You Gave the Money to the Wrong Person

FAMILY UPDATE

Last week, I complained that my pets follow my wife around like they are in a parade and ignore me. One of my faithful readers gave me a great suggestion: be the one that feeds them. I've been trying it, and it's working! I got two puppy cuddles last week.

My middle son, Alex, won last weekend's 1600-meter race in track. Luckily my wife, Dalanee, is athletic. They certainly didn't get it from me.

My oldest son and I are trying out (what we call) "basic dude stuff." Last weekend we tried shooting a bow and arrow. The target was a pillow but we imagined it to be a zombie.

A tremendous amount of confusion and misinformation surrounds your beneficiary and leaving moo-lah to your heirs.

It’s time for: Dave’s Quick and Easy (and Important) Guide to Understanding Beneficiary Arrangements.

It is essential that your beneficiary arrangements match your desires, and today I am going to dispel some common misconceptions. Get ready to learn.

Retirement Accounts

On any sort of retirement account (IRA, 401k, Roth IRA, etc.), you are able to name primary and contingent beneficiaries.

Example:

IRA Account Holder: Joey Jenkins

Primary Beneficiary: 100% going to Joan Jenkins (wife)

Contingent Beneficiaries: 50% going to Johnny Jenkins (son)

50% going to Jackie Jenkins (daughter)

If Joey (husband) were to die, Joan (wife) would take possession of the retirement account assets and directly roll over the money to her own retirement account. There is no taxation on this kind of transaction.

If Joey and Joan were to die in an accident, then Johnny (son) and Jackie (daughter) would each receive half of Joey’s retirement account.

Johnny and Jackie then have two options:

Option #1– Take the money in cash. With this option, Johnny and Jackie would be required to pay taxes on their full share of the inheritance.

So if Johnny (the son) were to receive his portion of $300,000, he would then be required to claim all of that money as income on his tax return for that year. He very well could pay $100,000 to Uncle Sam in federal income tax.

Option #2- Roll the money over into an Inherited IRA. This option would allow Joey to pay no taxes for now. As he pulls money out of the account over time, he must pay income taxes, based on his tax bracket, on whatever amount he withdraws.

An Inherited IRA is a great way to stretch out the tax liability, as the beneficiary has up to ten years to withdraw the money.

Also, the 10% tax penalty does not apply to an Inherited IRA (normally you need to be 59 ½ to withdraw money from retirement accounts without penalty).

Roth IRAs pass tax-free, there is no timetable for their withdrawal, and are tax-free when the money is withdrawn.

Important Notes

You can change primary and contingent beneficiaries at any time.

If you have a 401k, by law, your spouse must be the primary beneficiary (unless they sign a waiver). This is not the case with IRAs.

Beneficiary arrangements on retirement accounts supersede your last will and testament. This is essential to understand.

If your will instructs your IRA to go to your son, and your IRA account names your daughter as beneficiary- the daughter gets the money. It doesn’t matter what the will says. The beneficiary designation trumps the will.

Non-Retirement Accounts

Now let’s move on to non-retirement assets. These include cash, savings, brokerage accounts, stocks, bonds, or anything else you possess outside your 401k or IRA. Your home and other properties would also fall under this category.

These assets fall under completely different rules.

You can have a non-retirement account "held jointly." So if one person dies, the other automatically takes full control over the account.

You can also set up a Transfer Upon Death designation (commonly referred to as a TOD). So if Joey Jenkins has a savings account titled in his name, and his desire is for the account to transfer to his daughter upon his death, the account would look like this:

Owner: Joey Jenkins TOD Jackie Jenkins.

Important Notes

A TOD designation avoids probate. The money transfers to the beneficiary immediately upon your death. Jointly held accounts also avoid probate.

You can name more than one person on your TOD instructions. You can split up the beneficiaries just like a retirement account.

In Florida, while your home can be owned jointly, you cannot place a TOD on it or any other real estate.

Setting up a trust can accomplish the same things as mentioned above, but a TOD might be simpler in many situations.

Annuities held outside of retirement accounts require you to name a beneficiary. Therefore annuities operate in a very similar fashion to retirement accounts.

Life insurance also operates under beneficiary rules similar to retirement accounts.

Wow! That was some technical (and important) information.

This info can help you avoid probate and make sure the right people get the right money.

Throughout my career, I’ve seen outdated beneficiary instructions create messy situations. I’ve even seen spouses forget to take their ex-spouses off their accounts! Don’t let your ex get your 401k!

Be Blessed,

Dave

 

I Love Paying Taxes

FAMILY UPDATE

We have three cats and a dog, all devoted to my wife. When she walks around the house, there is a parade behind her. Why doesn't the dog like me like that? Why does she get all the cuddles and love? It's not fair. How do I get them to like me? My puppy will pay attention to me if I throw him a tennis ball but other than that he is lying by my wife's side.

I've always liked baking and I baked a couple of fruit pies this week. Using frozen cherries is a great way to make a delicious and healthy pie. Canned pie filling is pure sugar.

Below you will see the ugliest blueberry pie ever made (it was still gone in less than an hour).

Tax time is rolling around, which confuses many of my clients. There are a lot of daunting terminologies out there. I’m going to stick with the stuff you actually need to know.

1099-MISC: A “1099-MISC” is for work you did as an independent worker or freelancer.

1099-INT: This reports interest income you’ve received from savings/CD/money market accounts. It also includes any interest you receive from bonds outside a retirement account. This income is taxed at your federal income tax bracket.

1099-DIV: If you are receiving dividends from an account outside a retirement account you must pay taxes. These tax rates can be more favorable.

As an aside, most people believe the long-term capital gains rate to be 15 percent. The truth is that it is dependent on certain factors, which means it often is not 15 percent.

If you are married and show less than $83,350 in income, the tax rate for long-term capital gains is zero. If you add your social security, IRA withdrawals, and capital gains and it totals less than $83,350, there is no capital gains tax.

1099-R: This is probably the most important form to most clients. It reports how much money you distributed from your retirement accounts (IRA, 401(k), etc.). It does not apply to Roth IRAs.

Required Minimum Distributions (RMDs): I get a tremendous number of questions on this subject. The IRS just raised the age at which you need to start withdrawing money from your retirement accounts each year (from 72 to 73). The amount you need to remove depends on your age. At 73 the amount is around 4 percent. It goes up a little each year. At age 80 you need to take out around 5% from your retirement accounts. At age 90 it climbs to 8%; at age 100 it's 15%.

Stretch IRA: When you pass your retirement accounts on to your heirs, they don't need to cash in the account right away. This would trigger massive taxation. The IRS now gives them 10 years to spread the tax burden over time.

Standard Deduction: The vast majority of you will utilize the standard deduction. If you are married, you can deduct $27,700 from your income. Meaning that if your income is $100,000, you only have to pay taxes on $72,300 after the standard deduction. If you are single, the number is $13,850.

The only time you would not use the standard deduction is in situations where you have several other deductions (mortgage interest, charitable giving, etc.). These are called itemized deductions. If these deductions exceed the standard deduction, you would deduct that amount. About 90 percent of the U.S. population uses the standard deduction.

For example, if you are married and your mortgage interest is $15,000, you do not get to deduct it from your taxes, as it is less than the standard deduction.

Progressive Taxation: I find some people can have difficulty with this concept. I put the tax rates at the bottom of this article.

This is where the confusion comes in. Some people believe if they make one dollar over the 12 percent threshold they must pay 22 percent income tax on all their income. This is not how this works.

Let’s say you are single and make $89,077.

The first $9,875 is taxed at 10 percent. From $10,275 to $41,775 you pay 12 percent. From $41,775 to $89,076 you pay 22 percent. So if your income is $89,077, you would only pay 24 percent on that one dollar.

Cost Basis: First look at how much you paid for a stock, bond, or real estate property. Then look at the selling price. You must pay taxes between the cost basis and the selling price. This does not apply to retirement accounts.

Estate Tax: Florida has no estate tax. As far as the federal estate tax goes, it only applies to people worth over $12.92 million dollars.

Gift Tax: This is also extremely misunderstood. Unless you are worth over 12.92 million dollars, you can gift as much as you want. Be generous. You might have to complete a gift tax form for the IRS, but neither you nor the recipient will have to pay taxes.

State Investment Income Tax: Florida does not tax investment income. Some states do. If you lived in New York, in additional to federal tax, you would have to pay an extra 8.82% tax on the gains from your investments. There's a reason why rich people have their residency in Florida!

I hope this helped.

Be Blessed,

Dave

I am holding Social Security webinars each Saturday at 10:00 AM. Go to www.SocialSecurityRSVP.com to register.

 

A Cure for Stock Market Fatigue

FAMILY UPDATE

We have two indoor cats. This breed, called Ragdoll cats, is bred to be completely defenseless. You can pick one up and rub his tummy; they will just lay there. They absolutely cannot be outdoor cats. They would lose in a fight to a squirrel.

Of course, they want to go outside and become expert escape artists. This week it took almost an hour to coral Coconut. We were chasing her with the golf cart, but we finally got smart. We sent our (also harmless) puppy running after her, like a sheepdog. In a matter of minutes, Coconut ran right back in the front door with the dog in hot pursuit.

My latest orchid in full bloom below.

It seems like the stock market has been going down forever. It has been two years since the peak. Since then, everything has been flat or moving down. If you are retiring or retired, what do you do? Even though I tell you to look at your account once a quarter (at most), I know many of you don’t listen. I understand that seeing your account go down is disheartening. You’ve pegged your retirement security on these vehicles. If you are retired, you are probably taking distributions each month. You are taking distributions from an account that is going down. It's not a fun feeling. Not at all. I’ve been in the investing game for twenty-one years. I’ve seen these kinds of scenarios before. Investing was so much fun in the 2010s. You couldn’t go wrong. All your accounts were going up. In fact, you were taking retirement income checks from the investments AND the account was still increasing in value. What a great feeling! Now, in this current environment, is when the rubber meets the road. For investors that stay the course, financial success will come their way. Those who panic and sell are breaking the fundamental rule of investment: Don't buy high and sell low. Financially successful people ignore these bumps and focus on other things in their life, like relationships and health. What have I seen in the past during periods such as this? I’ve seen one phenomenon reveal itself again and again. Whenever the stock market is finished being in the doldrums, it recovers- fast. After the 2008 real estate crisis, the market had a tough year. Unfortunately, many people bailed out of their investments. But what would have happened if you had stuck in there? In 2009 the stock market returned 25.94%. Let me emphasize this fact by saying: Whoa! After the internet bubble in the early 2000s, things turned around in 2003. The return that year? 28.89%. Again, when it turns, it turns quickly with an extremely high return. I’m a history guy. Let’s go back further. During the Great Depression, after four bad years, in 1933, the market returned 49.98% I bet you would have been pretty upset if you threw in the towel too early. World War II is another good example. 1940 and 1941 saw negative returns, only to see it pop by 19.17%, 25.06%, 19.03%, and 35.82% over the next four years. Believe it or not, there weren’t any strings of bad years all the way up to the 1970s, where, you guessed it, after a two-year downturn, the markets increased by 37% and 23.83% the next two years. Every time in the past that markets experienced a prolonged downturn, the year it recovers has banner returns. Moral of the story. Hang in there. I know it feels like it will take years for your account to recover. When the markets start upward again, it will probably happen quickly. We can’t time the market on this one. If we wait until the markets "look better," you’ve probably already lost at least half of the return. Here is your homework for this week: Delete the stock tracking app on your phone. When you see the stock market results on TV say to yourself, "who cares? In a year anything that happens now will be a blip on the radar." If you know of a friend suffering from stock market fatigue, send them this email.

Be Blessed,

Dave

I am doing Social Security Strategy webinars each Saturday at 10:00 AM. To sign up go to www.SocialSecurityRSVP.com. I guarantee this one-hour class will help you get the most from the system.

 

Investment Bank Failure

FAMILY UPDATE

Have you noticed that new gas stations have many more food options inside? I had my son (student driver) drive us to a new station nearby. It had a full kitchen and a full menu. How exciting! It was almost like we had a new restaurant by our house.
We ordered several items from the menu, and after having tasted it all, we came to the conclusion that no matter how fancy they made it seem, it still tasted like gas station food.
My son commented, "We should have gone to Publix."
Below is Jesse holding his best friend's hand (leg).

It was early Thursday morning when Mike and Connie King watched a documentary on Bernie Madoff, the notorious criminal who stole billions of dollars from investors. He was the king of the Ponzi scheme. A Ponzi scheme is simple. You invest money with someone. They put the money in their own bank/investment account to spend on themselves. If a client wants a small amount of money he pays it out of his bank account. If too many people want their money back the whole thing falls apart.

They'd been having breakfast in their kitchen with the TV on and discussing plans to play pickleball doubles with friends when the documentary grabbed their attention. Afterward, Connie was worried.

She turned to Martin and said, "We have all our money with a financial advisor too! It all seems so easy. All Bernie Madoff had to do was fake statements. He took all of those people’s money."

"Honey, remember. We talked to our advisor about this exact concern. He explained how we were fine," comforted Martin.

"How do we know he wasn’t lying? Bernie made everything look fine too. He faked statements, Martin, for years," Coretta said.

"Our advisor told us that our money was held at a bank, TD Ameritrade. We get statements from them every month and they have online access. It seems pretty legit to me," responded Martin.

Coretta was not feeling any better. "I saw a TD Ameritrade branch over in Shelbyville. I’m driving over there now."

Martin and Coretta raced over to the bank. As they got up to the teller, Coretta said, "We wanted to check on our account."

"Of course," replied the clerk. She pulled up the account and gave her a statement. It looked exactly like the ones she saw in the mail.

"Have you heard of your financial advisors running away with people’s money?" Corretta asked sheepishly. The teller looked confused. "I’ve never heard of that before."

Martin and Coretta went out to lunch at Chick-fil-A. "Do you feel better?" asked Martin.

"I guess so," answered Coretta. She was now thinking about all the ways she could lose her money.

"I know TD Ameritrade is a big bank and everything, but what if they go out of business?" Coretta exclaimed. "You've read the headlines. A couple of banks went out of business."

So Martin and Coretta went back to the bank again (Martin was getting a little frustrated). Coretta went up to the same teller and asked, "What happens if you guys go out of business? Do I lose all of my money then?"

"No need to worry," said the teller.

"Think about it this way. If you have stock certificates inside a safe deposit box inside a bank, what happens if the bank goes out of business? Do they open all the safe deposit boxes and steal the contents? No. The owner of the safe deposit box goes into the bank and removes the contents. Your stocks are no different. They are held separately from the bank’s assets. It's different than cash in a bank."

She continued, "Back during the Great Depression when many banks were failing, a large number of people lost all of their money. But for the people who had stocks and bonds the bank closures did not affect them. Yes, their portfolio was way down, but they still had the shares. Given time, their stocks would have all come back. The bank customers lost their cash forever."

Coretta breathed a deep sigh of relief. But as they drove home from the bank, Coretta couldn’t get the nervous feeling out of her chest.

"Maybe our investments are safe, but that still doesn’t mean we couldn’t lose our money if the stock market crashes," Coretta said.

Martin, gripping the steering wheel tightly, responded, "Our advisor has been that through, too. Let’s go home and re-read one of his newsletters."

So that is what they did.

Their advisor fancied himself an economic historian and often pointed out long-term historical results that were hard to ignore.

"Coretta," Martin reassured his wife. "We have about half of our money in bonds and half of the money in stocks. Let’s look at his charts again."

Results from
50% Bond Aggregate Index
50% S and P 500 Index

1990 1.5%
1991 24%
1992 9.8%
1993 13.2%
1994 0%
1995 28.58%
1996 13.74%
1997 22.47%
1998 18.15%
1999 10.87%
2000 .15%
2001 2%
2002 -11.8%
2003 20.9%
2004 10.3%
2005 4.88%
2006 11.33%
2007 4.3%
2008 -20.81%
2009 24.64%
2010 11.59%
2011 7.34%
2012 13%
2013 15.55%
2014 11.95%
2015 .34%
2016 11.07%
2017 15.67%
2018 -3.50%
2019 23.28%
2020 12.87%
2021 13.42%
2022 -14.5%

"That doesn’t seem too scary. I know we can’t guarantee the future but even during 2008, we would have only lost 20%. We’ve made a ton of money otherwise. Look at that! It’s only gone down four times in thirty years. We need to hang in there. Our advisor is right. The only way to be financially successful in retirement is to invest in stocks and bonds," said Martin.

"Ok, I feel better, "Coretta said. "Let’s go play pickleball."

Be Blessed,

Dave

I am doing Social Security Strategy webinars each Saturday at 10:00 AM. To sign up go to www.SocialSecurityRSVP.com. I guarantee this one-hour class will help you get the most from the system.

 

Dying with Too Much Money

FAMILY UPDATE

Red tide is no fun at all. My parents are coming down for spring break, and we were planning on staying at the beach. Unfortunately, I think our plans have been ruined.
I still can't believe some of the tourists who come down and swim in the murky water. If I traveled from Minnesota, and this was my one tropical vacation of the year, I suppose I'd also consider swimming in polluted water.
My 15-year-old son, now that he has his driver's permit, has been driving me around. A couple of nights a week, my other two sons and I have Chris drive us to the gas station to get a candy bar.
Orchid picture below. Sorry about all the orchid pictures but this is peak season. I'll soon revert back to pictures of dogs, cats, and kids.

Often times the information I give you, while interesting, is very academic and sterile. Yet, what we discuss each week, is not an academic subject. We are talking about real people living real lives. I often discuss generosity. What I’ve discovered is everyone wants to be generous. Who doesn’t want to be open-handed? Humans have been designed to serve and help their fellow man. So why don’t more retirees show generosity during their retirement years? It’s not because they don’t want to give. It’s because they are worried about running out of money. How can you be a giver when you fear your own survival? Hopefully, by now, you agree with my argument that spending 5% of your retirement savings each year is not too much and not too little. Now if you are retired and living "paycheck to paycheck" on your monthly investment checks, you cannot be overly generous. You need to take care of yourselves first. But let’s look at Linda and Larry, who found a way to live fearlessly and lived a retirement to be proud of. This example is pretty extreme and few of you have the endurance of Linda and Larry, but I’m trying to make a point. In 1990, Larry and Linda both retired at age 65. Together they had about $800,000 in retirement savings. They entered their retirement years with the same core beliefs as me: —They invested in a diversified portfolio of stocks and bonds. For this example, we will suppose they had their money invested in a generic portfolio of 60% stocks and 40% bonds. —They started taking out 5% of the original account value ($33,000/yr). —They did not watch the financial news. They understood that long-term investing had worked time and time again throughout history. —They focused on living their best life possible. Or more specifically: In 1990, with the money, they hired a personal trainer and a nutritionist. It wasn’t cheap, but it got them in the best shape of their lives. In 1991, with the money, they hiked the Appalachian Trail. They pampered themselves by staying at several hotels along the way. In 1992, they paid the down payment for their son’s first home. His wife and their four kids needed a bigger place and were struggling financially. In 1993, with the money, they took up fishing and hired a charter boat (with a captain) each month. In 1994, with the money, they renovated their kitchen. In 1995, with the money, they started education funds for their grandkids. In 1996, with the money, they rented an RV and traveled to every state in the U.S. (except Alaska and Hawaii). In 1997, with the money, they took a month-long luxury Alaskan cruise. In 1998, with the money, they helped out their struggling daughter who lost her job. In 1999, with the money, Linda volunteered for a battered women’s shelter and sponsored over 20 women to get back on their feet. In 2000, with the money, they went to several shows in the theater district and paid for their grown kids to go with them (they needed some culture). They saw shows in a few different cities. In 2001, with the money, they turned their yard into a landscaped tropical paradise. In 2002, with the money, Larry bought a pristine 1972 Volkswagen Super Beetle. In 2003, with the money, they put $6500 into each child’s Roth IRA to jump-start their retirement and teach them the importance of starting early. In 2004, with the money, they took a river cruise through Europe (Budapest was their favorite part). In 2005, with the money, they sent their granddaughter to England to study for a summer in Oxford. In 2006, with the money, they took up photography. Linda became especially skilled and developed an interest in tropical birds. In 2007, with the money, at age 82, they decided to take up tennis in order to stay active. They got a membership at a country club, took lessons every week, and played with their friends on Tuesday and Thursday mornings. In 2008, with the money, they helped their grandson with the down payment on his first house. In 2009, with the money, they hired a concierge doctor. The best medical care money could buy. In 2010, with the money, they organized a huge family reunion, bringing together several generations from all over the country. In 2011, with the money, Larry published his memoirs and Linda published a book about her passion for photographing nature. In 2012, with the money, they supported a local charity that helped feed hungry children in the area. In 2013, with the money, they supported missionaries from their church working in Guatemala. In 2014, with the money, they tipped every waitress with a crisp one-hundred-dollar bill, no matter how much the meal cost. In 2015, they both passed away. So did they run out of money while having all of this fun? No. What was their account balance based on historical index returns at the end of their life? $2,056,427 They started with $800,000, spent $625,000 generously over 25 years, and died three times wealthier (which they used to create a trust to help future generations of the family). While you might not be quite as busy, you need seriously start thinking about what your money is for. Maybe it is time to spend more and worry less! Be Blessed! Dave

I am doing Social Security Strategy webinars each Saturday at 10:00 AM. To sign up go to www.SocialSecurityRSVP.com. I guarantee this one-hour class will help you get the most from the system.

 

Is the World Getting Better?

FAMLY UPDATE

My one and only beloved daughter is looking at colleges. We went to a college fair represented by sixty universities. It was a little overwhelming. We are trying to decide how big the school needs to be. She's very social and likes big schools. University of Florida seemed impressive. But who knows? I'm sure she'll find the right fit.
Hemingway (the cat) has been stalking my wife around the house. As soon as she puts down her glass of water he instantly jumps up and drinks from it. Below you can see him majestically watching over the orchids.

We are living in some interesting times. I figured we all needed some good news to fight the unrelenting negativity of the media.

The following good news contains an important financial lesson. The human capacity to grow, change, and innovate is absolutely incredible. If you’re worried about the stock market stopping its 200-year positive run, try this on for size:

In 1981, 42% of human beings lived in poverty. By 2018, that number had dropped to 8.6%.

Even with the destruction in Turday, the chance of a person dying from a natural catastrophe (earthquake, flood, drought, storm, wildfire, or landslide) has declined 99% since the 1920s and ’30s.

90% of the world’s population was illiterate in 1820. Today the world literacy rate is over 90%.

In 1870, the average time in school globally was six months. That number is now eight and a half years.

The IQ’s of people of the world are growing at an incredible pace. IQ over the past hundred years has increased 30 points. How is that possible? No one knows for sure, but it probably has something to do with better nutrition, mentally challenging media, more schooling, and a reduction in childhood diseases.

Mothers died 1% of the time during childbirth in the 18th century. Now it is 500 times less.

Smallpox, in the 20th century, accounted for between 300 and 500 million deaths. That is almost unimaginable. Prior to 1980, 30% of people who became infected died. Now the disease has been completely eradicated by vaccines.

Since 1990, the number of people dying from cancer has dropped by 17% due to advances in medical treatments.

In the past thirty years, homicide rates have been reduced by 17%.

Military spending is going down. In the past fifty years, 6% of the world’s GDP (gross domestic product) was spent on the military. That number is now 2.2%.

For thousands of years the Earth was inhabited by hunter-gatherer societies. They worked between three and eight hours a day. Once they found their food, they stopped.

Once we became more of an agrarian society, the average person worked between eight and twelve hours a day (depending on the time of year), six days a week.

By 1830, the country was industrialized and the average American urban worker worked ten to twelve hours a day, six days a week.

Today we stand at eight hours a day, five days a week. Even that has been reduced by 20% since 1950.

The number of countries with legalized slavery has dropped from sixty in the year 1800 to zero today.

One hundred years ago almost no land on Earth was deemed as “protected and regulated.” Yosemite Park was one of the few. Today fifteen percent of the Earth is protected under these laws, which is twice the size of the United States.

Since 1910 economists have warned that the Earth is running out of oil. However, the world has pumped nearly one trillion barrels of oil since 1980.

Oil reserves now stand at 1.7 trillion barrels. At the current rate of consumption, oil will run out in fifty years. Alternative energy is predicted to overcome the use of fossil fuels in the next 20 to 30 years. It appears we will be left with a significant surplus of oil before it runs out.

In the past fifty years, the prevalence of malnourishment in the world has dropped from 37% to 10%.

In the past thirty years, world access to electricity rose from 71% to 87%.

In the past thirty years, access to clean water in the world rose from 76% to 91%.

Seventy-three percent of Sub-Saharan Africa owns a smartphone. A Nigerian coal miner can send money to his mother in Lagos. A fisherman in the Congo can warn his friends about bad weather.

In the U.S., emissions of carbon monoxide fell 73% in the past thirty years.

Wow, that was a lot to take in. No matter what doom and gloom the media likes to heap upon you, never forget that we live in the wealthiest and safest world in human history.

Be Blessed,

Dave

 

When Should I Start My Social Security?

FAMILY UPDATE

My oldest son, now fifteen, recently got his driver's permit. We try to practice a little bit each day. We are still sticking to the neighborhood. It's a little unnerving that he will drive a thousand-pound rocket around town. I guess all parents go through this stress.
We have a couple of indoor cats who like to escape. We've discovered that our adorable mini Goldendoodle is quite the shepherd. We just send him out and he herds them back into the house. It is really funny to watch.
I currently own 208 orchids. The one below, when in bloom, is the #1 out of all of them.

Here are five important questions and five important answers.

1. Dave, how do you invest your own money?

I maximize my 401k contributions and invest 100% into the stock market. Why? I’m 46 years old and plan on working for 20+ more years. If I use any other investment vehicle, I will have a lower return. By maximizing my contributions, I get a big tax break. For every $100 I contribute, I save about $35 in taxes. It really adds up!

2. The government requires you to take money out of your IRA at a certain age. How does that work?

Required minimum distributions (RMDs) are a tool the government uses to collect more taxes. It forces you to withdraw a certain percentage yearly from your IRA once you turn 73. It’s confusing because two years ago, the age was 70 ½, and last year it was 72. It will stay at 73 until 2032 when it will increase to 75.

The amount required to withdraw at age 73 is 3.7%. It slowly increases each year. At 80, you need to withdraw 5%.

3. Can I retire if I still have a mortgage?

Of course. Your mortgage payment is no different from a car payment. If your monthly retirement income can afford the mortgage payment, it is no different than any other monthly debt.

4. Should I pay extra toward my mortgage?

This answer might surprise you, but my answer is a strong "no."

This is the problem: once you put money toward your mortgage, there is no way to get it back out. Now that interest rates are so much higher, second mortgages and home equity lines of credit are very expensive. If you use a good-sized portion of your savings to pay off your mortgage, what happens if a considerable expense comes up?

Also, consider the fact that your current mortgage probably has a low-interest rate. It just doesn’t make sense to upend your financial picture by paying off a low-interest loan.

5. When should I take Social Security?

I’ve taught classes on this stuff for years. More and more, I am noticing that people are taking their benefits much too early. I know it can be hard to wait, but when starting benefits, you need to consider how long you might live. Believe it or not, if you are a healthy 65-year-old, your life expectancy is 90.

If you take your benefit at 62, you get 60% of the benefit you would get if you waited until age 70.

Let’s look at someone who is eligible for $2000 a month at their full retirement age (67 for most of you).

If you take it at 62, you will receive $1533 a month.
If you take it at 70, you will receive $2507 a month.

*All the following numbers assume a 2.5% cost of living adjustment per year (which has been the average for decades).

Let’s say you live until 80 in this scenario.

If you took it at 62, you would have collected $383,000.
If you took it at 70, you would have collected $404,000.

Let’s say you live until 90 (there is a 50% chance you will live this long)

If you took it at 62, you would have collected $697,000.
If you took it at 70, you would have collected $917,000.

Let’s say you live until 95 (there is a 33% chance for women and a 20% chance for men).

If you took it at 62, you would have collected $885,990
If you took it at 70, you would have collected $1,226,420

Let’s take it a step further. What if your full retirement age benefit is $3000 a month?

At 62, $2300 a month.
At 70, $4360 a month.

Let’s say you live until 80.

If you took it at 62, you would have collected $574,000.
If you took it at 70, you would have collected $606,000.

Let’s say you live until 90.

If you took it at 62, you would have collected $1,054,000.
If you took it at 70, you would have collected $1,376,000.

Let’s say you live until 95.

If you took it at 62, you would have collected $1,329,000
If you took it at 70, you would have collected $1,839,000

These numbers can be mind-boggling. It is absolutely possible that there are married couples out there that will collect $3,000,000 of benefits from Social Security during their lifetimes.

Don’t collect Social Security just because you want that extra spending money in your early 60s. It will really come to bite you later on.

Be Blessed,

Dave

P.S.- I am doing Social Security webinars each Saturday at 10:00 AM. If you like to register, please go to www.SocialSecurityRSVP.com.

 

Fighting Over Your Money

FAMILY UPDATE

We had a Superbowl party while my parents were down visiting from Pittsburgh. My wife's parents were there too, so we had all four grandparents together! What fun!
I allowed each kid to get one item of junk food for the party. They chose Doritos, chicken wings, chocolate, and a Superbowl cake. This is in addition to the homemade cookies Grammy made. When all four grandparents are there the kids should be spoiled as much as possible.
Unfortunately, it wasn't the best beach weather. The red tide was so strong on Sunday that you could barely get out of your car without your eyes watering.
Below is Senay's lacrosse photo. The season has started!

J. Howard Marshall II was a billionaire. He passed away in 1995. If you don't remember him, you probably remember his wife at the time of his death, Playboy playmate Anna Nicole Smith.

When Marshall died, he left her out of his will completely. The majority of his inheritance was left to his son. Anna Nicole Smith sued, claiming that Marshall had promised her half the estate.

The case went to the US Supreme Court. Twice. It took twenty years to resolve the issue. Finally, a probate judge in Texas denied the request to sanction Marshall's estate. Anna Nicole Smith did not get $44 million. The will and testament were preserved.

Now, let's talk about YOUR will and a few other important financial documents.

Is this stuff fun to think about? No. Is it something you’ve been putting off for years? Probably. Do you know it is important? Yes.

When it comes to legal documents you need to prepare for retirement, there are four basic items.

Your Last Will and Testament.
Your Health Care Advance Directive
Your Durable Power of Attorney
Your Trust documents

Your Last Will and Testament

All of you know what this means. It basically tells everyone who gets your stuff. For example, you may wish that all of your assets are split between your three kids.

Now, whatever passes through the will has to go through a process called "probate." Probate seems to be a scary word to people, but the concept is very simple. Before the money can be passed on to the beneficiaries, creditors get a chance to collect any unpaid bills.

The executor handles this process. If you have gone through this process, you know that it’s not a lot of fun. You should be very proud of yourself for putting up with the hassle. For large estates, this process can last for a year or more. Smaller estates can expect about six months before the assets are distributed. Remember, IRAs, 401(k)s, life insurance, and annuities do not go through probate. They go instantly to the heirs.

Homes, farms, and other real estate properties are notoriously a mess to leave to heirs. Probate is complicated. Kids fight. You need to have specific instructions as to what you want to be done with the house.

Your will may also include instructions on gifts to charities, scholarships or trusts you would like to fund and even your funeral wishes.

Health Care Advance Directive

Here’s something that is super fun to think about. Who gets to make medical decisions for you if you are unable to do so for yourself? This document better allows your loved ones to advocate on your behalf. It gives them access to all your medical records and allows them to authorize medical procedures.

And of course, this document outlines if and when it is time to pull the plug. (Like I said, not a really fun document.) If you remember the controversial case of Terri Schiavo, you know how important this document can be.

Schiavo sustained a cardiac arrest in 1990, leaving her in a permanent vegetative state. Her husband and her parents battled in court, and much of the nation battled along with them, until 2005. I don't care which side of the debate you fall on; the fact that it had to happen is heartbreaking. A Health Care Advance Directive can make an incredibly difficult moment just a little bit easier for your family.

Durable Power of Attorney

A durable power of attorney simply shows who can handle your financial affairs if you are unable to do it for yourself. Often a spouse is put into this position. You would be surprised at how many things a spouse cannot access without a power of attorney in place. Does Mom need money sent from her IRA to her checking account for important expenses if she is incapable? Without this document, you cannot make that transfer.

A common example is selling a parent's primary residence upon entering an assisted living facility. You need to have the ability to act as their representative.

This doesn’t only apply to elderly parents. It can also apply to a spouse with a sudden injury where he/she is unable to communicate their wishes.

Trusts

I’m sure you’ve heard the term "Trust Fund Baby." What does that actually mean? Trust documents give you control of your money from beyond the grave. Instead of dumping a pile of money into your kids' (or grandkids') laps all at once, a trust gives you control over how and when they receive the money.

Examples:

"Upon my death, my son gets 25 percent of the money when he turns 25, 25 percent when he turns 30, and the rest when he turns 35."

"Upon my death, my children may receive 5 percent of my trust value per year." (This is a common strategy for charitable trusts. If the money is invested, the portfolio should make an average of 5 percent, so that the trust fund will last forever).

Not only do trusts allow you to control your assets beyond the grave, but they can also protect your money from getting into the hands of people you don’t like.

"Upon my death, these trust funds may be paid out to my daughter and her children. In the event of a divorce, my son-in-law has no rights to this money in the trust."

Why is this important? If you dump a lot of money into your child’s lap when you die, and your child then gets divorced, their ex could go after half of the assets, including the inheritance. If the money stays in the trust they have no claim against those assets.

What if one child gives all the care to elderly parents? Should they get more of the inheritance? These documents would spell this out and hopefully stop any fighting between the kids.

What if your kids face a lawsuit? Trusts can help protect those assets.
What happens if your child dies, and their spouse gets all the money? Are you ok with that? Would you prefer it go to your grandchild? Or a charity?

I hope this at least gets you thinking about your own death. I’m just kidding. Don’t think about that.

It is so easy to ignore these issues. Just do it! Get it out of the way. Do you know who didn’t have any of these documents upon his death? Michael Jackson.

Can you imagine the mess? Can you imagine people coming out of the woodwork trying to get their "share" of the loot? He died ten years ago and court battles still rage.

Be Blessed,

Dave

P.S.- I am doing Social Security webinars each Saturday at 10:00 AM. If you like to register, please go to www.SocialSecurityRSVP.com.

 

Einstein Invested Too

FAMILY UPDATE

My oldest son just turned fifteen. That means he now has a driver's permit. He isn't especially thrilled that he has to learn how to drive in the lame minivan.
My parent's flights were canceled over the Christmas holiday (they were flying Southwest). They are coming down this weekend. We plan on having a fun Superbowl party with lots of junk food.
Last year I took a couple of kids to the grocery store to buy stuff for the Superbowl party. That was a big mistake. Before I turned around the cart was filled to the brim with unhealthy snacks. My son ended up eating Doritos and M&M's for dinner.
Also, February is prime orchid season.

If you’ve been reading my articles each week, by now, you know that I believe in the incredible power of the stock market. I’ve spoken, at length, about how investing in the stock market is essential to your long-term financial well-being. I’ve also spoken about how no one knows what the markets are going to do. No one. Anyone you see on TV or any article you read on the internet is pure conjecture. They are guessing. They might as well be using a crystal ball. In the short term, no one has ever had the ability to diagnose the markets. Don’t let them derail you. I can’t believe I am doing this but….. Now I am going to make a big prediction. Are you ready? A portfolio of stocks will double in value over the next ten years. Have I completely lost my mind? Are you sitting at the screen, staring in disbelief? It’s ok. I understand. But let me make a very logical argument why this prediction has a good chance of coming true. I like to think of myself as somewhat of an economic historian. So let’s take a look at the past century. From 1920 to 1930 the Dow Jones rose from 107 to 244 points. You may notice that the points more than doubled. They increased by 128%. So my prediction would have come true. Let’s look at all the other decades. 1930’s, the Dow went down from 244 points to 151 (or a 38% loss) 1940’s, the Dow went up from 151 points to 198 (a 31% gain) 1950’s, the Dow went up from 198 points to 679 (a 242% gain) 1960’s, the Dow went up from 679 points to 809 (a 19% gain) 1970’s, the Dow went up from 809 points to 824 (a 2% gain) 1980’s, the Dow went up from 824 points to 2801 (a 239% gain) 1990’s, the Dow went up from 2801 points to 11,357 (a 305% gain) 2000’s, the Dow went down from 11,357 points to 10,583 (a 7% loss) 2010’s, the Dow went up from 10,583 points to 28,868 (a 172% gain) "But Dave," you may be saying to yourself, "there are a lot of decades where the markets did not go up by 100%. How can you say my money would double in a single decade?" I have four words for you: dividends and compounding interest. You see, when you look at the S&P 500 and Dow Jones, the percentage changes do not include the dividends. It only reflects the point increase. Let’s take a look at the 1940s. At first glance it is not particularly exciting. A 32% increase over an entire decade is only 3.2% per year. But those stocks were also paying out dividends which are not included in the point increase. In the 1940’s the average dividend across all the companies in the Dow was 4.7%. That is a very big deal. The actual amount of money an investor would have made was: 3.2% stock price growth plus 4.7% dividend per year is 7.7% per year. Then we come to compounding interest. Albert Einstein famously said, "Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't, pays it." Compounding interest is the idea that your money makes money on the money that it makes. Let’s say: Year 1: 10% investment return on $100 is $110. Year 2: 10% investment return on $110 is $121. Year 3: 10% investment return on $121 is $133…..you get the idea. In the 1940s, 7.7% compounding over ten years is a 110% increase. Your money would have doubled. If you include dividends and compounding interest, the only decades where your money would not have doubled were the 1930’s and the 1970’s and the 2000’s. So you would have doubled your money in seven of the last ten decades. You would have only lost money during the 1930’s (The Great Depression). So will my prediction come true? Will your money double in this decade? It certainly isn’t a guarantee but I still like my chances. Be Blessed, Dave