Helping your adult kids: How much is too much?

Transcription

1 Previous issues New legislation is ending key claiming strategies. What you need to know now. > Read more Roth IRA Financial miscues? Tips to get back on track. Pension > Read more What to consider if you re thinking about merging plans from former employers. > Read) more (k When it comes to helping your grown children with finances, the old adage show, don t tell might be the best approach. > Read more 401

2 Your adult children are navigating a tough job market and a postrecession economy. While your instinct may be to bail them out, there may be better ways to help them in the long run. You probably talked to your kids about money when they were younger saving, spending and everything in between. But what about when kids aren t kids anymore, and they are out in the world on their own? You know from your own experience that the money decisions they make early in their adult life will make a lasting impact on their finances. But it can be tough to balance sharing that hardearned wisdom with letting them find their own way. Christine Romans, CNN Business Chief and author of Smart Is the New Rich: Money Guide for Millennials, offers tips for three important conversations parents should have with their adult children. Next page: Living within their means

3 1. Saving money whenever possible Romans says people should only spend 85% of every dollar they make, but that equation can get more complicated for young people unable to set anything aside from their early-career income. This is especially common in areas such as the Northeast or Silicon Valley, where the cost of living is higher than the national average. Romans suggests that you refrain from giving advice. Instead, share how you saved money on day-to-day expenses when you were their age. Another option: Since housing is usually the largest expense in a budget, consider inviting a child living in a high-rent area to move home with a two-year contract that has an out-clause at a year for either party. That s one of the financial arrangements that Romans has seen with adult children. Others have included putting them in charge of grocery shopping and paying for food. Or even handing over 10% of each paycheck to their parents, who set it aside for a deposit on an apartment or a down payment on a home. 2. Eliminating debt Here s a sobering statistic: 2015 college graduates have an average of more than $35,000 in student debt (compared to a little more than $22,000 just ten years ago). 1 On top of that, 44% of millennials have either missed a credit card payment, exceeded their credit limit or had to work out a payment plan with a credit card issuer 2 all of which can negatively impact credit ratings. Those debts can also take a long time to pay off, delaying saving and investing. If you have incurred and paid off debt at some point in your life, share details about how you got into and how you got out of debt. 44% of millennials have either: Source: Discover survey, July 8, Missed a payment Exceeded their credit limit Worked out a payment plan Next page: Learning how to save

4 3. Starting a retirement fund early Romans recommends talking with your adult children about your own investments and encouraging them to begin saving and investing by age 25. This can be another challenging discussion, as retirement seems a long way off for a 20-something. One way to open the dialogue is to talk about the choices that your own parents made as they saved for retirement and how it affects their lifestyle today. You can then share your own financial situation and goals for the future. This serves two purposes: Telling your adult children what they need to know about your plans and wishes, and helping them learn from your successes and mistakes. Since no one wants a lecture, it can be very effective to discuss your own finances with your adult children, says Romans. Your financial advisor can also recommend ways to help your adult children learn fiscal responsibility without enabling them. Perhaps you ll purchase stocks for them as a gift or give them cash to invest. If you struggle with knowing when it s appropriate to help, consider that helping your grown children too much may actually hurt them. How? By depriving them of valuable money lessons that could help them in the long run and that they can also pass on to their own kids. While you may feel you are being too tough on them at times, remember that the more reality checks they get while young, the more likely they are to enjoy financial success later. It can be very effective to discuss your own finances with your adult children. Christine Romans, CNN Business Chief and author of Smart Is the New Rich: Money Guide for Millennials See last page for important information

5 BREAKING NEWS Security rules affect you? New legislation will soon eliminate some claiming strategies. Here s what it may mean for you and what you can do about it. You may have thought the only big news around Social Security was that benefits are not being adjusted for cost of living in But the Bipartisan Budget Act of 2015 signed into law on November 2, 2015, involved much more, including significant changes to two Social Security claiming strategies. These provisions commonly referred to as file-and-suspend and restricted application will be eliminated with this legislation. The good news? If you are already using one of these claiming strategies, you will still be able to do so. Depending on your age, you may also be able to use the file-and-suspend strategy before the legislation goes into effect on May 2, Survivor benefits will not change: You will still be able to begin collecting widow or widower benefits anytime between the ages of 60 and your full retirement age, while allowing your own benefits to accumulate delayed retirement credits until age 70. Too young to take advantage of these strategies? Remember that the most effective way to maximize your benefits allowing them to grow until you reach age 70 is an option for those with enough savings to live on in the first years of retirement. To find out if you are eligible, see the following charts. Then read on to find out how these strategies work. Next page: What is file-and-suspend?

6 File-and-suspend This strategy allows you to file for benefits at full retirement age, enabling your husband or wife to receive their spousal benefit while you suspend your own benefit. Why would you do this? Because you would continue to earn a delayed retirement credit of 8% per year up to age 70 thereby increasing your own monthly benefit taken at a later date. This strategy has been commonly used among married couples with large differences in benefits, with the higher earner suspending their benefit to let it grow. The legislation affects single people as well. If you do not need to leave benefits to a spouse, under the old rules you could delay taking your benefit, then take a retroactive lump-sum payment of suspended benefits before the age of 70. This option could be helpful if you wanted to claim retroactive benefits all at once if, for example, your health or finances took a sudden turn for the worse. Both single and married people who have reached the full retirement age of 66 by May 1 can still use file-and-suspend (applications due by April 29). Currently enrolled Still eligible File-and-suspend Allows you to file then suspend your benefit so your spouse can collect their spousal benefit. Single (never married) When is your birthdate? May 1, 1950 or earlier May 2, 1950 or later Currently married Still available at FRA, 1 must file by April 29, Not eligible Surviving spouse Still eligible Married at least 10 years Ex-spouse is not remarried Ex-spouse is at least 62 If yes to all, then Divorced If no to any, then not eligible 1 Full retirement age. 2 If divorced for 2+ years, eligible ex-spouses as shown above can begin receiving spousal benefits even if you have not filed. Next page: How does the restricted application work?

7 Restricted application This provision allows you to file for benefits at the full retirement age of 66, but restrict your application to spousal benefits only. That means you can collect spousal benefits while your own benefit grows until you decide to collect at a later date (up to age 70). People born on or before Jan. 1, 1954, will be able to file a restricted application for spousal benefits at any time in the future. For all those born Jan. 2, 1954 or later, you will no longer be eligible for restricted application. This means you will apply for your own and spousal benefits at the same time and will receive the larger of the two. Currently enrolled Single (never married) Currently married Divorced (not remarried) Surviving spouse Still eligible Restricted application Allows one spouse to file for benefits at full retirement age then restrict their application to claim spousal benefits only. Not applicable Still available at FRA* Not eligible When is your birthdate? Jan. 1, 1954 or earlier Jan. 2, 1954 or later How long were you married? At least 10 years Less than 10 years Not eligible Still eligible * Full retirement age No matter what your age and claiming status, your financial advisor can help you figure out how to supplement your Social Security benefits in order to stay on the path to a confident retirement. See last page for important information

8 Stay on track for a confident retirement by avoiding these common missteps. According to the Social Security Administration, if you re an average American aged 65 today, you can expect to live into your 80s. What s more, 25% of today s 65-yearolds will live past age retirement planning mistakes and how to fix them You ll want to be prepared for a long, secure retirement, one that allows you to get a full return on life. Don t let things just happen, says Mike Greene, Senior Vice President of Financial Planning at Ameriprise. Key decisions can help you achieve a fulfilling retirement. How can you work toward a confident retirement? By avoiding or fixing some of these financial missteps people tend to make along the way. Mistake 1: Failing to diversify The idea behind diversification is that the positive performance of some investments may serve as a buffer for the negative performance of others. This is especially important as you get closer to retirement age, when you want to increase profits and reduce losses. Also consider diversifying your retirement assets into tax-free, tax-deferred and taxable accounts. Doing so can help make it easier to estimate what your income and tax burden at retirement will be. The fix. Your financial advisor can work with you to diversify your portfolio. If, for example, one investment has a rocky year or quarter, a diversified portfolio can help ensure your overall retirement plan remains on track. Remember though, diversification can help protect against certain investment risks, but the strategy does not assure a profit or protect against a loss. Next page: Plan ahead for health care 1 2

9 Mistake 2: Avoiding crucial medical care decisions Enjoyment of your retirement years can tarnish quickly if an illness leads to unexpected medical expenses. Not having enough Medicare coverage or a long-term care strategy can shatter your financial plans, and those of your significant other. The fix. Understand what Medicare benefits you ll be eligible for down the road and note that Medicare isn t a substitute for chronic care or long-term care coverage. It can pay off to find a supplemental policy that will work for your budget. Mistake 3: Spending rather than saving Whenever you re about to splurge on one of life s luxuries a boat, a five-star vacation or a second home do a cost-benefit analysis. How much more could the money buy you later if you save it rather than spend it? Remember the power of compound interest: the ability to earn interest on the initial amount you invest as well as on the interest itself. The fix. Consider catch-up retirement account contributions, which are allowed for people 50 or above. Another smart move: Build up a cash reserve. Setting aside two to three years worth of lifestyle expenses will allow you to travel or spend time with grandchildren without threatening your portfolio if the stock market is down. Mistake 4: Not planning for your legacy Death is difficult to talk about. But not talking about it and not planning for it could place a burden on your loved ones after you pass on. The fix. Update your paperwork. That includes writing a will or setting up a trust, and making sure your beneficiary designations for retirement accounts, annuities and insurance are current. Make sure to keep a list of your online accounts and passwords in a secure place and ensure your attorney or beneficiaries can access it quickly if needed. Schedule a retirement checkup Wondering if there are other steps you should be taking (or not taking) to help ensure a secure retirement? Your Ameriprise financial advisor can help you navigate the options and stay on course. See last page for important information 1 2

10 Account consolidation: Thinking about merging retirement accounts from former employers? Here are the key considerations to keep in mind before you take action. Given that the average American employee switches jobs every 4.6 years, it s possible to leave a trail of retirement accounts at various employers over the course of a 40-year career. Having your accounts spread across several institutions doesn t necessarily help and could actually hurt your ability to have a clear picture of your asset allocation and of how your dollars are working together, says Amy Diesen, Head of Retirement Planning at Ameriprise Financial. Granted, there may be good reasons to leave your money in a 401(k) instead of rolling it over to an IRA. For example, if you leave your employer in the year you turn 55 or later, you can begin drawing on a 401(k) without early distribution penalties, while you d have to wait until you re 59½ to take money out of an IRA. Depending on the individual situation, I don t always recommend consolidating to one account, Diesen acknowledges. But your financial advisor will look at your plans and goals, then help you make an informed decision. With that in mind, here are some of the factors to weigh when looking into consolidating your retirement accounts. 4.6 years is the time spent at each job by the average American. Source: Bureau of Labor Statistics, Next page: Weigh the pros and cons

11 Investment control When your dollars are in a company 401(k), your employer is responsible for choosing which investments are available to you. Consolidating your retirement assets into an IRA puts you in charge of your investment strategy. Many people like the independence and flexibility of moving to an IRA and having the ability to purchase any investment they choose, Diesen says. Investment options in an IRA may also include products typically not available in a 401(k) plan that allow you to lock in your existing gains. Consolidation can also provide you with face-to-face access to a financial advisor who can integrate your retirement assets into a financial plan and track your progress. A streamlined view The complexities of managing multiple accounts from different providers can make it difficult, if not impossible, to know exactly what you have and what to do with it. Getting all your assets under one roof helps you make sure your money is working effectively for your goals around retirement, Diesen says. Asset allocation and rebalancing People may erroneously assume that they re diversified because they have their dollars invested with different institutions, Diesen says. But their funds should really be diversified by product and asset class, which is easier to do with all your investments in one account. * Tax considerations If you have highly appreciated employer stock or hope to in the future, taking an in-kind distribution from an employer plan may allow you to take advantage of a special tax strategy called Net Unrealized Appreciation (NUA). NUA is only available via a lump sum distribution from an employer plan and is not allowed from an IRA. Simplified RMDs If you re retired and receiving required minimum distributions (RMDs), holding just one retirement account prevents having to take distributions out of different locations. If all your retirement assets are in one place, you have just one calculation and one RMD, Diesen points out. *Asset allocation does not assure a profit or protect against loss in declining markets. Next page: Be mindful of fees

12 Fee considerations Paying fees to different providers can extract a big chunk from your retirement savings. You want to be aware of the fees you re paying, then ascertain whether there is a good reason to have all these accounts, Diesen says. A lot of large 401(k) plans are inexpensive because the investments receive institutional pricing. If you roll over your 401(k) into an IRA, you may be paying higher fees for the benefits of additional investment flexibility and personalized advice. Creditor protection Assets in employer plans are protected from creditors under federal law. Funds rolled over to an IRA are protected under federal law in the event of bankruptcy, but other creditor protection depends on state law. You ll want to talk to an attorney in your state if IRA asset protection is a concern for you. Efficient estate planning With multiple statements, it s easy to lose track of whether you have the right beneficiaries on all of your plans, Diesen says. Unless you re closely managing every retirement plan you have, the wrong people could end up inheriting your money. Most employer plans limit death distribution options, especially for non-spouse beneficiaries, while IRAs generally allow for lifetime payouts. Determining the nuances of asset allocation, distribution strategies and taxation consequences for each plan can be an arduous task. Your financial advisor can help you navigate the complexities that naturally arise when consolidating retirement accounts. See last page for important information

13 1 Source: CBS MarketWatch, May 9, 2015, Class of 2015 has the most student debt in U.S. history. 2 Source: Discover survey, July 8, Source: Social Security Administration, This information is being provided only as a general source of information and is not intended to be used as a primary basis for investment decisions, nor should it be construed as advice designed to meet the particular needs of an individual investor. Investment decisions should always be made based on an investor s specific financial needs, objectives, goals, time horizon and risk tolerance. Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value. Christine Romans is not affiliated with Ameriprise Financial. Ameriprise Financial and its representatives do not provide tax advice. Consult with your attorney or tax advisor regarding specific tax issues. Please refer to the Ameriprise Financial Internet Privacy Statement for our internet privacy policies. Investment advisory products and services are made available through Ameriprise Financial Services, Inc., a registered investment adviser. Ameriprise Financial Services, Inc. Member FINRA and SIPC Ameriprise Financial, Inc. All rights reserved.