on your tax return. 

Take photos or videos to help you record your belongings and where appropriate, write down descriptions. For higher priced items, add as much detail as you can. For instance, instead of simply listing “camera,” note the specific model number and the year you bought it. Also consider having especially valuable items appraised. There are often local services that can help you create audiovisual inventories or even apps that can help keep you organized. Store your inventory and appraisal documents with your other important financial documents. 

What To Do After a Disaster

If disaster strikes, consider taking a bit of time to yourself before springing into action, if that’s possible. Grieving the losses you’ve endured is an important step in the recovery process, and acknowledging your emotions may take precedence over the financial harm done. 

Once you’re ready, contact your insurance company to report the damage. Document and prepare a list of damaged items, and keep the items, if possible, until a claims adjuster has visited.  

You’ll also want to hang on to receipts for expenses you incur, such as supplies, repairs, and lodging if you can’t stay in your home. These expenses may be covered by insurance. 

If you can’t stay at home, notify your utility providers and have them pause or discontinue services. You’ll still be on the hook to pay certain bills after a disaster. Prioritize paying your insurance premium and mortgage, which you must pay even if your house is damaged. If it becomes difficult to pay debts, including your credit card bill, contact your creditor who may be willing to work with you on a payment plan. 

No one expects to be on the receiving end of a life-changing disaster. But being prepared can help ensure you can pick up the pieces more quickly. If you have any questions about putting together a disaster plan of your own, reach out and we can help. 

Emily Balmages, CFP®

Director of Financial Planning, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents 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 document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

Mastering Tax Season: Top 5 Tips for a Smooth Filing Process

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Tax season is upon us, and while it may not be everyone’s favorite time of the year, being well-prepared can make the process much smoother. To help you navigate the complexities of tax filing, here are our top 5 tax season tips:

1. Download Your Tax Documents Online

In the digital age, many financial institutions issue tax documents exclusively online, skipping the traditional postal route. As you gear up for tax season, ensure that you’ve received a tax form from every expected institution. Log in to your online accounts and download the necessary documents. Stay proactive and make sure nothing slips through the cracks.

2. Gather Documents Early 

Most tax documents are available by mid-February, so start gathering them early. This proactive approach gives you ample time to review the information, identify any discrepancies, and seek clarification from the issuing institution if necessary. Being ahead of the game can significantly reduce stress as the filing deadline approaches.

3. Embrace E-File and Direct Deposit

E-filing and direct deposit have become the preferred methods for both filing returns and receiving or paying tax refunds. The IRS can be sluggish when it comes to processing paper mail, leading to delays in refunds or acknowledgments. Save time and expedite the process by opting for electronic filing and direct deposit for a more efficient and secure experience.

4. Keep Copies for Seven Years 

Once your tax return is filed, keep copies of your tax returns and all supporting documents for a minimum of seven years. This ensures that you have a comprehensive record of your financial history in case of audits, inquiries, or future financial planning. 

5. Review Previous Returns

Look out for specific items such as Capital Loss Carryforwards and Form 8606 (IRA Basis). If you’ve changed tax preparers or tax software in recent years, there’s a chance that crucial information may have been overlooked. Rectify any discrepancies and ensure that your current return reflects the most accurate and up-to-date financial information

By incorporating these top 5 tax season tips into your filing routine, you’ll not only streamline the process, but also gain confidence in the accuracy of your returns. So, gear up, gather those documents, and tackle tax season with ease! 

Emily Balmages, CFP®

Director of Financial Planning, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents 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 document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

3 Ways to Apply the 80/20 Rule to Your Financial Pursuits

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Ever heard of the 80/20 rule? It suggests 80% of an outcome is often the result of just 20% of the effort you put into it. 

Often, by prioritizing the 20% of your efforts that make the biggest splash, you can reduce excess commotion. In that spirit, here are 3 financial best practices that pack a lot of value per “pound” of effort. 

1. Investing: Be There, and Stay There

You could do far worse than invest, according to a sentiment attributed to Woody Allen: 

“80% of success is showing up.”

Going back to 1926 and after adjusting for inflation, U.S. stocks have delivered about 7.3% annualized returns to investors who have simply been there, earning what the markets have to offer over the long haul. Those who instead fixate on dodging in and out of hot and cold markets are expected to reduce, rather than improve their end returns. That’s because, when markets recover from a downturn, they often more than make up for the stumble quickly, dramatically, and without warning. Instead of chasing trends, simply stay invested over time.  

2. Portfolio Management: Use Asset Allocation, and Don’t Monkey With the Mix

Asset allocation is about investing in appropriate percentages of security types, or asset classes, based on their risk/return “personality.” For example, given your financial goals and risk tolerances, what ratio of stocks versus bonds should you hold?

Both practical and academic analyses have found that asset allocation is responsible for a great deal of the return variability across and among different portfolios. So, to build an efficient portfolio, we advise paying the most attention to your overall asset allocation, rather than fussing over particular securities. Luckily, if you’re a client of ours we’ve already taken care of this for you. 

3. Financial Planning: Do It, But Don’t Overdo It

Also in 80/20 rule fashion, an ounce of financial planning can alleviate pounds of doubt. Planning connects your resources with your values and priorities. It’s your touchstone when uncertainty eats away at your resolve. And it guides how and why you’re investing to begin with. 

Here’s some good, 80/20 news: Your plan need not be elaborate or time-consuming to be effective. In The One-Page Financial Plan, author Carl Richards describes: 

“Your one-page plan simply represents the three to four things that are the most important to you: some action items that need to get done along with a reminder of why you’re doing them.”

If you’d like to do more, great. But even a one-page plan will give you a huge head start. Write it down, as Richards describes. When in doubt, read what you’ve written. Is it still “you”? If so, your work is done; stick to plan. If not, consider what’s changed, and update your plan accordingly. I

Building Lifetime Wealth, 80/20 Style

Properly applied, the 80/20 rule can help minimize the time and energy you have to put into maximizing your financial well-being. Whether you’re saving for retirement, funding your kids’ college education, preparing for a wealth transfer, applying for insurance, or otherwise managing your hard-earned wealth, we can help you identify and execute these and other actions that matter the most, so you can get back to the rest of your life. 

Ready to put the 80/20 Rule in action for yourself? Give us a call today.

Cary Facer

Partner Emeritus, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents 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 document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

Why We Believe Social Security Will Endure

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In planning for retirement, one topic is often top of mind: whether or not Social Security will still be around when we retire.

As we covered in a related post, When Should You Take Your Social Security, most of us have been paying into the program our entire working life. We’re counting on receiving some of that money back in retirement. 

But then there are those headlines, warning us that the Social Security trust fund is set to run dry around 2034. 

Does this mean you should grab what you can, as soon as you’re able? Let’s explain why we agree with Social Security specialist Mary Beth Franklin, who suggests the following: 

“While there may be good reasons to file for reduced Social Security benefits early, claiming Social Security prematurely out of fear is a bit like selling stocks in a down market: All you’ve guaranteed is that you’ve locked in a loss. And if future benefit cuts did materialize, the benefits of those who claimed as soon as possible would be reduced even further.” 

— Mary Beth Franklin, InvestmentNews

Still, Social Security Will Likely Change 

While we don’t expect Social Security to go bust, we do expect it will need to change in the years ahead. As its trustees have reported:

“Social Security is not sustainable over the long term at current benefit and tax rates … [and] trust fund reserves will be depleted by 2034.”

But let’s unpack this statement. First, “depleted” does not mean the Social Security Administration is going to turn out the lights and go home. It means it could run out of trust fund reserves by then, which are used to top off the total amount spent on Social Security benefits. There are still payroll taxes and other sources to cover more than 77% of the program’s payouts. So, worst case, if we did nothing but wait for the reserves to run out, we’d be forced to make hard choices about an approximate 23% shortfall starting around 2034.  

Admittedly, Social Security is between a rock and a hard place. Nobody wants to lose benefits they’ve been counting on or spend significantly more to maintain the status quo. But if we don’t do something to shore up the program’s reserves, our options will likely only worsen. 

In this context, the political will to reform Social Security seems strong, and bipartisan. As Buckingham Strategic Partners retirement planning specialist Jeffrey Levine has observed: 

“My gut sense is that practically no politician in America would ultimately be happy having to explain to voters why they let Social Security collapse on their watch … That’s not a great message to have to bring to voters, especially older voters who show up at the polls in the greatest numbers.”

As members of Congress wrangle over the “best” (or least abhorrent) solutions for their constituents, they have been submitting proposals behind the scenes, and the Social Security Administration has been weighing in on the estimated effect for each. 

Time will tell which proposals become legislated action, but the range of possibilities essentially falls into two broad categories: We can pay more in, or we can take less out. Most likely, we’ll need to do a bit of both. 

Possible Ways to Pay More In

To name a few ways to replenish Social Security’s reserves, Congress could: 

  1. Raise the cap on wages subject to Social Security tax: As of 2023, earnings beyond $160,200 per year are not subject to Social Security tax. There’s been talk of increasing this cap, eliminating it entirely, or reinstating it for income beyond certain high-water marks.
  1. Increase the Social Security tax rate for some or all workers: Currently, employers and employees each pay in 6.2% of their wages, for a total 12.4% up to the aforementioned wage cap. (This does not include an additional Medicare tax, which is not subject to the wage cap.) As cited in a September 2022 University of Maryland School of Public Policy report, “73% (Republicans 70%, Democrats 78%) favored increasing the payroll tax from 6.2 to 6.5%.” 
  1. Increase the tax on Social Security payouts, and direct those funds back into the program: Currently, if your “combined income” exceeds $44,000 on a joint return ($34,000 on an individual return), up to 85% of your Social Security benefit is taxable, as described here. Anything is possible, but taxing retirees more heavily seems less politically palatable than some of the other options. 
  1. Identify new funding sources: For example, one recent bipartisan proposal would establish a dedicated “sovereign-wealth fund,” seeded with government loans. Presumably, it would be structured like an endowment fund, with an investment time horizon of forever. In theory, its returns could augment more conservatively invested Social Security trust fund reserves. Other proposals have explored a range of potential new taxes aimed at filling the gap. 

Options for Taking Less Out

We could also cut back on Social Security spending. Some of the possibilities here include:

  1. Reducing benefits: Payouts could be cut across the board, or current bipartisan conversations seem focused on curtailing wealthier retirees’ benefits. 
  1. Extending the full retirement age: There are proposals to extend the full retirement age for everyone, or at least for younger workers. This would effectively reduce lifetime payouts received, no matter when you start drawing benefits. 
  1. Tinkering with COLAs: There are also bipartisan conversations about replacing the benchmark used to calculate the Cost-of-Living Adjustment (COLA), which might lower these annual adjustments in some years. 

These are just a few of the possibilities. Some would impact everyone. Others are aimed at higher earners and/or more affluent Americans. It’s anybody’s guess which proposals make it through the political gamut, or what form they will take if they do. 

Should You Take Your Social Security Early? 

So, given the uncertainties of the day, should you start drawing benefits sooner than you otherwise would? An objective risk/reward analysis helps guide the way. 

Many investors feel “safer” taking their Social Security as soon as possible, to avoid losing what seems like a bird in the hand. However, the appeal of this approach is often fueled by deep-seated loss aversion. Academic insights suggest we dislike the thought of losing money about twice as much as we enjoy the prospect of receiving more of it. Thus, we tend to cringe more over a potential loss of promised benefits than we factor in the substantial rewards we stand to gain by waiting. Put another way: 

You’re not reducing your financial risks by taking Social Security early. You’re only changing which risks you’re taking. In exchange for an earlier and more assured payout, you’re also accepting a permanent, cumulative cut to your ongoing benefits. 

If this still seems like a fair trade-off, consider that Social Security is one of the few sources of retirement income ideally structured to offset three of retirement’s greatest risks: 

  1. Life expectancy risk: In an annuity-like fashion, Social Security is structured to continue paying out, no matter how long you and your spouse live. 
  2. Inflation risk: The payouts are adjusted annually to keep pace with inflation. 
  3. Market risk: Even in bear markets, Social Security keeps paying, with no drop in benefits.  

In short, if you are willing and able to wait a few extra years to receive a permanently higher payout, you can expect to better manage all three of these very real retirement risks over time. 

This is not to say everyone should wait until their Full Retirement Age or longer to start taking Social Security. When is the best time for you and your spouse to start drawing benefits? Rather than hinging the decision on uncontrollable unknowns, we recommend using your personal circumstances as your greatest guide. Consider the retirement risks that most directly apply to you and yours, and chart your course accordingly. 

But you don’t have to go it alone. Please be in touch if we can assist you with your Social Security planning, or with any other questions you may have as you prepare for your ideal retirement.

Emily Balmages, CFP®

Director of Financial Planning, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents 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 document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

When Should You Take Your Social Security?

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Ever since President Franklin D. Roosevelt signed the 1935 Social Security Act, most Americans have pondered this critical question as they approach retirement: 

“When should I (or we) start taking my (or our) Social Security?”

And yet, the “right” answer to this common query remains as elusive as ever. It depends on a wide array of personal variables, including how the unknowable future plays out. 

No wonder many families find themselves in a quandary when it comes to taking their Social Security benefits. Let’s take a closer look at how to find the right balance for you.

Social Security Planning: A Balancing Act

For Social Security planning purposes, you reach full retirement age (FRA) between ages 66–67, depending on the year you were born. However, you can generally begin drawing Social Security benefits as early as age 62 (with the lowest available monthly starting payments) or as late as age 70 (for the highest available monthly starting payments). 

Retirees are often advised to wait at least until their full retirement age, if not until age 70 to begin taking Social Security. In raw dollars, waiting to take your Social Security often works out to be the best deal for many families. Plus, these days, many of us choose to work well into our 60s, 70s, and beyond. Some analyses have even factored in the cost of spending down other assets while you wait, rather than using them for continued investment growth. The conclusion is the same. 

However, you’re not “many families.” You’re your family. Your personal and practical circumstances may mean this general rule of thumb won’t point to your best choice. Following are some of the most common factors that may influence whether to start taking Social Security sooner or later. 

  • Alternative Income Sources: First, and perhaps most obviously, if you have few or no alternative income sources once your paychecks stop, you may not have the luxury of waiting. You may need to start taking Social Security as soon as possible. 
  • Life Expectancy: If you’re considering the benefits of waiting until age 70 to take Social Security, remember that this strategy assumes you live to at least the average age someone your age and gender is likely to reach. Even if you can afford to wait, you’ll want to factor in whether your health, lifestyle, and family history justify doing so. 
  • Estate Planning: Have you placed a high or low priority on leaving as much as possible to your heirs and/or favorite charities after you pass? Your preferences here may influence how, and from where you’ll spend down your inheritable estate, which in turn may influence the timing of your Social Security enrollment. 
  • Employment: How likely is it you’ll keep working until your FRA? Once you reach it, you can collect full Social Security benefits, even if you’re still working. But until then, your earnings may reduce your Social Security benefits.
  • Marital Status: If you’re married, one of you has probably paid in more to Social Security. One is likely to live longer. You may retire at different times, and your ages probably differ. All these factors can complicate the equation. You’ll want to consider the timing, rules, and outcomes under various scenarios—such as when and whether to take Social Security as an earner, the spouse of an earner, the widow or widower of an earner, or an ex-spouse of an earner—while also factoring in whether you and/or your spouse are still working prior to your FRAs, as described above. Ideal start dates for one scenario may not be ideal for another. 
  • Other Circumstances: Beyond your marital status, there are other factors that may influence your timing decisions if they apply to you—such as if you’re a business owner, you live abroad, you qualify for Social Security Disability, or your children qualify for Social Security benefits under your account. 
  • Income Taxes: We find many pre-retirees don’t realize that up to 85% of their Social Security income may be taxable. Your annual Social Security income also figures into your modified adjusted gross income (MAGI), which can push you past thresholds for incurring Medicare surcharges (beginning at age 65, based on your MAGI from two years prior). Bottom line, broad tax planning may influence your timing as well. 

Degrees of Control 

Clearly, there’s a lot to think about when deciding when to start taking Social Security. Whether you’re going it alone or with a financial planner, here’s one piece of advice that should help: 

Control what you can. Let go of what you can’t.

What do we mean by that? There are many known factors you can include in your Social Security planning. You know your marital status. You can access your Social Security account and/or use a calculator to estimate your benefits. You can make educated guesses about your life expectancy, how long you’ll work, and so on. Also, if you’ve delayed taking Social Security past your FRA, you may be able to change your mind … to a point. You can file to collect up to six months of retroactive benefits if you end up needing the income sooner than planned. 

You can use all of this planning information and more to make reasonable assumptions and timely decisions about when to take your Social Security. 

After that, we recommend going easy on yourself if (or more realistically, when) some of your plans don’t go as planned. Come what may, you’ve done your best. Instead of channeling energy into regretting good decisions, use it to make judicious adjustments whenever new assumptions arise. By consistently focusing on what we know rather than what we hope or fear, we remain best positioned to shift course as warranted in the face of adversity. 

Whether you’re planning to file for Social Security or you’re already drawing it, we appreciate the opportunity to help you and your family make good choices about when, and how to manage your available options. We hope you’ll contact us today to learn more.

Cary Facer

Partner Emeritus, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents 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 document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

Essential Financial Planning for Expecting Parents

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You just learned that you are going to have a new baby or child join your family, by birth or adoption. It’s an exciting time! As you start to make preparations you will quickly discover that there is a seemingly endless list of things to do, items to buy, books to read, and classes to take. 

Despite what the targeted ads and influencers may tell you, it doesn’t matter too much if your bundle of joy has state-of-the-art nursery gear or the trendiest stroller on the market. But there are a few financial planning considerations that will make a world of difference for your family and your child’s well-being.

1. Estate Planning

As soon as you become responsible to care for a dependent, basic estate planning documents are essential. You may think you don’t currently have an estate plan if you have not drafted a will or trust, but guess what? You actually do have an estate plan! It was written for you by federal and state law and will be administered by a court (at your estate’s expense). If you pass away you can either rely on the state’s estate plan for you, or you can have the peace of mind that comes from writing your own estate plan that is specific for your wishes and your family’s best interests.

At a minimum, all parents (or anyone with financial dependents) should have (a) a will that includes guardianship designations, (b) an advanced health care directive, and (c) a durable power of attorney. Many parents or guardians will also want to establish a trust.

In addition to drafting these documents, we also recommend making sure that you have named non-minor primary and contingent beneficiaries on all your financial accounts and life insurances. At your death, many accounts will simply pass to the named beneficiaries on file. 

Check out our post Estate Planning: A Checklist of Essentials for more valuable guidance as you review your estate planning.  

2. Life Insurance

If you were to pass away tomorrow, your partner and/or children would most likely need additional financial support. The cost of a funeral, additional child care, extra time off work, and covering everyday expenses and bills can add up. Not to mention the desire many parents have to help with specific expenses, such as education, for a child. Life insurance can fill that gap and provide vital support and peace of mind to your family during a difficult time. 

Whatever role you serve in your household, there is a cost to your absence. If you are an income-earner for your household, the loss of your income would need to be supplemented for your family. If you are the primary caretaker of children and household manager, your labor would need to be replaced. Life insurance is for everyone with dependents, no matter their income-earning or employment status.

Term life insurance is usually inexpensive and easy to obtain. We strongly recommend term life insurance for all parents or those with dependents. 

3. Extra Cash Savings

The cost of having a baby is no small thing. There are baby essentials to buy, doctor’s appointments to attend, and the labor and delivery bill at the end. It can add up to thousands of dollars to bring a new life into the world, and that is without a single complication. Additional medical care, a NICU stay, or any other unexpected circumstances can compound the bill.

When you find out that you, or your partner, is pregnant, you should start making plans for your cash flow needs. Remember that so much of the next 9-12 months is unpredictable for your bank account, so having a larger-than-average cash reserve is a good idea. 

Medical care and baby items are the first expenses that come to mind when planning for your new child. But it is wise to also consider what other large expenses may come up during the pregnancy and postpartum period. Your savings account during this time has to do double duty as a baby preparedness fund and an ongoing emergency fund.

Consider two of the biggest culprits for emergency fund withdrawals – home repairs and car repairs. Do you have a lingering issue with a home appliance that is going to require a repair or replacement any day? Is your old car on its last leg? Is there anything in your house or car that needs to be addressed to ensure safety for your little one? Keep in mind that these non-baby expenses can and should be part of all the other preparations.

There is no hard fast rule for how much to save for a new baby, but having easily-accessible cash in a savings account is a must. If your emergency fund is slim, it may be time to pause aggressive debt repayment plans, saving for your next vacation, or excessive spending on non-essentials and put that extra cash in savings. Once you have returned to a more predictable financial situation, you can reevaluate your budget and priorities and return to your usual emergency fund and other financial goals.

4. Know Your Legal Rights and State Benefits

The state that you work in may have specific laws that require your employer to provide a certain amount of leave for pregnancy-related disability and/or bonding with a new child. Your state may also have paid leave or disability pay available for pregnancy and the postpartum leave period. You should carefully research your legal rights as a worker in your state and be familiar with all the benefits available to you.

In California, there are three laws or resources available to support you during pregnancy and postpartum and to bond with a new child: the Family and Medical Leave Act (FMLA), Paid Family Leave (PFL), and State Disability Insurance. FMLA legally protects the ability of eligible employees to take up to 12 workweeks of unpaid leave a year. PFL provides up to 8 weeks of payments for lost wages due to time off work to bond with a new child. State Disability Insurance may provide payments during pregnancy and postpartum recovery if you are unable to work.

Visit the following state websites to learn more about these California benefits:

Family and Medical Leave Act

FMLA Frequently Asked Questions

Am I Eligible for Paid Family Leave?

Disability Insurance – Pregnancy FAQs

5. Know Your Employer’s Policies and Make a Plan

On top of any legally-required paid or unpaid leave, your employer likely has their own company policies related to family leave. Ask your HR representative for all the information you can get about these policies. Start making a plan for how you (and your partner, if applicable) will take leave and how you will bridge any gaps in income during this time.

Your ability to negotiate paid or unpaid leave depends on various factors, but many employers are becoming more family friendly. Talk with a trusted supervisor or manager about your options. Don’t be afraid to negotiate and ask for what you need in terms of additional paid time off, schedule flexibility, or extended leave. 

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Are you expecting a little one? First – congratulations! If you feel like now is the time to get the support of a financial professional for your growing family, contact Warren Street for a one hour consultation.

Kirsten C. Cadden, CFP®

Associate Advisor, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents 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 document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.