From CFP Board's Consumer Advocate, Eleanor Blayney, CFP®
The Gift of Giving: Planning for Charitable Donations and Gifting
I’ve saved the best for last in this final column of the "12 for ’12" series.
Over the past 11 months, I’ve looked at the building blocks of personal finance, from setting goals, to budgeting basics, to strategies for tax, education, retirement, and estate planning. By now, faithful readers should be feeling more confident about dealing with the common financial challenges in life.
But I want consumers to leave 2012 feeling more than just confident. I want them to feel positively wealthy!
The secret is simple. It’s common knowledge among the world’s wealthiest men and women, such as Bill Gates, Oprah Winfrey, or Warren Buffett. To feel rich, give money away. Just make a gift.
Apparently no arm-twisting is necessary to get people to make gifts at this time of year. According to the National Retail Federation, nearly $586 billion was spent on holiday shopping in 2011, and the total is expected to be higher this year. As for charitable giving, Americans donate approximately $220 billion annually, much of it at year end. That’s almost a trillion dollars of gift-giving. No doubt about it: we are a wealthy nation of generous people.
But are we completely smart about the gifts we make? Too often, gift-giving becomes a chore, just another thing to get done during the holidays. It’s about finding “stuff” for the stockings and for all the people on your list, or dashing off a check to a charity before the end of the year.
It’s possible to transform your giving from just stuff – opened today, forgotten tomorrow – to gifts that benefit both the donor and recipient long after the tinsel and bows have been swept away. Here’s how:
- Plan Now, Give Later, Part 1: Imagine receiving an envelope with $1,000 to spend for the holidays. It would certainly make the season merrier, both for you and the people and causes you care about. You can do this for yourself simply by budgeting and setting money aside throughout the year for year-end giving. Remember the popular concept of Christmas Club savings accounts, first introduced in the Depression? It’s the same idea. But we often do just the opposite – spend first without planning, then pay later. It takes the average American until March to pay off December’s spending: a sure-fire way to turn the joy of giving into a new year’s hangover.
- Plan Now, Give Later, Part 2: This good advice deserves a second look, but now in the context of charitable giving. There is a whole category of charitable transfers, called planned giving, which involves pledging or earmarking assets today for a future transfer to charity. Making a charitable bequest in a will is one such example; naming a charity as a beneficiary on a retirement plan or insurance policy is another. Charitable remainder trusts and gift annuities also provide for future donations, but can generate current tax deductions in an amount equal to the “present value” of the later transfer. From a financial planning point of view, these gifts are both smart and generous: they ensure that a donor’s assets are available to him or her if needed for lifetime expenses. Once that need is no longer there, the remaining assets go to benefit charity.
- Plan Now, Benefit Later: This method of giving is really a form of “investing” – using today’s money to build a better future. Consider having some of your holiday gifts fit into this category. Most of the gifts we give are depreciable goods like clothes, games, and food. Once worn, used, or consumed, they have little remaining value. Instead, think of gifts which have long-term benefits: a contribution to a child’s college savings plan, payment for a skills-building workshop, or picking up the fee for an adult child or relative to talk to a CFP® professional.
- Plan Now, Benefit Now: With a bit of careful planning, you can make some of your gifts this holiday season pay off almost immediately in terms of added tax savings. For example, rather than just writing a check to a charity, review your portfolio for appreciated securities you have held for more than a year. Not only do you get a deduction for the market value of the securities donated to the charity, but you get the additional benefit of avoiding the capital gains when the security is sold. For individuals who may be subject to estate and gift taxes, making a gift to a beneficiary today can have the advantage of minimizing the total taxes which must be paid both now and later. A CFP® professional can assist with the finer points of this gifting strategy, helping you to choose the best types of assets to give now, and using gift-splitting between spouses to maximize the amount of current gifting that can be done transfer-tax free.
You’ve no doubt noticed, both in this column on giving as well as in all my columns this year, I’ve used the words “plan” and “planning” more often than the Salvation Army man on the corner rings his bell. There’s an important reason for this focus, one that has been consistently demonstrated in the consumer surveys periodically conducted by the CFP Board. In short, those who plan their finances have greater sense of hope, security, and confidence about their future than those who do not.
And I have it from a certain jolly gentleman who is the undisputed expert on these matters: hope is at the very top of everyone’s list this season. It always fits, and never gets returned.
From CFP Board Ambassador Dan Mathews, CFP®
Generation X: Ten Tips to Make Your Financial Plan Come Alive!
In May of 1992 Pearl Jam, which had recently released its debut album Ten, rolled into Lawrence, Kansas, and performed a free concert at the University of Kansas’s “Day on the Hill”. Most of us in the crowd that day (yes, including me) were Gen Xers; an apathetic bunch labeled as slackers with a cynical view of the world. I believe that we have successfully debunked the slacker myth in the workplace. I am still working on being less cynical!
Now that we are turning 40 (yes, including me), the days spent vegetating on MTV or Space Invaders are well behind us. Instead, we focus on more serious matters like family, career and becoming financially independent. Becoming financially independent requires a financial plan, so here are 10 tips to make our financial plans come alive!
- Create a written financial plan with the help of a CERTIFIED FINANCIAL PLANNER™ professional. A written financial plan that outlines short and long term goals is actionable and can be monitored. Consulting with a CERTIFIED FINANCIAL PLANNER™ professional is the best approach to “put it all together.”
- Pay off non-mortgage debt. High-interest debt like car and school loans erodes cash flow. Aggressively pay down these loans to free up more cash for spending and saving.
- Place a greater emphasis on saving for retirement. We Gen Xers embrace being independent and resourceful, so planning for our retirements is going to be our opportunity to shine. Company pensions are like hair bands - nearly extinct - and the entitlements from Social Security may not be fully available to us. Save at least 10% of income by making pre-tax and/or after-tax (Roth) contributions into a 401(k) Plan account or IRA.
- Create a diversified investment portfolio that is not too conservative. It’s easy for us to be skeptical toward the stock market, given the financial collapses after 9/11 and in 2008, but we need to keep an open mind. In my opinion, a diversified portfolio of stocks, bonds, alternative investments, and cash is still the best investment strategy to grow savings over the long term.
- Start a 529 Plan education savings account. The total average annual cost of a four-year public institution has increased threefold since 1992, according to the National Center for Education Statistics. A 529 Plan account, which allows for tax-deferred growth, is one of the best options to save for college.
- Protect assets and income with insurance. Our ability to earn income is the greatest financial asset we have. It’s called our human capital. Protect it with disability and life insurance in case something unexpected happens.
- Execute an estate plan with signed documents and beneficiary designations. Without a signed will and power of attorney, we in effect turn over the disposition of our personal and financial matters to the state. Make sure that beneficiary designations for life insurance policies and retirement accounts align with the estate plan. Recently divorced individuals should update beneficiary forms, insurance policies and estate documents to avoid unintended beneficiaries.
- Get an annual physical. Twenty years ago, we were invincible; today, not so much. Minimizing the risks of major health events will lead to healthier finances over the long run.
- Pay bills with a joint checking account, but open his/hers checking accounts for “fun money.” This is a simple way to reduce financial stress in a marriage. Plus, we probably don’t want our spouses to know how much we spend on collecting old vinyl grunge albums.
- Talk to parents about their financial goals. It’s time to drop the rebellious attitudes and to gain a better understanding of our parents’ personal finances. This will protect them from becoming victims of scams, and prepare us for the time when we will have to play a greater role in their personal finances.
We Gen Xers will have to follow an alternative path to financial independence versus the Baby Boomer and Silent generations before us. Given our experiences with bands like Pearl Jam, I think the alternative suits us just fine. However, there is no alternative, even for us, to help make our financial plans come alive. You want a CFP®
professional, no substitutes accepted.
From CFP Board Ambassador Elaine King, CFP®
Steps to Financial Planning for the Holiday Season
Did you know that you can save 30% on average if you plan ahead for this holiday season? Now is the time to get started and dust off the plan you set up in January and make sure you are on target with your spending plan.
Financial planning is more than just keeping track of your money. Other areas of financial planning include education, retirement, taxes, investments, and estate planning, among others. But it all starts with a spending plan. To get started on this first step, follow these 3 tips to stay on track for the holidays, and for the rest of the year.
- Create a realistic spending plan. Before going out shopping, it is essential to have a fund designated for each activity in your spending plan. A spending plan is a list of all of your expected outflows for the month, designated as either a variable or fixed expense. Fixed expenses are those that must be paid, holiday or no holiday, and are the same amount each month, such as your rent or mortgage payment. A variable expense, on the other hand, is one that is not necessarily incurred each month and/or varies in amount. Some of these variable expenses are necessary – such as utilities or transportation, while others are entirely subject to your discretion. This last category includes your holiday spending.
The key to keeping holiday spending under control is to build these year-end expenses into your budget at the very beginning of the year, and actually fund them monthly. The money can be moved from your checking account to a savings account or a money market, so you are not tempted to use it for other expenses during the year. A good practice to keep you motivated and on track to having the holiday money when you need it is to use online tools such as Mint, Doughhound, Geezeo, Yodlee or Pennyminder.
- Share your spending plan with the family. Most of the commercials, ads and marketing campaigns developed for the holiday season are targeted to children and families. They are attractively designed, promoting “must have” products and experiences for the holidays. It is imperative that you take the time to share with your children the value of money and giving, but also discuss what is appropriate and affordable for your family. Consider empowering your children by designating an amount in your spending plan that is for them to use (and keep within!) as they do their own shopping. Have them participate in financial decisions about entertaining. For example, you could set aside $50 for a small gathering at your house, and have the children share in the task of buying food and supplies at the supermarket. You might reward them if they find ways to spend less than the budgeted amount, such as putting the savings in their own accounts. It’s so important to get children involved in financial management and empowered to take control of finances.
- Stay away from credit card debt. Equally important is to avoid using your credit card to buy more than you can currently afford. You should also limit the number of credit cards that you hold. Consider that only paying the monthly minimum on a debt of $1,000 at a 19% APR will take 20 years to pay off the balance. Debt is not always bad, however. Debt that is used to finance items that appreciate over time such as a college education, or a business start-up, are effective uses of leverage. On the other hand, using debt to purchase something that depreciates in value or has only short-term benefits, such as clothing or entertainment, is bad debt. During the holiday season, our generosity and holiday spirit can sometimes lead us into bad debt that lingers long after the festivities have ended.
In the past few years, the year-end has brought feelings of anxiety and loss due to economic, political and social turmoil. However, we all want to close the year on a positive note, creating a culture of responsible finance despite the affairs of the nation. Consider giving donations in the name of a family member or friend rather than buying the person a store gift. Consider hosting events and asking your guests to bring a toy for a shelter, or contributing to someone’s education fund. A CERTIFIED FINANCIAL PLANNER™ professional can help you with your seasonal planning and budgeting and give you more control of your finances, allowing you to enjoy the season and relax.
Financial Planning for Your Retirement
Maximize Your Retirement Portfolio by Following These Year-End Tips
There are a few things you should do at the end of the year to maximize the value of a 401(k) account. First, any contributions should be made before Dec. 31, as taxes can be deferred on up to $17,000 in 2012. "It's not unusual to have someone put a large portion of their paycheck in a 401(k) plan in the month of December," says Randy Clayton, CFP®
. "You can go to HR or personnel and change it just for one or two paychecks to get more money into the 401(k)." Also due by the end of the year are catch-up contributions for workers over age 50 who may deposit up to $22,500 for the year. Checking year-end quarterly statements is important to see the fees being paid as compared to a benchmark, which is required for the first time this year. Meanwhile, there are several things that can wait until next year, such as 2012 IRA contributions. "You can fund a Roth or traditional IRA as well as the additional $1,000 catch-up contribution up to the 2012 tax filing deadline of April 15, 2013," says Jean Sinclair, CFP®
. The financial institution will have to be told that contributions after Jan. 1 are intended for 2012 so that they are not recorded for 2013. Charles Buck, CFP®
notes that an IRA contribution can even be claimed on a tax return before the deposit is made, as long as the money is in the account by the return’s due date. "You can file your taxes and get the refund and then use it to fund your IRA," he says. Another April deadline is for taking required minimum distributions (RMDs), which must be done by April 1 in the first year after a person turns 70.5 years of age; otherwise a 50 percent tax will be levied on the amount that was to be distributed. Each following year the distribution must be made by Dec. 31, and if there is a delay, two distributions must be taken in the same year, potentially resulting in a higher tax bill. Finally, everyone should examine their contribution levels because limits will increase next year for both 401(k)s and IRAs.
Q&A: When Can This Couple Withdraw From Their Retirement Savings Accounts?
It’s important for retirees to understand when and how much to take out of their retirement savings accounts. Dan Moisand, CFP®
advises one couple – he is 70-and-a-half, she is 68 – about how best to withdraw from their retirement accounts. Moisand says the absolute latest they can withdraw the first Required Minimum Distribution (RMD) for 2012 is April 1, 2013. However, RMDs applicable to 2013 must be withdrawn by Dec. 31, 2013. First, he advises, calculate the RMD for each non-Roth IRA account, including traditional IRAs, SEP IRAs, and simple IRAs. The couple can then withdraw the total of those RMDs from any of those accounts in any sum. However, for 401(k)s or other company-sponsored plans, tabulate and take the RMD for each plan separately.
Delaying Taking Social Security Will Mean a Bigger Retirement Income Benefit
By delaying collection of their Social Security benefits, seniors’ retirement income benefit will grow by 8 percent for each year delayed between ages 66 and 70, says Robert S. Pennartz, CFP®
. To determine if delaying benefits is appropriate, Pennartz says seniors should examine whether they need the retirement income money immediately or not. If a delay is not possible, then the benefit should be taken, he says. Another key point to consider is a person's anticipated longevity because it could take to age 79 before a person starts receiving more total income from a delayed benefit, says Pennartz. A different strategy is "file and suspend," where the higher-income worker can file and suspend his (or her) benefit upon reaching full retirement age to start spousal benefits, which translate to 50 percent of the higher-income worker's benefit. This lets couples start with a smaller benefit at age 66, building up to a larger benefit later on. Meanwhile, Pennartz notes that starting in 2013, there is a new 3.8 percent tax on investment income that applies to individuals with modified adjusted gross incomes over $200,000 and couples filing jointly over $250,000. The tax applies to interest, dividends, capital gains, annuity income, passive rental income, and other types of investment income. He notes that while consumers can defer or avoid these items, a Roth Conversion in 2012 will eliminate future taxable income in 2013 and beyond, and that pre-tax contributions to 401(k)s and IRAs can help reduce a person's modified adjusted gross income to keep it under the threshold amount.
Financial Planning for Your Life Now
Millennials, It's Time to Start Funding Your Nest Egg
There are many strategies people in their 20s can take to save money for the future. Dr. Don Taylor, CFP®
says it is important for Millennials to contribute enough to their 401(k) to ensure they are receiving the maximum company-matching contribution. In addition, first-time homebuyers can take out up to $10,000 from a Roth IRA with no penalty tax on the distribution, he says, but the account will need to be seasoned, or established for five years, before any money can be taken out as a qualified distribution. Roth IRAs are funded with after-tax dollars, so account holders will not owe income tax or penalty tax on the distribution of contributions. Taylor warns that distribution or investment earnings may trigger income taxes and a penalty tax if the account is not seasoned though. A seasoned Roth IRA account will enable account holders to channel $550 per month into that account up to the yearly contribution limit of $5,000. Money left over after investing in a 401(k) and Roth IRA may be placed into a taxable account. For example, a high-yield savings account could be appropriate if you plan to buy a home within the next two to three years. Lastly, when purchasing a home, Millennials might consider a Federal Housing Administration (FHA) loan versus a standard mortgage. An FHA loan with a 3.5 percent down payment costs well below a conventional mortgage.
Answer These Questions Now to Prepare Now for the New 2013 Tax Laws
With tax laws slated to change in 2013, now is the time to take advantage of some of the most lucrative estate tax benefits available, says Mark Keating, CFP®
. Answering a few basic questions can help a person appreciate the importance of creating an estate plan and the ways in which it can help protect assets. Sample questions include: Who should inherit the money? Who helps if you are incapacitated? Who makes the difficult personal health care decisions if you cannot? Answering these and other potential long-term questions, as well as consulting with a team of skilled estate planning professionals, will help ensure the effectiveness of your estate plan.
You'll Need to Consider These Factors When Inheriting an IRA
For those inheriting an IRA account, Wes Moss, CFP®
offers several guidelines. If inheriting an IRA from a deceased spouse, he gives three tips: the IRA can be treated as your own if your spouse died before taking Required Minimum Distributions (RMD); the IRA can be treated as your own if your spouse started taking RMDs but was older than you; and the IRA can be treated as a Spousal Inherited IRA if your spouse was younger than you and started taking RMDs, meaning you can take your own RMDs based on your spouse's previous life expectancy. For those inheriting an IRA from someone other than a spouse, the IRA can be treated as an Inherited IRA if the deceased died before taking RMDs or if the deceased died after taking RMDs, but you will need to take RMDs based on either your life expectancy or the deceased's remaining life expectancy. If a trust is inheriting an IRA, the status of RMDs does not come into play and distributions are made based on the life expectancy of the oldest beneficiary.
Military Veterans Have Some Things to Teach You About Money
Military veterans know well the importance of accountability, sacrifice, discipline, and flexibility. Steve Repak, CFP®
, a veteran, writes that these same qualities can also help improve your financial decisions. Similar to how a leader must take responsibility to fulfill a mission, you must take responsibility when managing your money. Honesty and accountability are also essential, helping you to identify your own weaknesses when it comes to finance and to learn to make smarter decisions that produce better results. Sacrifice is also important in finance – finding areas to cut back, such as giving up a $4 daily coffee, will help to make one’s future more financially secure. Other traits common in the military that should be modeled in financial decisions include prioritizing goals, thoroughly planning the steps to a secure financial future, working as a team with a CERTIFIED FINANCIAL PLANNER™ professional, being flexible in order to respond and adjust to changes such as Hurricane Sandy, keeping it simple by doing the obvious such as avoiding use of credit cards in order to get out of credit card debt, and staying determined to fight the good fight and accomplish the mission. None of these qualities are fun or easy, but they will help lead a person to financial victory.
Financial Planning for Your Children
Consider a 529 College Savings Plan for Your Children’s Education
While saving for your children’s college education is daunting, a 529 Savings Plan can make the sticker shock a little more manageable by giving you complete control over your account. A 529 Savings Plan is a tax-advantaged college savings plan sponsored by a state or educational institution that allows the owner to save money, tax free, for future college expenses on behalf of a beneficiary. There are many benefits to saving with a 529 Savings Plan: the funds grow tax-free if they are used for qualified education expenses; the owner has the freedom to select or change the beneficiary; and the owner can make the investment choices. Compared with custodial accounts for minors, in which the assets are held in the child’s name, are irrevocable, fully taxable, and detrimental to need-based financial aid applications, 529 Savings Plans often are the better choice. While 529’s have many benefits, they do have a downside, mainly that the funds must be used for educational purposes or face a 10% penalty fee. Used correctly, 529’s can be a valuable asset in preparing for your children’s education.
Financial Planning for Women
Both Women and Men Make Their Share of Money Mistakes
Financial experts share the financial strengths and weaknesses of women and men based on their years as money advisers. Experts say men tend to not seek advice, and are therefore more prone to make rash decisions based on limited information. Men also display a level of over-aggressiveness when it comes to investment habits. This makes them more willing to take on undue risk, the advisers say. Matthew Brock, CFP®
says men make financial moves more like someone who is playing a game than someone who has a family to provide for. "They have a hard time taking their family situation into account. Big mistake," Brock says. The issue for younger men, on the other hand, is procrastination and making few financial decisions at all. Another common error among men is ignoring the necessity of long-term care planning. "Men would rather play martyr than admit they could get dementia, become incontinent, or need a sponge bath," says Michael Maynes, CFP®
. "But this is reality. People decline mentally or physically, or both." On the other hand, the biggest mistake older women make is not getting involved in any financial decisions and leaving the planning up to their husbands. Problems surface years later when they go through divorces or their husbands pass away, Brock says, and they find themselves going back 20 or 30 years to learn about their financial position. Women also tend to underestimate their financial skills. "The dumbest thing I see women do with money is convincing themselves that they aren't good with it," says Ellen Rogin, CFP®
. "They tell themselves things such as, 'I don't have a head for numbers.'" This type of thinking is "disastrous," she says. Both men and women should be realistic and seek areas of improvement when it comes to determining realistic risk, being appropriately aggressive, and realistically planning for the future.
Women Need to Be 'Involved' With Their Finances
When it comes to finances, women need to "be involved," says Beverly Provost, CFP®
. At a minimum, this means knowing where accounts are, having wills in place, and participating in discussions about financial planning strategies. Provost suggests that married couples work with an adviser to create a financial strategy. Once that strategy is in place, she advises saving regularly and making it "a consistent part of your monthly expenses." Finally, she suggests meeting with the financial adviser at least once a year and anytime there is a significant change in the household financial situation.
Hiring a CERTIFIED FINANCIAL PLANNER™ Professional
Selecting the Right Financial Adviser Is Made Easier with the Right Information
Finding a true financial adviser amid the labyrinth of financial service professionals and credentials can prove challenging, but it is not impossible if you are equipped with the right information. Amid the options, CERTIFIED FINANCIAL PLANNER™ professionals take a more holistic approach to financial advice. These professionals are college graduates with a minimum of three years of work experience who have completed all coursework, passed a two-day, 10-hour exam covering financial planning topics, and continually update their education by taking 30 hours of coursework biennially. When selecting a financial adviser, regardless of their credentials, you should find out how they are compensated, whether through an hourly fee-for-service – either fixed or based on the assets they are managing – or on a commission for implementing recommendations they make, such as placing trades. You should also check to make sure your financial professional adheres to a code of ethics or a professional standard of conduct; most financial adviser credentials have a code of ethics. Lastly, you should be sure to check out the Web site of the organization that gave the planner their license or designation. The site will typically show information on the adviser's background, including information on any illicit or unethical practices.
Take the Time to Research Your Financial Planner
Be wary of people that claim to be “Retirement Specialists” and “Wealth Coaches”; chances are, they’re claiming to have an expertise that doesn’t match up with their experience, let alone meet industry best practices. For this reason, it’s important to research your financial adviser. There are several different resources to help you choose the right adviser for your needs. The Securities and Exchange Commission website lists the history, experience and any disciplinary actions taken against your adviser. If that’s overwhelming, ask your adviser for an “ADV Part 2B,” which includes important information such as educational background, job history, credentials and actual years of experience as an investment adviser; they must have this documentation readily available for all prospective clients. Lastly, be aware that while investment advisers must adhere to a fiduciary standard, that standard does not apply when they sell you an insurance or annuity product. The more information you have about your financial adviser, the better decisions both you and the adviser can make about what’s best for your future.
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