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How long do you think you will live? How long does your money need to last? If you’re like most people, you get this age wrong.
The consequence? Faulty retirement planning, overspending now and running out of money before you actually reach your true longevity. Or spending too little now, depriving yourself of a comfortable retirement before your death.
Your longevity is the statistically expected number of years of life you have remaining at a given age – specifically, your current age. (Your longevity depends on other factors and you can find calculators with good insights into these by Googling “life expectancy calculator”).
There are two well-known tables for life expectancy managed by the Social Security Administration: the Social Security general population table and the Annuity Table. The tables constantly change with shifting demographics, lifestyles, medicines and other advances. Today’s tables may, therefore, understate longevity, especially for younger people.
Let’s look at a couple of examples to get a general sense of longevity, using the “Retirement & Survivors Benefits: Life Expectancy Calculator” created by the Social Security Administration. This chart, from the Social Security table, gives you a point of reference when thinking about how much longer your money needs to last.
While this might be decent guidance, keep this in mind: these figures do not take into account a wide number of factors such as current health, lifestyle, and family history that could increase or decrease life expectancy.
Let’s use another example, someone who is currently 85 years old. According to the Social Security Administration:
In other words, at age 85 you may have seven or more years remaining – illustrating the importance of understanding your life expectancy when you plan retirement spending.
Further, the “healthier” population subset enjoys a greater number of remaining expected years compared with Social Security’s general population. In some cases (depends on age), about 60% of the 70-year old “healthier” population may outlive members of the general population due to lifestyle choices, lack of accidents and other similar factors (including just plain luck).
That’s why many financial advisors suggest planning to age 95. Such advice can reduce how much you spend today just in case you live to 95.
Further, financial advisory best-practices suggest adjusting spending over time. Instead of guessing an age you think too old to imagine, anchor your expectations on how long your money needs to last using statistics for your population group. Update that expectation each year during your annual financial review.
Rather than fear outliving your money, embrace uncertainty through a structured process that incorporates uncertainty into your financial decisions. Life is full of uncertainty and forks in the road. You can prudently manage your retirement money surer than that.
The strong dollar is much in the news lately. But most Americans, other than tourists beyond our shores, don't focus on what that means to them. For U.S. investors, the upshot is not great. In fact, for most, currency fluctuations worldwide (and not just that of the dollar) are an invisible force that they don’t reckon with until it’s too late.
Calculating currency valuations from one country to another is complex and, if you’re like most people, you don’t give the subject much thought until you get ready to travel. You might visit your bank to swap greenbacks for a few euros, but usually you just plan to use a credit card to cover your tab on the Spanish Rivera or at the Tuscan villa.
For corporations and for your portfolio, though, fluctuating currency rates carry much more weight.
So what? Maybe you never plan to go to Europe. Your portfolio, likely containing international investments in its mutual funds, might still feel the fallout.
Let’s look at one past global monetary event back in 2015 when Switzerland reaffirmed the commitment to keep its franc at $1.20 to the European Union’s euro – then suddenly changed its position, sending the euro falling, the franc soaring and world markets reeling.
For one, German businesses suddenly found it much more expensive to buy Swiss watches, chocolates and cheese as Switzerland’s exporters were caught in a battle literally overnight. Meanwhile, Swiss citizens enjoyed welcome wealth.
Unlike Americans who may plan only an occasional trip to Paris, Swiss citizens commonly drive to France for the day. The currency move suddenly put an extra 15% to 20% of buying power into the hands of the Swiss who visit France.
We live in a global society, so understanding currency fluctuation means much more than calculating our travel costs and daily vacation spending. Exporters win or lose every time currency valuations change.
Keep in mind if the euro declines substantially against the U.S. dollar, for example, that new Mercedes is more affordable here but Apple iPhones cost much more in Germany than in this country.
Don’t feel too flush with the dollar’s comparative value. Nearly half the earnings in the Standard & Poor’s 500 come from companies based outside the U.S. Slowdown in global growth also dims outlooks for robust domestic growth as economists cite troubled overseas markets, volatile oil prices and, ironically, a stronger dollar.
For most of us, international investing, whether overt or hidden in our mutual funds, comes with pros and cons:
Pros: Variation in ups and downs of the world’s markets means your diversification enjoys a chance to work better. Mixing asset classes with low correlation to one another usually guards against portfolio-wide losses – and you won’t find lower correlation anywhere than across some pairings of global stock markets and indexes.
Cons: For the risks in international investing, look no further than headline political turmoil, border wars and other upheavals that send shock waves through almost all the world’s markets. Less grandiose but no less devastating: Exchange rate risk if your money must be converted before you can invest.
Like all financial decisions, such as investing and retirement planning, the further out you plan your trip, the more successful your journey.
Remember to add the world’s currencies to your budgeting and investing discussions with your financial advisor.
Developing effective strategies for achieving your goals within the limits of your particular financial circumstances can be difficult. Each stage of your life may create new financial challenges. Sending your child to college, remodeling your home, caring for an elderly relative, or starting your own business are objectives that may require a certain amount of capital, according to your needs.
Even when your overall financial situation appears to be positive, your available cash flow may be constrained. Should you be faced with a need for greater cash than what you have on hand, here are some alternatives you may want to consider:
You can take distributions from your traditional Individual Retirement Account (IRA) at any time. However, the full amount of your distribution will be subject to income tax. In addition, if you are under age 59½, your distributions may be subject to a 10% Federal income tax penalty. No tax penalties are incurred if early distributions are due to a qualifying exception, or if the withdrawal is part of a series of equal periodic payments based on your life expectancy. However, premature distributions may also hinder your ability to reach your retirement goals in the future.
Some employer-sponsored 401(k) plans allow participants to take an income tax-free loan from their accounts. Interest rates are generally comparable to those of commercial loans. But these loans are usually short term, and amounts not repaid on time are considered taxable withdrawals and could be subject to penalties. Should you leave the company, your employer may demand full repayment within 60 days, and you could owe taxes and penalties on the unpaid balance. In addition, as with IRA distributions, borrowing from your 401(k) can actually counter the plan’s ultimate purpose: building tax-deferred savings to help provide retirement income.
If you own a permanent life insurance policy, you may be able to borrow against the policy’s cash value. A policy loan is not a loan at all, but rather an advance of some of the cash value to which you, as policy owner, are entitled by contract. However, access to cash values through borrowing or partial surrenders can reduce the policy’s cash value and death benefit, can increase the chance that the policy will lapse, and may result in a tax liability if the policy is terminated before the death of the insured.
If you are a homeowner, you may be able to access the equity in your home through mortgages and equity loans. Although rates on such loans are traditionally low, it is important to keep in mind that, when you borrow against your home, you are pledging your house as collateral against the loan.
Should you be unable to repay the loan, the lender would have the right to force foreclosure, with the loan being repaid from the eventual sale of the property. So, you may want to avoid using such loans for “live-without” items, such as vacations, clothing, or jewelry.
Borrowing from a bank may be an alternative, if your credit history is good, you meet certain financial requirements, and your intended use of the borrowed funds is well-defined. Loans for education or start-up business expenses are fairly common. However, when considering loans from a bank, it is important to be sure you can meet the monthly loan payments.
The ever-increasing availability of credit card loans has resulted in a tempting, yet expensive, borrowing option. Credit cards can be a good source of quick cash when you are certain you are able to promptly repay the amount charged. But because credit card loans often carry high interest rates and finance charges, they can be expensive for longer-term debt.
Should you ever need to access one of these resources to meet a pressing cash need, it is important to weigh the relative benefits and potential drawbacks of each option to help determine the most appropriate course of action for your situation. Your financial advisor can also help give insight into your unique situation. Making a wise borrowing choice now may save you substantial time and money later.
For today’s business owner, continuation and estate planning go hand-in-hand. Without proper tax strategies, the time, hard work, and money you’ve invested in your business could yield little more than a significant tax bill for your heirs. Fortunately, with careful planning, there are numerous ways of reducing your family’s tax burden while keeping your business intact.
You are annually allowed to give assets valued up to $15,000 in 2020 to each of your children or grandchildren (or anyone else, for that matter) without incurring a tax penalty. A married couplecan transfer assets worth $30,000 in 2020 – $15,000 per adult.
Making gifts qualifying for this annual gift tax exclusion can help lower your estate’s taxable value and minimize estate taxes. In 2020, the federal estate tax generally applies when a person's assets exceed $11.58 million at the time of death and can be as high as 40%. Further, some states also assess estate tax.
Accordingly, above and beyond the annual gift tax exclusion, every individual has a lifetime gift tax exemption of $11.58 million in 2020, almost $180,000 more than it was in 2019. Most taxpayers will not reach the gift tax limit of $11.58 million over their lifetimes, but for some business owners, this amount is not enough to transfer an entire business. Furthermore, using the lifetime gift tax exemption will reduce what you can transfer tax free at death. So in order to substantially reduce your tax liabilities, further planning options should be explored.
For many estates, a trust is a cost-effective method of making gifts, which can often facilitate intergenerational transfers. In particular, the grantor retained annuity trust (GRAT) enables you to gift a substantial amount while retaining an income interest for a specified period of time. This significantly minimizes your gift tax liability or entirely eliminates your exposure. GRATs are especially useful if a business or estate assets will appreciate in value.
With a GRAT, you can put all or part of your company’s stock into an irrevocable trust that pays you, the business owner, a fixed income for a specified number of years.
Since the trust is irrevocable, once you place stock or other assets into the trust, they are there for good, or until the GRAT terminates and the assets pass to your designated beneficiaries.
Assets transferred to the trust are considered a gift for gift tax purposes. GRAT gifts do not qualify for the annual exclusion because the beneficiaries have a future interest, not a present interest, in the gift. Since you retain an income interest, the gift’s value is discounted, reducing your total gift tax liability. However any income is taxed to you as the grantor.
An applicable Federal interest rate determines your annuity (the income you receive as a percentage of assets transferred) value. GRATs are generally most attractive when interest rates are low because you may receive substantial transfer tax savings if the growth rate of assets transferred to the trust exceeds the federal interest rate. Your beneficiaries will receive any appreciation free of estate and gift tax, provided you survive the trust term. It is important to keep in mind that while reducing your transfer tax liability and possibly building wealth for your heirs, a GRAT also locks in a guaranteed income stream for yourself for a fixed time period.
It is important to emphasize one major drawback to using a GRAT: If the grantor dies before the trust term expires, then the trust’s full value falls back into the grantor’s estate. It is important to plan for a trust term you expect to outlive. Given this risk, older grantors may wish to specify shorter terms, or set up several trusts of varying durations, known as “laddering.”
Business owner estate planning is a multifaceted endeavor. Advance planning and carefully considered tax-efficient strategies may help maximize the transfer of wealth to your heirs.
Be sure to consult your financial advisor about your unique circumstances.
How you arrange your financial life is important. But so too is how you live your life. The second part is unfortunately often neglected in financial planning. Would you rather own your own business? Travel more? Write a novel?
With an enormous amount of focus on investment returns and stock prices, one key question that all financial advisors should ask their clients is this: “Are you trying to make a living or a life?”
Most of us clearly want to make a life, and so do we. Life means living the way you want to live.
Ask any business owner their top reasons they run their own business and you will likely agree with all of them: control your destiny; choose the people you work with; take on the risk; reap the rewards; challenge yourself; follow your passion; get things done faster; personally connect with clients; and feel pride in something you own.
We help clients build the life that they want to live. Often one’s money and values disconnect. A financial advisor helps point out those discrepancies and highlight ways money can match values. Some advisors, however, take clients no further than that.
Some seem to believe that financial planning involves only planning the finances of our lives. Many planners cut right to the planning without exploring behind the money. Too bad, because identifying a client’s deepest values makes it easier to talk about trimming expenses or increasing income.
We encourage our clients to talk about goals and values. It’s pointless for us to make financial planning recommendations if we don’t know what’s important to them and how they want to live.
Know precisely what you want in life. A financial plan helps you map your goals that lack a clear path.
Strong Valley provides comprehensive wealth management services to our clients using straight-forward, transparent, and an all-inclusive fee-based approach. As part of a comprehensive wealth engagement we can help you craft a clear long-term vision and solution for managing every aspect of your financial life, freeing you to focus on living life to the fullest today and free from worry about tomorrow.
In the rush of daily business activities, business owners can lose sight of what they had originally hoped to accomplish through their continuous efforts. Over time, as the business grows, personal objectives may also change. When was the last time you stopped to reevaluate your personal priorities and goals? Here are some key areas to consider:
Many business owners become so engrossed in company operations that they inadvertently neglect their personal finances, particularly when most of their liquid assets are tied up in the business. To achieve financial independence and build personal wealth, it is important to make personal savings a priority. By conducting regular financial reviews and taking follow-up action as needed, you can develop strategies that will help strengthen your personal finances.
Many tax-deferred, qualified retirement savings vehicles, such as simplified employee pension plans (SEPs) or 401(k) plans, are available to business owners and their employees. The size of a company, along with the ages and salaries of its employees, often determine which type of retirement plan is most appropriate. In addition, nonqualified plans allow business owners to provide selective retirement benefits for themselves and their key employees.
Will your small business be marketable if and when you decide to sell? Develop an exit strategy that will help maintain the value of your business should you choose—or be forced by circumstance—to sell.
Keeping it in the family. Your company may be a closely held business, operated by more than one family member. If you wish to keep your company in the family, it is important to learn about transfer tax issues and to develop a business succession plan that will help secure your long-term goals.
As your company grows and develops, remember to set your personal priorities, especially as they change over time. Annual reviews can help ensure that your business operations are consistent with your overall objectives. Call your financial advisor today to set up a review.
A “bear market” occurs when stock prices in general are falling, and then widespread pessimism sustains the continued drop in prices. The stock market becomes a bear market whenever stock prices have fallen over 20% over the course of several months, as seen in market indexes like the S&P 500. Investors lose confidence in the market as they anticipate further losses.
A “bull market”, on the other hand, comes with rising stock prices and increasing investor confidence. Stock prices rise by at least 20% over the course of several months in a bull market.
Looking at history, bear markets are typically shorter than bull markets. A bull market's average duration is about 3 years, while bear markets last on average about 18 months.
Stock market corrections are a natural part of the stock market cycle.
Stock markets “crash” when stock prices plummet more than 10% in one day. The Great Crash of 1929 consisted of market drops of 13% and 12% on successive days.
In a normal bear market, there will of course be days or weeks when prices increase. It is important, however, to distinguish a bear market rally from the beginning of a bull market. In a rally, the stock market posts gains for days or even weeks in a row. Investors might be tricked into thinking that a new bull market has begun. However, until stock prices increase by 20%, there is still a bear market.
The terms, “bear market” and “bull market,” come from the behaviors of these animals: A bull thrust its enemies upward, while a bear prefers to knock foes into the dirt.
It is important to distinguish a bear market from a market correction, which is shorter and involves less of a market decline. Market corrections are part of the normal ebb and flow of the market. They are short-term trends that typically last less than two months and involve stock market declines of about 10% – not the 20% fall in a bear market.
A recession occurs when the Gross Domestic Product (GDP) declines for two or more quarters in a row. Many of the same factors cause recessions and bear markets, but the stock markets and the economy do not always move together. Usually, however, a bear market and a recession overlap.
The depression was preceded by the Great Crash of October, 1929, with price declines of 13% and 12% on successive days. The crash also inaugurated the worst bear market of all time, with stocks dropping 89% through June, 1932. High unemployment lasted through the 1930s.
A weakening economy, high inflation, a tumultuous year of assassinations and riots, and tensions of the Vietnam War influenced the development of a bear market, which accompanied a mild recession.
The 1970s were marked by chronically high inflation. Stocks also underperformed during the decade, rallying and then fading in value. In 1973, the Arab oil embargo drove up gas prices, sparking double-digit inflation, a recession, and a bear market.
By 1980, the country had faced almost a decade of sustained inflation, along with slow growth. In order to fight this “stagflation,” the Federal Reserve raised interest rates. This rate increase, coupled with a deep recession, led to a relatively shallow bear market lasting 21 months.
Due in large part to the excesses of automated computer trading, the market crashed, falling 22.6% in one day. The resulting bear market lasted only a brief 3 months. The GDP did not fall, so there was no recession.
The Dot.com bubble consisted of soaring stock prices and excitement about newly emerging Internet companies. The bubble burst when investors realized that the newly emerging Internet companies showed little or no profit. The attacks of 9/11 deepened a mild recession and prolonged this bear market.
A rising mortgage delinquency rate spilled over into the credit markets because a variety of financial instruments were tied to home loans. As a result, the U.S. and other countries enacted large economic stimulus measures. It was accompanied by the “Great Recession.”
Bull markets feature investor optimism, but this turns to pessimism and panic during a bear market. Both types of markets are driven by changes in investor attitudes as much as by economic fundamentals.
A bear market is difficult to predict. Falling stock values might just be part of a stock market correction. Rising values might only signal a bear market rally, as opposed to a new bull market.
Investors need to beware of the tendency to over-react to fears of a bear market or thrills of a bull market. Investors tend to tinker with their holdings, often selling after stocks have fallen sharply, instead of buying stocks at low prices (or buying after stocks have risen to unsustainable heights). Similarly, some investors sell stocks before the bear market begins but are then too frightened to return.
Many factors affect the stock market. Be sure to consult your financial advisory team for specific guidance.