Financial Building Blocks SJC Mom's Club February 24, Kirk A. Kreikemeier, CFP,CFA, FSA Pebble Valley Wealth Management

Transcription

1 Financial Building Blocks SJC Mom's Club February 24, 2012 Kirk A. Kreikemeier, CFP,CFA, FSA

2 Topics discussed today Current state of the economy and financial markets Economy s impact on individual s balance sheet Tools used to grow and protect your balance sheet Three key financial documents everyone should have Specific topics of discussion How much money should I have in savings for a cushion? I left the workforce. What should I do with my 401k/403b? I used to save for retirement in my 401k. What can I do now? When do I start saving for college? What is the best way? Are beneficiary forms that important? Doesn t a will take care of that? Why is life insurance so confusing? Should I have disability insurance? Every fall we go through the employee benefits list. Anything good? Retirement? College? What about now? Have you seen rates lately? 2

3 Current state of economy and markets Jobs are key driver to economic growth See Appendix for Federal Reserve Projections 3

4 Current state of economy and markets Different markets capture aggregate views 4

5 Impact on balance sheet depends where at Reverse Mortgage but watch fees 5

6 Impact on balance sheet risk, opportunity Equity market risk Interest rate risk Equity market opportunity Inflation erodes purchase power but raises Social Security Interest rate opportunity Reverse Mortgage but watch fees Insurance: <= Early death or disability=> <=Medical, Assisted Living, Longevity=> Tax aware: <= vehicles defer taxes while grow=> <=but withdraw carefully=> 6

7 Tools used to grow and protect balance sheet Diversified portfolio of assets Types of asset classes owned and what % to match target % Tax awareness to grow and retain wealth earned Tax treatment of securities owned and the accounts where held Insurance for risks not mitigated Pure insurance products or hybrid for different phases of life Legal documents Beneficiary designations on retirement accounts, insurance Trusts allow refined direction of assets; Will directs remaining 7

8 3 Key Financial Documents Three financial reports to capture your current situation Balance sheet Point in time value of assets owned and liabilities owed List type of account (taxable, tax deferred, personal use) and owner Budget List of money coming in and going out, including savings and taxes Break down by major categories but don t get lost in the details Asset Allocation You may own mutual funds and stocks and exchange-traded-funds, but what asset classes are they invested in; difficult to get but important 8

9 3 Key Financial Documents Balance Sheet Net Worth statement of assets and liabilities 9

10 3 Key Financial Documents Budget Tool to find savings capacity and play good defense; it is not evil 10

11 3 Key Financial Documents Asset Allocation Know what % of portfolio is in different asset classes, not just the type of security (a single mutual fund could be in many) * I use professional tool to summarize which asset class security holdings fall * Sample MODERATE target allocation * Vary by individual age and tolerance 11 Portfolio % Strategic % Tactical View

12 Specific Topic Reserve Fund How much money should I have in savings for a cushion? Funds to cover unexpected expenses or if income stopped Rule of thumb is 3-6 months of living expenses I refine living expenses to critical expenses + 50% discretionary Have assets that can be sold quickly without incurring market loss, large taxes or withdrawal penalty Savings account and money market is safest choice ultra-short bond funds riskier choice; tax-exempt if high tax bracket CD s and government savings bonds may have higher yield but be aware of early withdrawal penalty 12

13 Specific Topic Retirement Savings I left the workforce. What should I do with my 401k/403b? You are allowed to keep but may forget to continue managing DO NOT WITHDRAW THE FUNDS BEFORE RESEARCH If you withdraw funds before age 59 ½ there is 10% penalty In addition, pay taxes on the amount withdrawn assuming all pre-tax Allowed to do a direct rollover into an IRA account Open an IRA account at brokerage or mutual fund Request a direct rollover to IRA; assets continue to grow tax deferred Greater investment choices and no 401k plan fees (low for large plans) 13

14 Specific Topic Retirement Savings I used to save for retirement in my 401k. What can I do now? 401k/403b contributions tax deductible regardless of income Allowed to contribute to an IRA provided have income Type (Traditional or Roth) and deductibility will depend on income If one spouse has income, other still contribute to spousal IRA $5,000/tax year; can contribute previous year up to tax filing Can still contribute for 2011 if haven t Can contribute to the same IRA used for 401k rollover Non-deductible contributions on IRS form 8606 (check accountant) 14

15 Specific Topic College Savings When do I start saving for college? What is the best way? Make sure have reserve fund and saving for retirement first Consider tax advantaged vehicle like 529 Plan Two Types Pre-paid pay for future credits; take state credit risk, lower fix return Savings education inflation, investment risk; potential higher return Savings can be used for accredited college in any state; not limited to own state schools 529 Savings federal and state tax deferral on gains Illinois also state tax deductible up to $20,000/year/family Withdraw tax-free if used for qualified education expense 15

16 Specific Topic College Savings (cont) When do I start saving for college? What is the best way? Illinois Bright Start - Parent (or other adult) is owner of account; child is beneficiary Since assets in parents name, not punitive for financial aid You can change beneficiary without any cost or penalty if plans change Be aware of shorter time horizon when choosing investments Investment choices either age-based (like target-date funds) or individual asset class choices; WATCH RATE RISK See appendix for amounts to save; other considerations Two ways to sign up depending on help you need 16 Direct - comfortable with investments, savings; or fee-only advisor Advisor-Sold if need help and willing to pay via a commission

17 Specific Discussion Check Beneficiaries Are beneficiary forms that important? Doesn t a will take care of that? Beneficiary forms overrule a will Also allow for nuanced estate planning Applies to IRAs, 401k/403bs, life insurance, other qualified plans Primary beneficiary typically the spouse; need to sign documents if not listed as primary Children can t take ownership of assets and should not be listed Some possibilities are using a trust for full flexibility or a custodial account for child (check with legal expert) 17

18 Specific Discussion Insurance, Benefits Why is life insurance confusing? Should I have disability insurance? Intended to replace present value of lost net income if early death Important to have the right amount Term insurance most affordable since pure insurance coverage without savings component (like car insurance) Chance of disability higher than death; an illness can erase income Every fall go through employee benefits list. Anything good? Choose medical option; disability coverage Don t overlook Flexible Spending Account for pre-tax health costs Also high deductible plan with Health Savings Account for potential lower cost if utilization can be managed 18

19 Specific Discussion Debt Management Retirement? College? What about now? seen rates? Pay off credit card debt; It is ok to have good debt, especially at these low rates If you haven t refinanced in awhile, LOOK NOW! 19

20 App 1 Federal Reserve Economic Forecast 20

21 Appendix 2 Historic Returns and Risk 21

22 Appendix 3 Tax deductible vs. deferral Tax deductible is the more powerful attribute Utilize the feature where available 401k, some IRA, HSA Also value in tax deferral, though need time to accrue Utilize feature in non-deductible IRA, 529 Plans, Roth IRA DEDUCTIBLE TAX DEFERRAL BENEFIT 22

23 Appendix 4 Miscellaneous Traditional vs. Roth IRA Traditional IRA tax deductible (up to income limit), grow tax deferred, taxed at ordinary income when withdraw Roth IRA no deduction, grow tax deferred, no tax withdraw Roth conversion complicated; general rule if lower bracket later, no Dollar amount to save for college Get college cost estimates on websites NET PRICE CALCULATOR Does child share in cost? Student loans? Deduct those amounts; amounts assume use 529 Plan Start early, utilize tax favored vehicles, watch shorter time horizon 23

24 Contact Information Kirk A. Kreikemeier, CFP,CFA, FSA Registered Investment Adviser and Fee-Only Planner 4365 Lawn Avenue, Suite 5 pvwealthmgt.com Western Springs, IL (708)