When many people begin investing, they aim to find just the right asset mix to “beat the market.” This means attempting to gain a higher return over time than a commonly accepted index, such as the S&P 500. This inclination is natural but impractical, and research is now showing that it’s nearly impossible over a long period of time.
An Individual Retirement Account, more commonly known as an IRA, is a standard savings account approved by the IRS that grants significant tax advantages for users. While retirement is the most common way people use IRAs, it’s not the only way IRAs can be used. In this post, we explore the other ways IRAs can be used like for the down payment of a house, to cover college education costs, for medical expenses, as a tax-free gift to beneficiaries, as disability income, or even to purchase investment properties.
Today, the average American retires between age 62 and 65, with most people leaving the workforce at 63. If you’re nearing your mid-to-late 50’s, you may be starting to seriously consider when to retire and what steps you’ll need to take now to ensure you’re financially prepared when you do retire. Consider these 3 Tips to Successfully Transition into Retirement.
Life insurance is an important component in a diversified financial portfolio. While it may be a difficult conversation to have with your loved ones, it’s an important and necessary one. We may not like discussing our own death but ensuring our families are taken care of and supported is paramount, especially for families with children. The first step is to understand which type of life insurance policy fits best with your situation. In this post, we explore the various types of life insurance policies including term and permanent options including whole, universal, and variable options.
The Primary Roles in Your Policy
Before diving into the various types of life insurance policies, let’s review the various roles associated with a life insurance policy. There are four primary roles: the insurer, owner, the insured, and the beneficiary. The company that provides the life insurance policy is the insurer. Typically, a plan participant is both the owner of a policy and the insured; however, this is not always the case. For example, a parent might be the owner of a policy, and therefore be responsible for premium payments, while the policy insures a child. The beneficiary is the person or entity who will receive the benefits upon the insured’s death. It’s important to ensure your family has enough life insurance to cover and support them in the event of a death in the family. For example, if you were to die tomorrow, would your current policy provide enough money for your spouse to cover the mortgage and/or pay for childcare in the event he/she will return to work? These considerations play into determining which type of life insurance is appropriate for you.
Understanding the Differences in Life Insurance Policy
What’s the difference?Term Life InsuranceWhole Life InsuranceUniversal Life InsuranceVariable Life Insurance
Coverage is purchased for a set time period; typically 5,10, 15 or 30 years known as “term.”Permanent coverage for life. Also referred to as “cash value life insurance.”Permanent coverage for life. Also referred to as “adjustable life insurance.”Permanent coverage for participant’s life.
Benefits are distributed upon death within the term coverage only. Term coverage is an insurance-only tool.Permanent coverage has an insurance and an investment/savings component.Permanent coverage has an insurance and an investment/savings component.
Offers more flexibility than whole life insurance.
Permanent coverage has an insurance and an investment/savings component. Variable life insurance allows participants to invest cash value on stocks and bonds.
Term life insurance caters to short term goals. It is the easiest and most affordable life insurance to purchase.Whole life insurance caters to long-term goals. Premiums are consistent throughout the policy and guarantee cash value accumulation.Universal life insurance offers the benefits of low-cost term life insurance combined with the savings element of whole life insurance. For participants unable to make whole life insurance premiums this is a good alternative.Variable life insurance is suitable for participants looking for higher growth potential by investing cash value in markets. Therefore, policy participants bear more risk than in other policies.
Pricing is determined based on several factors including health, gender, and age. Generally, women qualify for less expensive coverage plans than men. Participant plans increase in price with age.Premiums are significantly higher than term insurance. It’s advised to purchase whole life insurance at a young age to get lower premium costs.Universal life offers sliding premiums; lower prices during early-to-mid life and higher premiums during later life stages. Accumulated cash value may be used to cover premium payments.Premiums are significantly higher than term insurance. There are fees and charges associated with variable life insurance not associated with other policies.
Term insurance can be converted into a whole life insurance plan.Conversion may be possible based on plan specifications. Typically, conversions take place from term to a permanent policy not the other way around.Conversion may be possible based on plan specifications. Typically, conversions take place from term to a permanent policy not the other way around.Conversion may be possible based on plan specifications. Typically, conversions take place from term to a permanent policy not the other way around.
Not applicable for term insurance plans.A portion of each premium payment is placed in a high interest bank account to accumulate value in a tax-deferred basis. Option to receive surplus savings as yearly dividends.Insurance company establishes set interest rate minimum. Excess earnings are applied to the cash value of a policy. The potential to earn more than the minimum crediting interest rate differentiates universal life insurance from whole life.Excess cash value accounts may be invested in mutual funds comprised of stocks and bonds with the goal of earning higher rates of returns. Full risks are comparable to typical market fluctuations.
Not applicable for term insurance plans.Participants may borrow against the cash value, accumulated savings, of their permanent life insurance policy. Typically, interest rates are significantly lower and more favorable than current market rates.Participants may borrow against the cash value, accumulated savings, of their permanent life insurance policy. Typically, interest rates are significantly lower and more favorable than current market rates.Participants may borrow against the cash value, accumulated savings, of their permanent life insurance policy. Typically, interest rates are significantly lower and more favorable than current market rates.
On February 3rd, President Trump issued an executive memorandum requiring review of the previously instated Department of Labor fiduciary ruling. In the memorandum, President Trump tasked the Department of Labor to fully review the ruling to assess if it would ‘negatively affect’ investors ability to access retirement information, offerings, product structures, or related financial advice.
Congratulations, on your upcoming marriage! Along with making wedding plans, there are many considerations to discuss with your soon-to-be spouse; one of the most important is financial planning. In fact, a 2016 study found that 31% of married participants reported arguing over finances at least once a month. The most common points of disagreement: major purchases, decisions about finance and children, a partner’s spending habits, and important investment decisions. Before you walk down the aisle, have an open and honest conversation with your spouse about your joint finances. Discuss current outstanding debt, retirement goals, and financial aspirations. Having these conversations upfront will help your marriage start on a clear path for financial success. To begin the discussion, consider these four financial topics:
1. Existing debts and loans. Take the time to fully understand each other’s current financial state. This includes reviewing common debt issues like student loans, car loans, credit card debt, or mortgage payments. When you get married pre-existing debt will stay in the debt holder’s name but it may significantly affect how both of you allocate your resources. In an ideal world, both people would head into a marriage with as little debt as possible. As couples continue to get married later in life, however, the reality is most newlyweds will enter into their union with pre-existing debt. Discuss the best way to work together to eliminate the debt. Additionally, consider future loans. Do you hope to apply for a mortgage in the next 5 years? If so, both of your credit scores will be used to assess eligibility. Work to pay your debts down and on time to improve your credit rating. Doing so will help you qualify for a mortgage at a competitive interest rate.
2. Budgets and financial planning. Next, discuss budgeting and financial planning. It’s important to lay out spending habits in the beginning to avoid frustrations. Typical problems arise when one person’s personal spending habits are more conservative than the others. One person might strive for frugality while the other is more of a spendthrift. Without discussing these issues upfront, newly weds can find themselves constantly arguing over spending. To start the budget process, sit down and establish spending limits in each category. How much money each month should be spent on groceries? Gas? Rent? Entertainment? Work together to find common ground and a workable budget for both people involved.
3. Retirement goals. Along with budgeting your expenses, you need to budget your savings as well. A general guideline is the 20/50/30 rule. This rule states that 20% of your income should be put towards savings and investments, 50% should be spent on necessities like rent and food, and 30% of your income should go towards discretionary spending. It can be tempting for young newlyweds to put off saving for retirement but the cost of doing so can be significant. The earlier you begin saving for retirement, the more compound interest can work for you. For an in depth example of the power of compound interest, check out our article on How to Save Your First Million. At TrueNorth Wealth we specialize in having the expertise to advise clients on the best tools to maximize wealth and retirement savings. From creating life insurance plans, to utilizing tax break strategies, to investing in bonds and mutual funds, our financial advisors can create a personalized investment strategy for your situation.
4. Tax implications. There are many financial benefits to getting married, one of them is the ability to file your taxes as either married filing jointly (MFJ) or married filing separately (MFS). Typically couples opt to file as MFJ because of the associated tax deductions and credits, like increased standard deductions, available under this filing. This increase can lead to significant savings for married couples with disparate incomes. Married couples are also entitled to give cash and property to one another without paying gift taxes. This can lead to substantial benefits in estate planning. Additionally, married couples who sell a property are granted $500,000 in tax-free profit, as opposed to the $250,000 limit for a single person. Again, this increase can be significant in terms of tax savings. These are just a few of the tax implications for married couples. For more information on tax changes associated with your upcoming marriage, contact your TrueNorth Wealth advisor.
TrueNorth Wealth is a financial and wealth management firm specializing in personalized financial planning to individuals and businesses. For a free financial consultation, contact us today.
Understanding finances and having a healthy relationship with money is vital to being a successful adult. And, yet, often children are not being taught important financial information about money from their parents. In fact, a 2016 T. Rowe Price survey found 71% of parents are reluctant to talk about money with their children. And only 22% of kids say they talk with their parents “frequently” about money. Having an open dialogue with your children about finances is important to prepare them for success in the future. As uncomfortable as it may be to discuss finances with your children, you need to do it. In today’s post we share specific tips for talking with your kids about the importance of saving for their future and utilizing smart investment tools and strategies.
- Introduce key concepts early. According to Beth Kobliner, New York Times bestselling author and member of the President’s Advisory Council on Financial Responsibility, children are capable of learning about specific financial topics like saving and spending as early as three years old. By beginning the conversation about money early, your children can form a better understanding about the relationship with money and satisfying needs and wants. It also helps put into context your own financial situation as a family. Perhaps a young family is working to pay off student loans from one of the parents or perhaps the family is choosing to move into a new home. Discussing basic tenants as to why certain decisions are made for the family can help the child begin to understand how money works. Certainly a three-year-old will not understand the intricate workings of a mortgage, but they are capable of understanding the importance of saving. This conversation will help kids understand the importance of delayed gratification and the idea of working hard and saving to purchase something in the future.2. Get them involved in the process. One of the first interactions kids are likely to have with money is in grocery stores or convenience stores. Talk to your children about what you’re purchasing and why those purchases are necessary. For example, you might explain that the grocery trip is specifically to buy food for dinner and that you are not there to buy anything else. You might also let your child help purchase the necessary ingredients. Give them $5 and let them see what the five dollars will buy to help cover dinner expenses. Let them choose between the more expensive name brand item and the generic, which item will they choose to buy? Introducing kids to how money works can help them understand commodities and how quickly money can be spent.
- Introduce the power of compound interest. Another great way to help children learn about investments and the power of compound interest is to teach them firsthand. Perhaps your child receives a weekly allowance for doing chores or receive money as a birthday gift. Let your child consider three options to use the money: 1. Save the money 2. Spend the money or 3. Invest the money. If your child decides to save the money, at the end of each month they earn $.01 for every dollar in their save jar. This cent represents the earned monthly interest in their savings account. Encourage them to keep adding to their savings account to cover a specific want or need. If your child decides to invest the money, at the end of each month they earn $.25 for every dollar in the investment jar. However, the investment jar may not be touched for a set period of time. The key here is to teach them how compound interest helps their money grow in investment vehicles. If your child decides to spend the money, the money is used and can’t be added to their accounts. Teaching children how and where money comes from, and how it can grow, will help them understand that there is not a limitless supply. If your children are older, say in their teens, you can apply this same lesson with real savings, checking, and investment accounts.
- Teach them about financial pitfalls like credit cards and high-interest borrowing. Older children need to be prepared to fight temptations to use credit cards and/or borrow high-interest loans. The key is to communicate what these financial tools are and explain the benefits and drawbacks of each. Certainly your children will use credit cards at some point in their lives, and credit cards can be very useful, but they should be aware to not overspend and to pay off balances each month. Likewise, discuss high-interest loans and what borrowing might mean for their future. Talk with your kids about their credit score and what this number means. Discuss how your children will pay for higher education costs and how interest rates will affect total repayment numbers. Again, the key is to have an open dialogue where children are taught how to utilize financial tools in a smart way.
For more information on financial strategies for your family contact our experienced financial advisors at TrueNorth Wealth.