Putting Together the Pieces of Your Financial Puzzle Lyons Township Adult & Community Education October 5, 2017

Transcription

1 Putting Together the Pieces of Your Financial Puzzle Lyons Township Adult & Community Education October 5, 2017 Kirk A. Kreikemeier, CFP, CFA, FSA 4365 Lawn Avenue, Suite 5 Western Springs, IL kirk@pvwealthmgt.com Complete Financial Picture Fitting Pieces Together Agenda Bombarded with confusing topics but difficult to put in context Implications of decisions seem overwhelming and not sure where to start We will start with a picture capturing the broad financial cycle of life Then will sharpen the focus on key areas and identify three action steps for each Like a puzzle, will start with square edges (base understanding) before filling in pieces No easy button leave tonight with checklist to do on own or with a professional 2 1

2 Financial Plan Big Picture Income Employment Other (non investment) Company Stock Options Checking Account Set Aside for Your Future 6.2% SS % Medicare 1 Social Security / Medicare Future Goals 401K / Pensions Taxes Health Savings Account IRA Account (Traditional and Roth) Mortgage/ Student Loans (good debt appreciating assets) Monthly Bills Outstanding Balances credit cards (bad debt depreciating assets) 529 Accounts Taxable Accounts (including reserve funds) Life Insurance / Annuities Estate Planning (Wills, POAs, Trusts) NOTES: 1. Employer also contribute 7.65%; extra 0.9% for income > $200k / $250K 2. Invest gains only taxed upon withdrawal 4365 Lawn Avenue, Suite 5 Western Springs, IL pvwealthmgt.com 2 Summary of key areas 1. Know what you have 2. Set goals and estimate costs 3. How do you react to market risk? How soon need the money? => Asset allocation 4. Understand key tax brackets and concepts 5. What accounts to open to back these goals and basics of investing 6. Save for retirement expenses where to begin! 7. Save for portion of college you are paying they grow quickly 8. Focus on basic features of insurance and annuities 9. Understand Social Security and Medicare 10. Pull it all together, stress test and monitor especially near retirement 11. You retired! Where does my paycheck come from? Don t forget taxes! How long last? 12. Leave your legacy by design, not default 4 Checklist 2

3 What have? Money coming in? Where does it go? 1. Prepare a net worth report List things you have (assets) and debts owed (liabilities); difference is net worth Assets taxable, tax deferred, personal Liabilities rate, funding an appreciating or depreciating asset #1 What Have, In, Out 2. Understand paycheck * Start with gross pay and note FICA deductions Then see amounts to savings, benefits, federal and state taxes 3. Prepare savings generator i.e. a budget On paper, spreadsheet or tools available Start with gross pay, list savings (pay self first), expenses, taxes Begin tracking actual; make sure going where want; have to measure to manage * Blog Post: Wrap the Gift of Financial Wisdom for the College Graduate 5 Net Worth, Paycheck and Budget Examples #1 What Have, In, Out 6 3

4 Set your goals and estimate costs 1. Identify items wanted in the future not covered by current job income Emergency fund for unexpected; 3 6 months expenses; keep liquid and safe Retirement living, health costs and college are common Travel that ends after x years; wedding costs; fun money Changing homes? State of residence may impact travel and taxes #2 Set Goals and Estimate Costs 2. Estimate cost in today s dollars with assumed inflation Use current expenses as a guide and apply inflation Health costs and college have higher inflation; fixed mortgage has none Consider reduction in living expenses at advanced ages 3. Prioritize into needs, wants, wishes Able to focus if funds are tight Determine portion of needs covered by annuity like income if wish 7 Set your goals and estimate costs #2 Set Goals and Estimate Costs 8 4

5 How handle market risk? How soon need money #3 Gut and time => Allocation 1. Complete risk questionnaire Questions help determine how you react to market volatility Range from general questions (custodian) to robust research based (Finametrica) 2. Choose portfolio consistent with risk tolerance and time horizon Key consideration is tolerance for loss and volatility of portfolio Consider how soon need money emergency fund, college savings, retirement 3. Establish portfolios with various asset classes and different weights Historically used 60/40 stocks/bonds; now add international, refine stocks/bonds, alternatives Different portfolios have same asset classes but % in asset class varies Some easy button funds target date (retirement) and age based (529s) See #1 Supplement at end for how different portfolios behave over past 20 years 9 How handle market risk? How soon need money #3 Gut and time => Allocation 10 5

6 Understand key tax brackets and concepts 1. Tax brackets and marginal rates Progressive tax rate and how next dollar of income is taxed Federal varies by single vs. joint filing; states range from 0% to flat % to progressive Know what marginal bracket in now vs. what expect during retirement #4 Tax Tidbits: Fed and State 2. Ordinary income vs. capital gains/qualified dividends * Wage income is ordinary ; capital gains / qualified at lower rate Some investment income is qualified, rest is non qualified => ordinary Capital gains tax depends on time held; if < 365 days then short term => ordinary 3. Tax qualified accounts deductible, deferred, taxed when withdrawn? Taxing the seed or harvest? Limitations on withdrawals? Apply to federal and state? What tax bracket when deducted vs. withdrawn? Ordinary income or qualified? * Extra 3.8% Medicare taxes on investment income > $200k (single), $250k (joint) 11 Understand key tax brackets and concepts #4 Tax Tidbits: Fed and State 12 6

7 What accounts to open; basics of investing #5 Where Invest? In What? 1. Who holds the money and executes trades? Custodian is firm where open an account brokerage, 401k, bank, insurance company Investment range: Brokerage full; 401k limited; bank savings, CDs; ins co annuities 2. Types of investment securities Individual companies issue stocks and bonds Mutual funds and exchange traded funds (ETFs) have basket of stocks or bonds for diversification More refined strategies ranging from options, factor based funds, commodities, currency 3. Type of underlying risk of investment Know what type of stock or bond is inside a mutual fund or ETF owned Should map to asset classes used for asset allocation Morningstar Instant X Ray not detailed asset class but good start; careful with bonds 13 What accounts to open; securities to invest Individual stocks and bonds from single company #5 Where Invest? In What? Funds and ETFs own many Source: BlackRock 14 7

8 Saving for retirement expenses #6 Retirement Savings 1. How much to save? As much as can. Max tax qualified limits is good start. Analyze if assets plus annual savings covers goals (see later) Priority emergency fund, 401k match max, HSA, better of 401k/IRA, 529 college savings 2. Use tax qualified 401k / IRA accounts Traditional vs. Roth * 401k (company match!); Individual IRAs; Spousal IRAs (different deduct level) Pay tax now (Roth) or withdrawal (Traditional); what tax bracket at each point? Don t forget about spousal IRAs; also maybe contribute to non deductible IRA Can convert Traditional to Roth but must pay taxes at current ordinary rates 3. Medical costs, use Health Savings Accounts (HSAs) and Flexible Spending Accounts High deductible medical plan with HSA?; if use low deductible, Flexible Spending Account HSAs encourage smart medical utilization; triple tax play if use for medical FSAs are deductible and use or lose, but nice deductible savings * Blog Post: Tax the seed or the harvest or neither? 15 Saving for retirement expenses #6 Retirement Savings View all retirement accounts on a combined basis vs. target allocation Consider tax treatment of securities and the account held asset location 401K/403B IRAs HSA Single HSA Family FSA Annual Limit $18,000 $5,500 $3,400 $6,750 $2,600 Catch Up $24,000 >=50 $6,500 >=50 $4,400 >=55 16 $7,750 >=55 N/A 8

9 College savings and rapidly declining time horizon 1. Decide what portion parent covers and estimate annual costs Even if parent pays 100%, discuss costs and value as child approaches college Colleges list tuition, room/board, fees but need to estimate tuition inflation #7 College Savings 2. Utilize 529 Savings Plans has market and tuition inflation risk No federal deduction for contributions but some states allow Both federal and state tax free growth and withdrawal if used for qualified education Age based or build own allocation; be mindful of rapidly decreasing time horizon PrePaid Plans has state credit risk and conversion factors Only covers tuition, not room/board Able to use out of state but conversion factor reduces benefit relative to in state school 17 #7 College College savings and rapidly declining time horizon Savings Assume $35,000/yr, 4 years, start saving age 5 through last year college, 6% returns 18 9

10 Basic features of insurance and annuities 1. What if die too soon? Life insurance Focus on amount needed first, then if term or cash value policy How much? Consider savings, SS, survivor expenses; NOT multiple of income Employer life insurance ok, but better choices if reasonably healthy 2. What if alive but can t work? Disability insurance Pays % of salary if can t work due to illness or injury; employer plans attractive #8 Insurance, Annuities 3. What if live long life? Annuities Pay as long as alive; can also continue to survivor; additional use is investment component Consider for core expenses (along with SS, pension) but give up control of principal 4. Long term care difficult decision Could buy insurance but expensive, future rates increases, once start need to keep paying Options insurance policy (individual or group), hybrid (life or annuity), self insure, Medicaid 19 Basic Features of insurance and annuities #8 Insurance, Annuities Term vs. Cash Value Life Insurance Different Annuity Options higher mortality cost at higher ages Consider portfolio for early years, then longevity annuity IF alive >

11 #9 Social Security and Medicare 1. Social Security yes will be around but maybe reduced benefit if younger * Risk free, inflation adjusted, 150% J & 100% S annuity for life Latest Trustee Report states 23% reduction in year 2034 if no changes made Benefits count as income; 50% if MAGI > $25k/$34k; 85% if MAGI > $32k/$44k Don t forget the disability and survivor benefits features also Understand Social Security and Medicare 2. SS claiming strategies, spousal benefits and increase if delay If each spouse has earnings history, analyze when optimal to claim; maximize highest earner Spouse will receive at least 50% of other s benefit, then 100% if pass away 3. Medicare (recall those payroll taxes!) ** Starts at 65 even if Normal Retirement Age later Part A (hospitals), Part B (doctors), Part D (drugs), Medicare Supplement (Part A, B copays/ded) Part B premiums surcharge for higher income MAGI > $85k / $170k Medicare DOES NOT cover long term care for life; only 100 days if preceded by hospital stay * Blog Post: Social Security and Medicare Financial Overview ** What s Your 2017 Medicare Premium? It Depends 21 Understand Social Security and Medicare SS statement wealth of information and assumptions Online ssa.gov/myaccount; paper statement mailed for age 60+ #9 Social Security and Medicare 22 11

12 Pull it all together, stress test, monitor 1. Project cash flows to see if cover goals; test what if scenarios Review goals with best estimates, different scenarios, stress test assumptions See which variables most sensitive to financial security and try to manage Life expectancy => 50% chance longer; optimistic returns; taxes on qualified balances 2. Continue to monitor, especially as event nears College savings happens quickly; estimated college costs can change Retirement plan changing tax laws, different savings, portfolio returns 3. Goals specified can change Annual needs increase with style of living May consider moving out of state (weather, taxes) or start own business 4. A free tool, but be careful with inputs T. Rowe Price Retirement Calculator Also see #2, 3 Supplement at end for very basic illustration of planning projections #10 Pull Together; Monitor 23 Pull it all together, stress test, monitor #10 Pull Together; Monitor 24 12

13 I m retired! Where is paycheck? Taxes? How Long? 1. Social Security plus pension (if any) Recall amounts in plan be aware of taxes including state Inflation adjustment for Social Security but usually NOT with pension 2. Investment portfolio for any shortfall; convert portion to annuity Manage tax recognition when can; forced RMD after 70.5 Consider annuity after rates rise for non discretionary expenses not covered by SS/Pension, Amount from portfolio not just income; use total return and sell gains 3. How long should it last? 50% chance of outliving life expectancy Consider health and family history, likely longer than think; age with 30% or 20% chance outlive Unknown, so have some resources in place to manage this risk (SS, annuity) 4. Tapping home equity if need (unexpected, LTC, other) Ideally not part of base income plan but have as extra security Reverse mortgage not first tool to use, but a nice back up; improved recently #11 Retiree Paycheck, Taxes 25 I m retired! Where is paycheck? Taxes? How Long? #11 Retiree Paycheck, Taxes 26 13

14 Leave your legacy by design, not default #12 Leave a Legacy 1. Wills, POAs, Trusts, Living Wills Will names guardian for children; specifies how assets distributed if not covered by other POA financial and medical; name someone to act on your behalf if unable Trusts specify how assets distributed; can be revocable or irrevocable Living Wills express final wishes; Being Mortal by Atul Gawande 2. Trusts manage distribution, control, taxes Federal estate exemption is large ($5.49mm/$10.98mm), but don t forget state (IL $4mm) Even if exempt from estate tax, trusts able to efficiently manage transfer and control of asset 3. Beneficiary designations Applies to IRAs, life insurance, pensions, company benefits, TOD/POD; they override a will Life changes make sure beneficiary designations keep up 4. Provide summary document for executor and communicate intentions to family Explanation from patriarch/matriarch while alive better than assumptions by children after 27 Leave your legacy it s not all about the money! #12 Leave a Legacy 28 14

15 Contact information and additional resources Appendix Upcoming Talk Who is FRED? Where to Find Free Web based Resources of Economic and Market Data Thursday, November 2 nd 7:00 9:00pm North Campus Rm 116 Sign up for monthly newsletter see sheet See website for blog and other resources: Kirk A. Kreikemeier, CFP, CFA, FSA and Bre Robinson 4365 Lawn Avenue, Suite 5 Western Springs, IL kirk@pvwealthmgt.com bre@pvwealthmgt.com 29 Growth of $100 10/4/97 10/4/17 Source: Morningstar, PVWM Research #1 Supplement Find asset allocation that fits tolerance for market s up/downs and how soon need $ 30 15

16 Back of envelope don t forget inflation, taxes #2 Supplement If projecting cash flow adequacy, don t forget expense inflation and taxes on IRA money 0% inflation, no tax, no LTC, $1mm earn 4% 3% inflation, 10% taxes, ignores any LTC 31 Back of envelope cash flows is portfolio pre tax? #3 Supplement 32 16