By Carl Trevison and Stephen Bearce “How much cash should I have now?” It seems like a simple question, but the answer can be complicated – especially in times of market volatility. Apart from an emergency fund, the amount of cash or liquid assets you need depends on many factors, including the current state of the market and major life events. “There isn’t really a general rule in terms of a number,” says Michael Taylor, CFA, Vice President – Investment Strategy Analyst at Wells Fargo Investment Institute. “We do say it shouldn’t be more than maybe 10% of your overall portfolio or maybe three to six months’ worth of living expenses.” Taylor notes that the number could change depending on what’s going on in the economy and markets. As a result of the pandemic, some investors preferred to keep up to 12 months of expenses in cash or cash alternatives. “You should make sure your emergency fund and cash reserves can meet your current needs,” he says. Taylor shares five events that should prompt a conversation with your financial advisor about how much cash to have on hand. When the market is in flux The state of the market can have an impact on how much cash you should have on hand, how long you decide to hold an asset as cash, or when to convert assets to cash. This can be especially true when you foresee a large discretionary purchase such as a vacation home or a luxury vehicle. “Plan for those purchases or defer them so you don’t have to liquidate assets at a loss during market uncertainty,” Taylor says. When your job status may change If you’re contemplating a career move such as starting a business, retiring soon, or facing a possible layoff, consider meeting with your…
By Carl Trevison and Stephen Bearce During times of heightened stress, such as when there’s extreme market volatility, a person can quickly become overwhelmed and struggle to do things that might be considered simple or obvious. It can be helpful to focus on the things you can control, identify actions that you can take, and complete those action steps. Here are four action items for you to consider: Review your investment plan Before you start making changes to your investment portfolio, consider your goals. Are you saving for retirement? Do you need to build a college fund for your children? Did a recent event create a need to adjust your plan? If your goals have changed or if you haven’t updated your plan in a while, review and, if necessary, update your investment strategy to support reaching your goals. Understand your risk tolerance Risk is a key principle in investing. Some investments are riskier than others, but every financial decision involves risk. Since risk is inescapable, the key is to understand your risk tolerance and manage how much you are taking, which should be based on your long-term financial goals. If your tolerance for risk has changed, review your strategy and make sure you are still comfortable with the amount of risk you’re taking. Stick to your plan When the market gets volatile, investors often react emotionally and may want to pull out of the market to try to avoid loss. However, remember that moving or selling investments during a market decline will likely lock in losses; staying invested may allow you to benefit if the market comes back. Before reacting, take time to step back and try to respond using logic rather than emotion. Organize and update important documents Are your important documents up-to-date and accessible to those who…
By Carl Trevison and Stephen Bearce If you haven’t created an estate plan or have one but the documents may be outdated, you might be putting yourself and your family at risk if the unthinkable, such as becoming incapacitated or passing away, should happen to you. To assist you with getting started on creating or updating your plan, it helps to understand these five important documents that are part of many estate plans: Will A will provides instructions for when you die. You appoint a personal representative (or “executor”) to pay final expenses and taxes and distribute your assets. Remember that beneficiary designations on 401(k) plans, IRAs, insurance policies, etc., supersede what you have in your will. If you have minor children, a will is the only way to designate a guardian for them. Durable power of attorney A power of attorney lets you name an agent, or attorney-in-fact, to act on your behalf. You can give this individual broad or limited management powers. Choose them carefully because they will generally be able to sell, invest, and spend your assets. A traditional power of attorney terminates upon your disability or death. However, a durable power of attorney will continue during incapacity to provide a financial management safety net. A durable power of attorney terminates upon your death. Health care power of attorney A durable power of attorney for health care, also called a health care proxy, authorizes someone to make medical decisions for you in the event you are unable to do so yourself. This document and a living will can be invaluable for avoiding family conflicts and possible court intervention if you’re unable to make your own health care decisions. Remember to review this document regularly to ensure the right person is designated to make any necessary medical decisions….
By Carl Trevison and Stephen Bearce While market volatility can be painful, it can remind investors of the importance of sticking to the fundamentals. Market volatility, painful as it can be, can actually provide an important lesson for investors about why it’s important to stick to the fundamentals, such as having an asset allocation strategy and reviewing your plan. With that in mind, here are suggestions for turbulent times that may help you turn today’s worries into tomorrow’s good habits. Remembering asset allocation When market volatility occurs, investors have the opportunity to get back to fundamentals they may have forgotten. This is especially true for asset allocation — the strategy financial professionals return to time and again when investors want help dealing with volatile markets. At its most basic level, asset allocation is how you diversify your investments across different asset classes (stocks, bonds, cash alternatives, etc.). This varies based on a number of factors, primarily: What you want your investments to help you achieve (objectives) How comfortable you are with market volatility (risk tolerance) How long it will be before you will need to access your investments (time horizon) The asset allocation model that best suits any given investor depends on where they land in regard to these three factors. It’s important to remember that asset allocation offers investors a trade-off. During good times, a diversified portfolio’s return will lag the best performing asset class. On the other hand, during down periods, it will do better than the worst performing asset class. It’s up to each investor to decide what’s more important — participating more in the good times by holding more stock or avoiding the worst of the bad by holding less. Reviewing your plan regularly If you have an asset allocation plan and still find yourself lying…
By Carl Trevison and Stephen Bearce 10 Reasons Why Beneficiary Designations Are Important Beneficiary designations can provide a relatively easy way to transfer an account or insurance policy upon your death. However, if you’re not careful, missing or outdated beneficiary designations can easily cause your estate plan to go awry. We often complete these designations without giving it much thought, but they’re actually important and deserve careful attention. Here’s why: Beneficiary designations take priority over what’s in other estate planning documents, such as a will or trust. For example, you may indicate in your will you want everything to go to your spouse after your death. However, if the beneficiary designation on your life insurance policy still names your ex-spouse, he or she may end up getting the proceeds. Where you can find them… Here’s a sampling of where you’ll find beneficiary designations: Employer-sponsored retirement plans [401(k), 403(b), etc.] IRAs Life insurance policies Annuities Transfer-on-death (TOD) investment accounts Pay-on-death (POD) bank accounts Stock options and restricted stock Executive deferred compensation plans Because you’re asked to designate beneficiaries on so many different accounts and insurance products, it can be difficult to keep up. However, it’s worth the effort; failing to maintain the beneficiary designation on that 401(k) from three employers ago could mean money will go to the wrong place. When you first set up your estate plan, go over all the designations you previously made and align them with your plan. After that, you should review and update them regularly – a least once a year. 10 Tips About Beneficiary Designations Because beneficiary designations are so important, keep these things in mind in your estate planning: Remember to name beneficiaries. If you don’t name a beneficiary, one of the following could occur: The account or policy may have to go…
By Carl Trevison and Stephen Bearce Understanding the complexities of Medicare While they’re working, many Americans become accustomed to getting health insurance through their employer. They make their initial selections and then update their choices once a year when its time to renew and during life events like adding to the family or, perhaps, starting a new job. But virtually all U.S. residents face a milestone when they reach age 65 and qualify for Medicare, which provides a new and, possibly, more complex approach to health insurance. Keep in mind that even if you take early Social Security benefits at age 62, you must wait until age 65 for Medicare. Breaking down Medicare’s four parts Part A: Hospital insurance Helps pay for: Inpatient hospital care Hospice care Skilled home-health services for homebound patients Part A also helps with short-term inpatient care in Medicare-certified skilled nursing facilities, but only if the patient is there for rehabilitation – not for long-term or custodial care. Qualifying Once you reach age 65, you qualify for Part A. It’s unlikely you will be charged a monthly premium if you have worked and paid the Medicare payroll tax for a minimum of 10 years. Part B: Medical insurance Helps pay for: Doctors’ services Outpatient hospital care Medical equipment and supplies Some preventive services Qualifying All U.S. citizens and all legal aliens who have lived in the United States for at least five years qualify for Part B at age 65. No work history is required, but everyone who wants Part B must pay a monthly premium. Monthly premiums are based off the worker’s modified adjusted gross income (MAGI) from filed taxes with higher income individuals paying more. Your first opportunity to sign up for Part B is the initial enrollment period, which begins three months…
By Carl Trevison and Stephen Bearce The Caregiver Crunch: Five Time-and-Money Coping Strategies For millions of unpaid U.S. caregivers, finding a healthy balance between taking care of children and elderly loved ones is a constant challenge—and often a drain on time, health, and finances. According to a 2017 report from Transamerica Institute, 74 percent surveyed have been caregivers for one or more years, with 27 percent providing care for five or more years. Caregiving is a full-time job for many—even though 52 percent are already employed. Thirty-six percent of caregivers spend 100 or more hours per month on time-intensive duties including companionship, meal preparation, personal care, and feeding.¹ Additionally, the same Transamerica report cites that the health of caregivers often takes a back seat to those they care for—55 percent admit their duties leave them physically and emotionally exhausted. Seventeen percent say their general health has declined since becoming a caregiver. Which begs the question: “Who cares for the caregivers?” If you’re a caregiver, or know someone who is, here are five practical ideas to consider. If you work, talk with your employer. Caring for family members can be a 24-hour-a-day responsibility, making it nearly impossible to coordinate with the demands of a full-time job. Among those who are employed or who have held jobs during their time as caregivers, approximately one-third have used personal, vacation, and sick-leave days for caregiving. Furthermore, depending on household income level, as many as one-fifth of caregivers have taken a leave of absence.¹ To find a better balance between your home and work life, discuss these options with your manager and human resources professional: Determine if your situation qualifies for the Family and Medical Leave Act (FMLA). Under this federal law, covered employers may be required to protect your job while you take unpaid…
Financial Focus by Carl Trevison and Stephen Bearce Build Your Portfolio on a Solid Foundation Asset allocation can be to investment planning what the foundation is to a house or the chassis is to a car. It’s what everything else is built upon. And just as important as constructing a house on a firm foundation, having the right asset allocation can be vital to helping you work toward your financial goals. Although the name may sound intimidating, asset allocation is just a technical term for a rather simple concept. It’s merely how your portfolio is divided up among different types of investments, such as stocks, bonds, and what are called “cash alternatives.” How it works Using asset allocation to build a portfolio designed to help you reach your long-term goals requires taking three primary factors into consideration: Goals. These are simply what you’re investing the achieve. For many of us, a major goal is to enjoy a financially secure retirement. If you have younger children or grandchildren, helping them afford higher education without building a mountain of debt is likely another goal. Or maybe you’d also like to make a luxury purchase – such as buying a vacation home or dream car or taking an exotic vacation – down the road. Time horizon. One reason why knowing your goals is important is because it helps determine your time horizon (how long you have until you need to tap into your investments). If you’re 28, for example, and want to retire at 68, your time horizon is 40 years. Simple as that. Risk tolerance. Your risk tolerance is the amount of volatility in your portfolio’s value you’re comfortable with. If you find you can’t sleep because you’re worried about your investments – especially when there’s market volatility – you…
Financial Focus By Carl Trevison and Stephen Bearce What is behavioral finance … and why should you care? Investors may like to think they’re completely rational in their decision-making, but that’s highly unlikely. We don’t stop being human beings when it comes to investing, so psychology and emotions are apt to play roles—sometimes large ones—in the choices we make. Behavioral finance studies investors’ real-life behavior and common biases. It considers the roles emotions and psychology play in making financial decisions and aims to identify factors that cause investors to sometimes act irrationally. A key concept in behavioral finance is “prospect theory,” which describes how investors make decisions involving risk and gain. Studies have shown people frequently consider losses far more undesirable than they find comparable gains desireable. For example, take the following scenarios: Given the first scenario, most people will avoid the risk and take option one (the sure $3,000 gain). On the other hand, when presented the second scenario, most favor option two (the 75% chance of losing $4,000) because it offers the possibility of avoiding the pain of a loss. Keep in mind – and this is important – all four choices are mathematically equivalent. This means individuals’ responses were based primarily on their emotional reactions to fear of loss vs. enjoyment of gain, not rational decision-making. The psychology of risk and reward If you ever wonder why markets sometimes act in ways that defy logic, behavioral finance helps explain it. For example, bubbles can form when prices rise based on investors’ emotional reactions rather than the fundamentals. Once their sentiment eventually changes, a precipitous sell-off can follow. Take what’s come to be known as the dot-com bubble of the late 1990s. Soon after the internet’s introduction, investors realized its potential to transform our everyday lives (which…
By Carl Trevison and Stephen Bearce Charitable Giving Considerations for 2021 If the COVID-19 pandemic’s far-reaching impacts have you looking to enhance your charitable giving, be sure to remember these tax-related considerations for 2021: Cash gifts. A special rule for this year allows taxpayers who do not itemize deductions to claim up to $300 ($600 for joint filers) for gifts to qualifying charities. If you do itemize, cash contributions to qualified charities in 2021 might be used to offset up to 100% of your adjusted gross income (AGI) (60% of AGI for cash gifts to a donor advised fund or 30% for cash gifts to a private foundation). This means that if you’re in a position to make generous gifts, you may potentially offset all of your taxable income. In addition, cash gifts could be used to offset Roth IRA conversion income or capital gains realized upon the sale of real estate or a large position in a single investment. If you’re unable to itemize but would like to, evaluate the possible impact of bunching several years’ worth of charitable contributions into one year. This may increase your itemized deductions above the standard deduction threshold so you can potentially receive a tax benefit for those gifts. Review your income and deductions for the current year and the next few years with your tax advisor to determine what is the best timing for those bunched contributions. Qualified Chartitable Distribution (QCD). For taxpayers age 70½ or older, a QCD allows you to gift up to $100,000 per year directly from your IRA to qualifying charities. QCDs are tax-free distributions and count toward satisfying your required minimum distribution (RMD). Remember that, while RMDs were waived for 2020, they must be taken for 2021. No deduction is allowed for a QCD…
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