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Major Risks to Family Wealth

5/30/2019

 
Picture
Will your accumulated assets be threatened by them?

All too often, family wealth fails to last. One generation builds a business – or even a fortune – and it is lost in ensuing decades. Why does it happen, again and again?
 
Often, families fall prey to serious money blunders. Classic mistakes are made; changing times are not recognized.
 
Procrastination. This is not just a matter of failing to plan, but also of failing to respond to acknowledged financial weaknesses.  
 
As a hypothetical example, say there is a multimillionaire named Alan. The named beneficiary of Alan’s six-figure savings account is no longer alive. While Alan knows about this financial flaw, knowledge is one thing, but action is another. He realizes he should name another beneficiary, but he never gets around to it. His schedule is busy, and updating that beneficiary form is inconvenient.
 
Sadly, procrastination wins out in the end, and as the account lacks a payable-on-death (POD) beneficiary, those assets end up subject to probate. Then, Alan’s heirs find out about other lingering financial matters that should have been taken care of regarding his IRA, his real estate holdings, and more.
 
Minimal or absent estate planning. Every year, there are multimillionaires who die without leaving any instructions for the distribution of their wealth – not just rock stars and actors, but also small business owners and entrepreneurs. According to a recent Caring.com survey, 58% of Americans have no estate planning in place, not even a basic will.
 
Anyone reliant on a will alone risks handing the destiny of their wealth over to a probate judge. The multimillionaire who has a child with special needs, a family history of Alzheimer’s or Parkinson’s, or a former spouse or estranged children may need a greater degree of estate planning. If they want to endow charities or give grandkids a nice start in life, the same applies. Business ownership calls for coordinated estate planning and succession planning.
 
A finely crafted estate plan has the potential to perpetuate and enhance family wealth for decades, and perhaps, generations. Without it, heirs may have to deal with probate and a painful opportunity cost – the lost potential for tax-advantaged growth and compounding of those assets.
  
The lack of a “family office.” Decades ago, the wealthiest American households included offices: a staff of handpicked financial professionals who worked within a mansion, supervising a family’s entire financial life. While traditional “family offices” have disappeared, the concept is as relevant as ever. Today, select wealth management firms emulate this model: in an ongoing relationship distinguished by personal and responsive service, they consult families about investments, provide reports, and assist in decision-making. If your financial picture has become far too complex to address on your own, this could be a wise choice for your family.
  
Technological flaws. Hackers can hijack email and social media accounts and send phony messages to banks, brokerages, and financial advisors to authorize asset transfers. Social media can help you build your business, but it can also expose you to identity thieves seeking to steal both digital and tangible assets.
 
Sometimes a business or family installs a security system that proves problematic – so much so that it is turned off half the time. Unscrupulous people have ways of learning about that, and they may be only one or two degrees separated from you.
 
No long-term strategy in place. When a family wants to sustain wealth for decades to come, heirs have to understand the how and why. All family members have to be on the same page, or at least, read that page. If family communication about wealth tends to be more opaque than transparent, the mechanics and purpose of the strategy may never be adequately explained.
 
No decision-making process. In the typical high net worth family, financial decision-making is vertical and top-down. Parents or grandparents may make decisions in private, and it may be years before heirs learn about those decisions or fully understand them. When heirs do become decision-makers, it is usually upon the death of the elders.
 
Horizontal decision-making can help multiple generations commit to the guidance of family wealth. Estate and succession planning professionals can help a family make these decisions with an awareness of different communication styles. In-depth conversations are essential; good estate planners recognize that silence does not necessarily mean agreement.
 
You may plan to reduce these risks to family wealth (and others) in collaboration with financial and legal professionals. It is never too early to begin.

Three Key Questions to Answer Before Taking Social Security

5/23/2019

 
When to start? Should I continue to work? How can I maximize my benefit?
 
Social Security will be a critical component of your financial strategy in retirement, so before you begin taking it, you should consider three important questions. The answers may affect whether you make the most of this retirement income source.
 
When to Start? The Social Security Administration gives citizens a choice on when they decide to start to receive their Social Security benefit. You can:
 
* Start benefits at age 62.
* Claim them at your full retirement age.
* Delay payments until age 70.
 
If you claim early, you can expect to receive a monthly benefit that will be lower than what you would have earned at full retirement. If you wait until age 70, you can expect to receive an even higher monthly benefit than you would have received if you had begun taking payments at your full retirement age.
 
When researching what timing is best for you, It’s important to remember that many of the calculations the Social Security Administration uses are based on average life expectancy. If you live to the average life expectancy, you’ll eventually receive your full lifetime benefits. In actual practice, it’s not quite that straightforward. If you happen to live beyond the average life expectancy, and you delay taking benefits, you could end up receiving more money. The decision of when to begin taking benefits may hinge on whether you need the income now or if you can wait, and additionally, whether you think your lifespan will be shorter or longer than the average American.
 
Should I Continue to Work? Besides providing you with income and personal satisfaction, spending a few more years in the workforce may help you to increase your retirement benefits. How? Social Security calculates your benefits using a formula based on your 35 highest-earning years. As your highest-earning years may come later in life, spending a few more years at the apex of your career might be a plus in the calculation. If you begin taking benefits prior to your full retirement age and continue to work, however, your benefits will be reduced by $1 for every $2 in earnings above the prevailing annual limit ($17,640 in 2018). If you work during the year in which you attain full retirement age, your benefits will be reduced by $1 for every $3 in earnings over a different annual limit ($45,360 in 2018) until the month you reach full retirement age. After you attain your full retirement age, earned income no longer reduces benefit payments.
 
How Can I Maximize My Benefit? The easiest way to maximize your monthly Social Security is to simply wait until you turn age 70 before claiming your benefits.

​Taking Charge of Your Financial Life

5/16/2019

 
Delegating responsibilities to others may lead to problems down the road.
 
When you are putting together a household, it isn’t unusual to delegate responsibilities. One spouse or partner may take on the laundry, while another takes on the shopping. You might also decide which one of you vacuums and which one of you dusts. This is a perfectly fine way to divvy up household tasks and chores.
 
One household task it’s valuable for both partners to take part in, however, is your shared financial life. It’s important, regardless of your level of wealth or stage of life. Counting on one spouse or partner to handle all financial decisions can create a gap for the other partner. Should the one in charge of the money separate, become severely disabled, or pass away, that may leave the other partner in a bind. A situation like that is probably difficult enough without adding additional stress.
 
A study conducted in April 2018 surveyed 1,662 American couples, covering households where one partner has primary budgeting responsibility as well as couples where the responsibility is shared evenly. For the latter, 87% of respondents indicated that they were “confident” in taking full responsibility, should it become necessary. For the former, only 52% of those partners who were not actively involved indicated that same confidence.
 
Begin the conversation. If you are the partner who isn’t steering the household finances, ask yourself why. It may be that you have preconceived notions about how difficult it might be to educate yourself to make informed decisions. Maybe you know how to do it, but you would simply rather not be bothered. It’s also possible that you recognize that your spouse or partner has a particular expertise in these matters and doesn’t need your help.
 
Regardless of the reason, it’s probably a good idea that you should at least be able to hop into the driver’s seat, should misfortune strike your household. In that unfortunate circumstance, you should feel confident that whatever the reason or the duration, you won’t have any unnecessary concerns about managing your household’s finances.
 
For example, what if you have insurance that covers extended care, in case of a severe injury that causes your spouse or partner to be away from work for an indefinite period? How will you be certain that the claim is made? Who will make sure the bills get paid? The job will fall to you.
 
Getting involved. The good news is that through communication, regular conversations, and a little effort, you can probably learn what you need to know in order to help yourself in these situations. Part of this, too, may be meeting and getting to know the financial professional who works for your household.
 
If it’s your first time, start simple. You may find worksheets helpful in guiding you on how to plan out a monthly household budget. There’s software that may help, but a budget doesn’t need to involve anything more than pen and paper, if you prefer. You’ll find several worksheets available online. You will also want to talk with your spouse or partner about the monthly budget they use, as it will likely be helpful if you are both on the same page – perhaps, literally.
  
The more knowledge you have, the more confident you can become. Starting the conversation is just the first step. It may take you some time to become comfortable in taking a greater role in the decision-making, but when you do, you may feel more confident if the responsibility ever falls solely to you. 

The Cost of Procrastination

5/9/2019

 
Don't let procrastination keep you from pursuing your financial goals.
 
Some of us share a common experience. You’re driving along when a police cruiser pulls up behind you with its lights flashing. You pull over, the officer gets out, and your heart drops.
 
“Are you aware the registration on your car has expired?”
 
You’d been meaning to take care of it for some time. For weeks, you had told yourself that you’d go to renew your registration tomorrow, and then, when the morning comes, you repeat it again.
 
Procrastination is avoiding a task that needs to be done – postponing until tomorrow what could be done, today. Procrastinators can sabotage themselves. They often put obstacles in their own path. They may choose paths that hurt their performance.
 
Though Mark Twain famously quipped, “Never put off until tomorrow what you can do the day after tomorrow.” We know that procrastination can be detrimental, both in our personal and professional lives. From the college paper that gets put off to the end of the semester to that important sales presentation that waits until the end of the week for the attention it deserves, we’ve all procrastinated on something.
 
Problems with procrastination in the business world have led to a sizable industry in books, articles, workshops, videos, and other products created to deal with the issue. There are a number of theories about why people procrastinate, but whatever the psychology behind it, procrastination may, potentially, cost money – particularly, when investments and financial decisions are put off.
 
As the example below shows, putting off investing may put off potential returns.
 
Early Bird. Let’s look at the case of Cindy and Charlie, who each invest a hypothetical $10,000 to start. One of them begins immediately, but the other puts investing off.
 
Charlie begins depositing $10,000 a year in an account that earns a hypothetical 6% rate of return. Then, after 10 years, he stops making deposits. His invested assets, however, are free to keep growing and compounding.
 
While Charlie fills his account, Cindy waits 10 years before getting started. She then starts to invest a hypothetical $10,000 a year for 10 years into an account that also earns a hypothetical 6% rate of return.
Cindy and Charlie have both invested the same $100,000, but procrastination costs Cindy, as Charlie’s balance is much higher at the end of 20 years. Over 20 years, his account has grown to $237,863, while Cindy’s account has only grown to $132,822. Charlie’s account has not only put the power of compound interest to work, it has also allowed the investment returns more time to compound.
 
This is a hypothetical example of mathematical compounding. It’s used for comparison purposes only and is not intended to represent the past or future performance of any investment. Taxes and investment costs were not considered in this example. The results are not a guarantee of performance or specific investment advice. The rate of return on investments will vary over time, particularly for longer-term investments. Investments that offer the potential for high returns also carry a high degree of risk. Actual returns will fluctuate. The types of securities and strategies illustrated may not be suitable for everyone.

Wise Decisions with Retirement in Mind

5/2/2019

 
Certain financial & lifestyle choices may lead you toward a better future.
 
Some retirees succeed at realizing the life they want; others don’t. Fate aside, it isn’t merely a matter of stock market performance or investment selection that makes the difference. There are certain dos and don’ts – some less apparent than others – that tend to encourage retirement happiness and comfort.
  
Retire financially literate. Some retirees don’t know how much they don’t know. They end their careers with inadequate financial knowledge, and yet, feel they can plan retirement on their own. They mistake retirement income planning for the whole of retirement planning, and gloss over longevity risk, risks to their estate, and potential health care expenses. The more you know, the more your retirement readiness improves.
   
Retire debt free – or close to debt free.  Who wants to retire with 10 years of mortgage payments ahead or a couple of car loans to pay off? Even if your retirement savings are substantial, what will big debts do to your retirement morale and the possibilities on your retirement horizon? On that note, refrain from loaning money to family members and friends who seem quite capable of standing on their own two feet.
 
If the thought of using some of your retirement money to pay outstanding debts hits you, set that thought aside. You have dedicated that money to your future, not to bill paying. On second or third thought, other sources for the cash may be apparent. 
 
Retire with purpose. There’s a difference between retiring and quitting. Some people can’t wait to quit their job at 62 or 65.  If only they could escape and just relax and do nothing for a few years – wouldn’t that be a nice reward? Relaxation can lead to inertia, however – and inertia can lead to restlessness, even depression. You want to retire to a dream, not away from a problem.
 
A retirement dream can become even more captivating when it is shared. Spouses who retire with a shared dream or with utmost respect for each other’s dreams are in a good place.
 
The bottom line? Retirees who know what they want to do – and go out and do it – are positively contributing to their mental health and possibly their physical health as well. If they do something that is not only vital to them, but important to others, their community can benefit as well.
     
Retire healthy. Smoking, drinking, overeating, a dearth of physical activity – all these can take a toll on your capacity to live life fully and enjoy retirement. It is never too late to quit smoking, stop drinking, or slim down.
 
Retire in a community where you feel at home. It could be where you live now; it could be a place that is hundreds or thousands of miles away, where the scenery and people are uplifting. It could be the place where your children live. If you find yourself lonely in retirement, then look for ways to connect with people who share your experiences, interests, and passions; those who encourage you and welcome you. This social interaction is one of the great, intangible retirement benefits.

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Blom & Howell Financial Planning, Inc. | 3340 Tully Road, Suite B-4, Modesto, CA 95350 | Phone: 209.857.5207 | Fax: 209.857.5098

Investment advisory services provided by Blom & Howell Financial Planning, Inc., an SEC registered investment adviser in Modesto, California. Advisory services are offered to clients or prospective clients where Blom & Howell Financial Planning, Inc. and its representatives are properly licensed or exempt from licensure. This website is solely for informational purposes. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. 
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