Do You Need a Financial Plan ?

Posted on March 15th, 2010 in Financial Abundance, Newsletter Articles by wayne

Many people are questioning what they should do in these uncertain financial times.  My best advice is to have a current financial plan.  Now, more than ever, the sage advice that, “if you fail to plan, you plan to fail” is applicable.

Financial planning is not mysterious and does not require that you pay a “financial planner” to do it for you.  The following eight steps will provide an outline of how to begin planning your financial future:

1. Become a saver, not a consumer. Why do our media call Americans consumers?  While food, clothing, medicines, etc., are required, much of our consumption is discretionary.  Your financial plan must determine your current savings amount.  Between now and retirement, individuals should save at least 10 percent of their net income.  This saving can be accomplished through company 401K plans or a combination of tax deferred retirement plans and individual savings.  The key is to start saving now, to help ensure that you will have the financial resources required when you retire.

2. Establish a Budget. It is important that you have a budget to understand your current expenses.  I recommend a two-step budgeting process.  First, budget for items that are absolutely required for your day to day living.  The second part of this budget would be expenses that you would like to include, but are not critical to your enjoyment of an abundant life.  If the budget is not at least 10 percent less than your after-tax income, cut items from the “nice to have” list until reaching the 10 percent savings goal.

3. Pay off all non-mortgage debt. The first use of the savings generated above is to remove any non-mortgage debt.  This means to paying off credit card debt, student loan debt, or any other debts that you may have.  Other than your fixed rate mortgage, all other debt should be eliminated through the use of your savings.

4. Build an emergency fund. With unemployment at ten percent, it should be obvious why everyone needs an emergency fund.  An emergency fund provides for at least six months of required expenses.  This fund can be used  for unemployment, disabilities or unexpected medical expenses.   Keep the emergency fund in very safe investments such as money markets, short term bond funds, and CDs.

5. Save for college expenses and retirement through tax favored vehicles. With an emergency fund in place, it is time to begin saving for longer term financial goals, such as helping fund college expenses and/or saving for retirement.  Coverdell Education Savings Accounts and 529 College Savings Plans are tax-deferred ways of saving for college education.  Retirement savings can be placed in IRAs or 401(k) plans that also provide initial tax savings and longer term tax deferred investment accruals.  Use tax deferred vehicles to the maximum extent possible when saving for your retirement.

6. Invest appropriately for the goal you are trying to achieve. If your investment objective is short term (three to five years), use very safe investments, including certificates of deposit, money market funds and short term bond funds.  If your investment goal is medium term (five to ten years) riskier investments such as government backed bonds, municipal bonds, highly rated corporate bonds and some equities can be added to the investment pool.  If your investment is long term, (over 10 years) riskier investments, including emerging market stock funds, REITs, commodity funds, and other riskier investments can be added to your portfolio.  Only a small portion of your portfolio should be dedicated to the riskier investments.

7.  Stay on target. It is very easy for fear (or greed) to enter into our financial decisions.  Bubbles will continue to occur in our economy and markets will continue to rise and fall.  However, by maintaining your strategic investment approach, you can avoid making irrational, fear based decisions when conditions get uncertain.  While it may be beneficial to make well-reasoned tactical investment plan modifications, it is unwise to make emotional, reactionary decisions regarding your investment strategy.  A written plan on your investment approach will help avoid this pitfall.

8. Update your plan at least annually. Revisit all aspects of the financial plan, at least annually, to determine if circumstances have changed.  If a change has occurred, it is time for a plan update.  With an active, up to date plan, you minimize the fear of financial uncertainties and maximize your ability to live from a sense of financial abundance.

As a very wise person once said, “a rich person is not the one who has the most, but the one who needs the least”.  By honestly planning for your financial requirements, you can determine your requirements for an abundant financial life.

The Social Security Mulligan

Posted on March 15th, 2010 in Newsletter Articles, Retirement Planning by wayne

For golfers, a mulligan is a “do-over,” typically of your drive on the first hole.  However, even the most avid golfer may not know that a mulligan is also available for your Social Security benefits.

If you are already collecting Social Security benefits or years away from collecting your benefits, knowledge of the Social Security “do-over” could provide for significant future financial benefits.  Let’s look at how this “do-over” works.

For a single taxpayer, the “do-over” option is fairly easy to understand.  For this article, we will assume a Full Retirement Age (FRA) of 66.  We also assume that other financial resources are available, so that Social Security benefits are not required before age 70.  We also assume that there is no inflation adjustment to the benefits

Between age 62 and your FRA you should begin collecting Social Security benefits in the first year in which you do not meet or exceed the “earnings test”.  In 2010, annual earned income in of more than $14,160 exceeds the “earnings test”, which reduces benefits by one dollar for every two dollars earned above this amount.  If the “earnings test” is always exceeded, begin taking your Social Security benefits at your FRA, when the “earnings test” is no longer applied.

Depending upon when Social Security benefits begin, you will receive between 75 percent and 100 percent of your “full” Social Security benefits until you reached age 70.  It is recommended that all of the Social Security benefits received be saved and put into very safe investments such as CDs.   At age 70, if you are in good health and expecting to live at least 10 or more years, you would revisit the Social Security offices to execute your “mulligan.”

The “mulligan” allows you to revisit the social security administration and repay all of the Social Security income that you have received.  Only the amount of income received must be repaid.   The interest or investment gain from these benefits is yours to keep.

When Social Security benefits are re-filed at age 70, the monthly benefit increases to 132% of the FRA amount for the rest of your life.  If you are in poor health at age 70, you would not pay back any Social Security benefits and would continue to collect the current amount for the rest of your life.

To maximize the “mulligan” approach, keep track of your taxes every year in which you take social security benefits before age 70.  Run an alternate tax return scenario showing what taxes would have been without receiving any Social Security benefits.  When you turn 70 and repay the benefits, file a tax Form 1341.  This provides a tax credit for the amount of additional taxes paid in the years before turning age 70.

If you are married, the “mulligan” option exists for each spouse.  If one spouse has significantly higher Social Security benefits than the other spouse, it is especially important for the higher earning spouse to consider this option.  Not only will the higher earning spouse receive 132% of FRA benefits for the rest of their lives, if this spouse predeceases the lower earning spouse, the survivor can claim the increased benefit for the rest of their lives.  This approach assures that 132% of the FRA amount of the higher earning spouse will be available for both spouses lifetimes.

As there are so many benefit options available for  couples, consult your local Social Security office or a financial planner, who is well versed on the complexities of Social Security, to determine the best approach for you and your spouse.

There are few “mulligans” in our financial lives with no downside.  If you are age 62 or older and your earnings do not exceed the “earnings test,” consider beginning Social Security benefits now.  If you are at your Full Retirement Age and have not begun taking Social Security, why not?  Based on your health and expected longevity at age 70, you can determine whether to maintain your current payments or to repay the payments made and switch to significantly higher payments for the rest of your (and possibly your spouse’s) life.