Longevity is a Blessing and a Curse

It is amazing how long people are living and the wonderful quality of life they live. We had a client that was 93 and was a fantasy football fanatic. Another client was 94 and still playing tennis and golf. We have a client over 100 and she is still sharp as a tack. We are blessed to be able to live long and fulfilling lives these days. Longevity is a real blessing but does not come without some challenges. The longer you live the larger the nest egg you will need and additional planning around things like long-term care is important as well. For tips on how to increase longevity or to review and make sure you will have enough income in retirement do not hesitate to contact us at financialplanning@bfsg.com

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s web site or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.

The Basics of Annuities & Mutual Funds Webinar

BFSG’s Senior Financial Planner, Paul Horn, CFP®, CPWA®, was invited to be a guest speaker for the “It’s Your Money!” workshop series put on by not-for-profit Financial & Estate Literacy. These workshops educate seniors to take control of their financial, estate, and charitable giving decisions. For this session, Paul focused on two of the most heavily sold products by financial brokers/dealers: annuities and mutual funds. Learn the basics and what to look for by clicking HERE.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s web site or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.

Save for Retirement or Pay Off Debt

First Things First: Build an Emergency Fund

Experts agree you should have three to six months of living expenses set aside in a safe, interest-bearing account. What you earn on that money is irrelevant. The main goal or objective of this investment is liquidity. Not having an emergency fund can prove to be a very costly mistake. For example, if you need to replace the brakes in your car, if your rent increases, or if you even lose your job. None of this is predictable. Without an emergency fund most people reach for the high-interest rate credit cards to pay their expenses. This strategy is in conflict with your long-term goal of saving for retirement.

One consideration: A Roth IRA. The Roth is unique, in that any contributions you make to a Roth can be withdrawn without penalty or taxes. The caveat is that any earnings in the account need to remain for five years and you must be 59.5 years old or older (unless an exception applies) for it to be considered a qualified distribution to avoid taxes and a 10% penalty. In turn, you are technically saving for retirement and building a nest egg for any short-term unexpected expenses (i.e., emergency fund). Check out our Roth in Retirement Plans webinar to learn more.

Next: Prioritize Your Debt Load

Maybe you have a car payment, student loans and miscellaneous credit cards. Put together a budget that reflects balances, monthly payments, as well as the interest rate attached to each of the debts. Once you have a clear understanding of your debt load you can then develop a plan to paydown the debts. There are a couple different schools of thought on this. You can either begin by making a “monster” payment on the credit card with the highest interest rate after the minimum payments are made on other debts with lower interest rates. This is referred to as the “avalanche” method and ultimately saves you the most in interest payments.

Secondly, there is the “snowball” method. Here you make the “monster” payment on the account with the lowest account balance. How do you eat an elephant? One bite at a time. The same is true for your debt – break down the debt into bite-sized pieces to make it more attainable and less scary.

There is no right or wrong method because everyone has a unique approach to managing their finances. If you are someone who can sleep better knowing you have completely paid off a debt and no longer owe money to a given creditor then the “snowball” method probably makes sense. Whereas, if you are a numbers-driven person and feel saving more money on interest charges over the long-term makes more sense the “avalanche” method might be for you.

Watch our “Connecting the Dots to Your Financial Future (Part 1)” webinar for learning more about these strategies to pay off your debt.

Wait: My Company Matches My Retirement Plan Contributions

If you are fortunate to work for an employer who matches your retirement plan contributions, then that is free money you should grab. For example, if your company will put in 50 cents for every $1 you contribute that is a 50% return in your account immediately! This strategy should be prioritized over paying down anything above and beyond the minimum payments owed on any debts described above.

The Bottom Line

It really comes down to personal preference. The math would suggest that you should maximize retirement savings while taking advantage of the current low-interest rate environment and potentially refinance debt if possible. However, if you’re someone who sleeps better knowing you don’t owe money to others that works just as well.

A Certified Financial Planner™ at BFSG can work with you to develop a plan designed to help you save for retirement and pay-off debt to achieve your financial goals.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s web site or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.

Plan Now Before Prop 19 Takes Effect

California is about to go through a dramatic change to real estate and property tax assessments with Proposition 19 (Prop 19) going into effect on February 16, 2021. Prop 19 replaces Proposition 58 (Prop 58), which has provided a favorable transfer of real estate from parent to child. It is important to understand these changes to see if you need to make any immediate changes to your real estate holdings before Prop 19 takes effect.

How do current laws work?

Currently, real estate with a low tax basis can be transferred during the parent’s lifetime or at death to a child and the child keeps the low basis and it does not trigger a tax reassessment. This rule applies to both primary residences and rental properties. The kids can live in the home or turn it into a rental and maintain the same low taxes the parents enjoyed. This transfer has unlimited value for a primary residence and “non-principal residence” (rentals or other homes) is limited to $1 million of assessed value per person. A married couple can transfer $2 million in assessed value. This means a property worth $3 million but a tax assessed value of $750,000 can be transferred to the children.

What changes with Prop 19?

Under Prop 19 any primary residence gifted to children will require the children to maintain that as their primary residence for the remainder of their life. If they turn the property into a rental or live in another home, that will trigger a tax reassessment on the property creating larger property taxes. The exemption amount is lowered to $1 million and applies ONLY to primary residences. The non-primary residence home exclusion is eliminated and will trigger a tax reassessment.

Examples:

1. Primary Residence

Assume you bought a home twenty-five years ago and today it is worth $2.4 million but has a tax assessed value of $400,000. Under current law, the home can be transferred to your children during your life or at death and they will maintain the tax basis of $400,000 and can live in the home or turn it into a rental.

Under Prop 19, once the home is transferred to your children, one of them must live in the home immediately and maintain it as a primary residence indefinitely to avoid a tax reassessment. Since the home is worth more than the $1 million new exemption, it would trigger a new tax assessed value. The new tax assessed value would be $1.4 million ($2.4 million value – $1 million exemption) instead of $400,000.

2. Rental Property

Assume you bought a rental property twenty-five years ago and today it is worth $2.4 million but has a tax assessed value of  $400,000. Under current law, the home can be transferred to the kids and they maintain the $400,000 tax assessed value since a couple can use exemptions up to $2 million in tax assessed value.

Under Prop 19, the “non-principal value” exemption is eliminated so it would trigger a large tax assessment and the kids do not retain the $400,000 tax assessed value.

What should you do?

If you own a home in California with a low tax basis and would like to keep the property in the family, talk with us and your estate planning attorney today to explore if you should consider gifting the property before the February 16th deadline when Prop 19 takes effect. If you would like to contact us, please speak with your advisor or you can reach us at financialplanning@bfsg.com.  

How to Make and Keep a New Year’s Resolution

Maybe you plan to start 2021 on the right foot by creating a resolution and sticking to it. Some of the most common resolutions each year include quitting smoking, losing weight, paying down debt, saving more, or maybe it is just to be happier. We know it is all too uncommon for people to have the best of intentions but not stick to their goals. If you go to any gym early in the year, you see the number of people there is huge (maybe not this year) and those numbers quickly dwindle as the new year rolls into February and March. So how can you ensure that your resolution makes it past the first 90 days?

You must create new habits by being intentional in your actions and having a plan. If you are consistent with your plan over time you will find the process becomes easier and more enjoyable, especially as you begin to see the results of your hard work. Making it past the first 30, 60, and 90 days is the hardest but gaining motivation from positive results along the way makes the process easier. Here are some tips to make it past the hump:

1. Identify the End Goal.  Dream. Dream Big! Having a huge, audacious goal provides clarity and motivation. Identify that big goal that can be measurable like losing 30 pounds, writing a book, starting a business, or learning a new language. With some support, grit, and help you can make the dream a reality! It is better to aim for the moon and settle for the stars.

2. Break Down the Goal into Manageable Pieces.  It can be overwhelming and paralyzing to think about what you must do to attain that big goal. Now you need to break it down into bite-sized pieces. How do you eat an elephant? One bite at a time. The same is true for your goals. Now break down the goal into bite-sized pieces to make it more attainable and less scary. Map out small steps that become bigger over time that move you towards your end goal. Write down the goal into a checklist and you can mark the first item off of starting the checklist.

3. Remember Why You Are Doing This. As you go through the process it is easy to become frustrated or lose sight of what motivated you to make the goal in the first place. When I lost the weight, I was frustrated by not seeing results “fast enough”. When I remembered that I was doing this so I can have more energy and be a better dad it helped me to stay focused. This step is important as you progress to help you maintain your focus, passion, and dedication to the goal

4. Commit Yourself. Make yourself accountable through a written or verbal promise to people you don’t want to let down. Goals are easiest if you are not alone. If you workout, have a gym buddy or a trainer. If you are starting a business, find a mentor or group of other individuals starting a business. Social media makes it easier than ever to find like-minded individuals to help you along the way. Let them know your goals and help keep you accountable.

5. Have Grace for Yourself. Understand that you have many victories along the way and not just when you complete the big goal. If you are running a marathon completing your first 10-mile run is just as important as completing the marathon. There will be setbacks and don’t get down on yourself. We are our own worst enemy.

6. Be Thankful and Enjoy the Process. Having a thankful heart and some humor makes the process much easier. If three months in you wanted to lose 15 pounds but only lost 10, be thankful that you are down a size. There will be days you do not have the time or will power to achieve your small targets. Maybe the plan for the month is to pay an extra $500 to debt but you lack motivation or had an unexpected expense. Pay an extra $100 that month instead and be proud of yourself for doing something towards your goal.

Remember that if you do not reach your goal this year you will still be better off for working towards the goal and making progress along the way. Have fun with it and involving other people always makes the process easier. Best of luck conquering those resolutions in 2021!