When Should You Take Social Security?
However, while the benefits you’ve earned are guaranteed, not everyone gets the same amount — and you can make choices that either increase or decrease how much you receive and when you receive it.
To make good choices with your Social Security, you first need to understand how Social Security works. Specifically, it’s important to know that the benefits are progressive. That means, if you’ve earned less than the national average throughout your career, you will have more of your earnings replaced by Social Security. If you’ve earned more than the national average, you’ll have less replaced. In general, lower-wage workers can expect to have about half of their earnings replaced, while higher-wage workers can expect to have a quarter or less of their earnings replaced.
As of 2020, the average monthly benefit was around $1,503. A cost-of-living adjustment routinely raises benefit payments by small amounts, with payments rising by 2.8% (an average of $40 more a month) heading into 2019 and 1.6% (an average of $24 more a month) heading into 2020. You can expect the average monthly benefit to be higher when you retire than it is now, but the exact amount you receive will be determined by more than cost-of-living increases and your lifetime earnings. It will also be determined by when you start claiming benefits — and that’s where the decision-making comes into play.
Claiming Benefits
Early If you want, you can start claiming your Social Security benefits as early as age 62. For some, this may be a necessity due to life circumstances. But, for most, claiming early is not a good idea. If you claim at 62, you’ll only receive 75% of your monthly benefit, and this percentage will never go up, no matter how long you live. The only increases you’ll receive will be cost-of-living adjustments. To avoid this penalty and receive 100% of your monthly benefit, you’ll need to wait until you’re older.
Receiving 100% of Your Monthly Benefit
You may have heard that the retirement age is 65. While you’re certainly free to retire whenever you choose, 65 is no longer the age when you can claim 100% of your monthly benefit — and hasn’t been for a while.
For those born between 1943–1954, the age at which they can claim 100% of their monthly benefits is 66. The last of this group will reach that age in 2020. After that, the age at which someone can claim 100% of their monthly benefit will slowly rise, eventually hitting age 67 for those born in 1960 or later.
Will that age rise again? That’s impossible to predict, but it could definitely happen. So, if you were born after 1960, you’ll want to pay attention to any future changes.
Deferring Benefits to Age 70
For many, holding off on claiming Social Security until age 70 is a smart idea. That’s because, for each year you wait beyond the age you can receive 100% of your benefits, you’ll get an extra 8% per year for the rest of your life.
This is a great benefit. What other way can you increase your guaranteed yearly retirement earnings by 24%–32%? To see how this deferment can add up for you, check out the Social Security Administration’s benefits calculator.
The only risk in deferment is the possibility that you won’t live until age 70, or won’t live long enough past 70 to make the increase in yearly benefits a net gain. Currently, the average life expectancy for a U.S. woman is 81.4 and the average for a man is 76.3. However, those life expectancies are calculated at birth and include those who die young. According to the Social Security Administration, a man who turns 65 today is likely to live until 84, while a woman who turns 65 today is likely to live until 86.
When determining if deferring your benefits makes sense, you’ll want to calculate your break-even date (i.e., the date when the total amount you’ll earn by deferring surpasses the total amount you would have earned if you started claiming your benefit earlier). Then, consider your health, family history, and any other factor that might affect your longevity. For most who reach retirement age, deferring pays off in the long run.
Considerations for Married Couples
If you’re married, your spouse’s benefits can become your benefits on the occasion of their death. While considering the death of a spouse is not pleasant, it is an important part of a strong social security claiming strategy.
As long as both you and your spouse are alive and of retirement age, you’ll each collect your own individual Social Security benefit, beginning at the age of your choosing. If one of you passes away, the surviving spouse will receive the highest of the two monthly benefits. Meaning, if a wife is receiving more in Social Security than her husband, the husband will start receiving her benefit (and his will stop) if she dies. If one spouse never qualified for any benefit of their own, they will begin receiving half of their spouse’s benefit on the occasion of the spouse’s death.
When deciding on when to start claiming your Social Security, you should take your spouse’s Social Security benefit into consideration. For many couples, it makes sense to defer the benefit of the spouse who will receive a higher amount. That way, whoever lives longest will be guaranteed the deferment bonus for the rest of their lives.
Of course, making these choices aren’t necessarily easy. And while the Social Security Administration can answer a lot of questions, they are not allowed to help you put together a strategy to maximize your lifetime benefits. For that, you may want to consider a financial advisor with retirement earnings expertise. Social Security is too important to ignore.
This content and information was created by a third party and not The College. The College assumes no legal liability for the accuracy, completeness, or usefulness of any such content and information and the views expressed therein do not necessarily represent the views of The College.
Philanthropic Planning Insights
5 Ways Financial Advisors Help Charitable Giving
While philanthropy appears to be simple — you identify the organizations and causes you want to support, determine what you can afford to give, and donate — professionals who specialize in the field can take your giving to the next level.
Here are five ways that financial advisors and professionals with philanthropic expertise add value.
1. They can maximize your philanthropy.
The rules, regulations, and tax codes related to charitable giving are anything but simple. And, because these can vary at the state level, advisors who understand the ins and outs of your particular situation can help you maximize your philanthropy.
For example, the Tax Cuts and Jobs Act of 2018 changed the allowable standard deduction and charitable giving deductions. Because the bill represented a significant overhaul of the 1986 tax code, it’s not surprising that many of its features were oversimplified in reports, with some observers suggesting that charitable donations were no longer tax deductible. In reality, the bill increased allowable deductions at certain levels.
There are also strategies such as “bunching” that an informed advisor can help you understand and utilize, if appropriate — all of which can help you increase the impact of your giving.
2. They can help you define your goals.
Advisors who counsel clients on philanthropy follow the same process as any financial advisor.
They begin by gaining an understanding of your overall goals and objectives.
- What are your priorities in giving?
- How do you want your giving to change over time?
- What do you want your philanthropic legacy to be?
Thinking of charitable giving strategically and in the long-term helps you define your goals in a way that annual giving does not. Equally important, your advisor works with you to develop and implement a giving plan to realize those goals.
3. They are connected to the charitable community.
Advisors who specialize in giving are connected to the charitable community. Many advise nonprofit organizations on financial matters, so they can be valuable resources in directing you to effective organizations that align with your interests.
They will also be familiar with like-minded donors who can broaden your community network.
4. They can incorporate giving into your larger financial planning.
Advisors with expertise in philanthropy can help you incorporate giving into your overall financial planning.
Do you want to keep giving during your retirement? Do you want to include philanthropy in your business exit planning, estate planning, or legacy planning?
For help with these and other questions, you’ll want to work with an advisor who understands how to translate your goals into realities.
5. They can support your big ideas.
If you’re in the fortunate position to set up a family foundation, you will definitely need the skills of an advisor with experience in long-term charitable planning.
Family foundations not only leave a personal and family legacy — often in perpetuity — but also bring your family together during the planning and implementation phases. This creates a life-long-and-beyond connection that spans current and future generations.
Whatever your philanthropic vision, a financial advisor or professional with specialized education and experience can make a difference in how you make a difference.
This content and information was created by a third party and not The College. The College assumes no legal liability for the accuracy, completeness, or usefulness of any such content and information and the views expressed therein do not necessarily represent the views of The College.
Philanthropic Planning Insights
How You Can Create a Philanthropic Legacy Without Being Ultra-Rich
While few of us are in that position, there’s no reason to exclude charitable giving from our estate planning. And yet, many of us are doing just that. Although 60% of U.S. households donate to charity every year, 86% of charitable donations made at death come from the wealthiest 1.4%. Put another way: we give during our lifetime, but we don’t think to give as part of our legacy.
There are reasons for this disconnect. To begin with, we don’t like to think about death, so a surprising number of us avoid estate planning completely. Caring.com’s 2020 Estate Planning and Wills Study found that the number of adult Americans who have a will or estate plan has dropped 25% since 2017, and procrastination and avoidance are likely contributors to that trend.
Here are some insights on how to make sure you include your philanthropic inclinations in your estate planning.
1. You are passing on your values, not just your money
Consider this definition of legacy: “something that someone has achieved that continues to exist after they stop working or die.”
That perspective changes the entire conversation around legacy giving. It shifts estate planning from a somber realization of the end of life to a positive way to leave lasting memories behind.
What charities do you support now? What organizations and causes do you think will be most important and impactful for the people you care about — your children, their children, your loved ones?
Asking and answering those questions can give you real insight into who you are and what you value, regardless of how much money you have.
2. Your support will encourage others to give
Charitable legacy planning can provide the organizations you care about with additional support, similar to challenge grants during fundraising drives. Nonprofits have created legacy societies to recognize, celebrate, and publicize the names of individuals who included their organizations in their estate planning. Your support becomes a public declaration of your belief in an organization’s mission and vision, and can inspire others to take action.
Legacy societies also connect you to like-minded people and allow you to appreciate the impact of your philanthropy. For example, the Kennedy Center Legacy Society, whose mission is “to promote dignity, empowerment, and opportunity for all individuals with disabilities and special needs,” lists its members on its website and publications and invites supporters to an annual endowment event. Legacy planning can enrich your life now.
Studies also show that people who are intentional about charitable legacy planning give, on average, three times the amount they’ve contributed throughout their lifetime, making it one of the most impactful decisions you can make.
3. Charitable legacy planning brings families together
Include your family early on in your charitable legacy planning discussions. That will avoid any future surprises and, more importantly, reinforce your belief in the importance of private giving.
These discussions can also bring us closer together. As family units become increasingly diverse and nontraditional, we can't assume that our current priorities and future intentions are understood by all.
Sharing your thoughts and motivations about your legacy plans can open rich avenues of dialogue. Use sources like Charity Navigator to ensure that the organizations you are considering have a track record of maximizing gifts.
4. Legacy planning can be simple
You don’t need fancy legal or financial instruments to include charitable giving in your estate planning. Unless you have complicated and extended assets, your contribution can be made through traditional means, including:
- Wills
- Trusts
- Retirement funds
- Life insurance policies
- Physical assets
There are tax implications that can maximize the gifts you leave for all of your beneficiaries. For example, assets from an IRA or 401(k) plan are subject to income tax when bequeathed to an individual, but are tax-exempt when left to a 501(c)(3) charity. Engaging legal and financial professionals who have the credentials and experience in estate planning is often the best way to understand which options are best for you, your family, and the causes you care about.
Why not maximize the impact you can have, now and in the future?
This content and information was created by a third party and not The College. The College assumes no legal liability for the accuracy, completeness, or usefulness of any such content and information and the views expressed therein do not necessarily represent the views of The College.
Is It Better to Give to One Charity or Many?
You should:
- Give $10 each to 10 different charities.
- Give $25 each to 4 different charities.
- Give $100 to one charity.
If you want to maximize the social impact of your charitable giving, what’s the best approach?
Let’s start by understanding what motivates you to give. As reported in Psychology Today, a recent study revealed five major reasons why people donate to charities:
- Trust. You are more likely to donate to organizations you trust.
- Altruism. We believe it’s our responsibility to care for others in need.
- Social. You have a direct connection to the organization you support. E.g., you support research to cure a disease that afflicts a family member, or you buy Girl Scout cookies from a neighbor’s child.
- Taxes. You can do well and good at the same time.
- Egoism. Giving makes us feel good about ourselves.
When choosing your giving strategy, take your motivations into account. With that in mind, here are the pros and cons of each strategy.
If you give $10 each to 10 charities
The pros. You can support the many organizations whose mission you believe in. You limit the times you decline a request from a family member or close friend to support a cause that’s important to them. You can take comfort in the fact that many deserving charities need support, and that no amount is too small to make a difference.
The cons. Every donation you make is subject to some kind of transactional fee — unavoidable administrative costs from your charity’s financial institution. The fee is the same regardless of donation size, so your 10 gifts will incur 10 times the fees of one gift.
The “head and heart” takeaway:
The rationale for spreading your money across multiple organizations is understandable. The world’s problems are complex, no single issue is clearly more pressing than any other, and every little bit helps. You also expand your social network in positive ways.
But from a pure numbers perspective, giving to more charities dilutes the amount of your gift that goes to the organization’s actual work. From a business sense, the more organizations you support, the higher your charitable overhead.
If you give $25 each to 4 charities
The pros. You can balance your support of multiple organizations with the knowledge that you’re giving more to each one. Hopefully, that translates to your gift having a more significant impact on the causes you believe in.
The cons. Although your overhead costs are less than the example above, they’re still higher than if your giving was even more focused. And you’ve sacrificed the ability to support more organizations that you view as worthy, increasing the likelihood that you’ll have to decline some requests.
The “head and heart” takeaway:
This is a “compromise” choice. It makes sense to weigh your interest in many causes with a desire to increase the potential impact each gift can make with the costs associated with each donation you make.
If you give $100 to one charity
The pros. By focusing on a single cause and organization, you’re maximizing the impact your giving can have. By giving more, you may be considered a “major donor” and have opportunities for increased involvement with the organization. You also reduce the amount of your philanthropy that is consumed by administrative fees.
The cons. Following the “all-your-eggs-in-one-basket” approach means that you’ve limited the causes you can support. You will likely need to say no to organizations who need your support and whose mission you believe in.
The “head and heart” takeaway:
Giving to a single charity appears to make the most sense from a strict dollars-and-cents perspective. It provides an organization with the most financial support and minimizes the amount of your giving that covers banking fees. At the same time, if the organization you support is not as effective as you think it is, the impact of your giving won’t be as significant as you had hoped.
Tips for whichever approach you take
It’s tempting to think of charitable giving the way we think of a stock portfolio, and try to spread risk and reward across a range of “holdings.” But charitable giving isn’t about maximizing wealth, it’s about making a difference (and, yes, feeling good about ourselves in the process).
Here are some things to keep in mind, regardless of your preferred approach to giving:
- Develop a plan. Many people give to charity throughout the year and only understand the sum total of their contributions when it’s tax time. A more intentional approach to giving can help you focus your efforts and maximize the impact of your contributions.
- Consider giving circles. If you’re committed to supporting multiple causes with maximum impact, consider joining a giving circle, a group of like-minded people who pool their resources and collectively decide what organizations to support. Giving circles can also provide volunteer opportunities, which enhances the involvement you’ll have with the causes you support.
- Check on the organization’s effectiveness. Just because an organization is doing work you think is important doesn’t mean they’re doing it well. Ask for performance reports and check online ratings. At the same time, heed this warning from Freakonomics: the percentage of money an organization spends on administrative costs is not the single, most important indicator of effectiveness. Instead, focus on outcomes: are they moving the needle on the issue they’re tackling?
- Engage a professional. As your commitment to philanthropy grows, consider working with a financial advisor who specializes in the field. They can help you develop a long-term plan that best matches your financial means with your charitable goals. But the single most important takeaway? Keep giving and know that you are doing good.
This content and information was created by a third party and not The College. The College assumes no legal liability for the accuracy, completeness, or usefulness of any such content and information and the views expressed therein do not necessarily represent the views of The College.
Is Buying a Second Home Right for You? It Depends
However, homeownership is a big decision, and owning two properties is (at least) twice as complicated as owning one. That’s why you need to understand what’s involved, the resources you’ll need, and how the decision may impact your financial future.
There are three main types of second homes:
- Vacation and weekend getaways
- Rental properties
- A house where you plan to retire
These categories can overlap: You may vacation in the house where you’ll retire or rent out your vacation home. Whatever your plan is, your intended use should play a significant role in your decision-making.
There are unique considerations for each type of second home, as well as questions you will need to answer that are common to all three.
The vacation getaway
If your dream is to own a vacation home, you may already have a location in mind. Chances are it’s in an area where people vacation! It’s not surprising that half of all second homes are in eight states, and that the top state — Florida — accounts for 15% of the total.
From a financial perspective, this is good and bad. Real estate in highly desirable areas is expensive, which could price you out of the market. On the flip side, if you can afford it, owning property in a vacation hot-spot increases the likelihood that your house will hold its value, if not appreciate.
Be honest about how many weeks you’ll be in the house in any given year. Does the time justify the expense, or would you be better off renting? If you plan to rent it out when you’re not there, is there a market in the off-season? Will you maintain the property yourself? How far away is it from your permanent residence?
If you’re not familiar with the area, spend a few vacations renting before you even consider buying, including in the off-season. You may discover this is more of a fling than a long-term relationship.
And remember that owning this home may cut down on your ability to vacation elsewhere — an important consideration if you’re someone who likes to travel.
The investment property
If you’ve seen TV shows about flipping houses or investing in real estate, you know that it’s easy money, right?
The truth is, while it’s possible to make money in real estate, it’s anything but easy.
First, you’ll need to assess the rental market in the location you’re considering. What is the demand for the type of property you can afford? Are the rental rates sufficient to cover your costs, which include not only your mortgage but also taxes, association fees, utilities, and homeowner’s insurance? Factor in these costs before you buy.
Understand what it means to be a landlord. Not only are you on call 24/7 when the roof leaks or the furnace breaks down, but it’s also your responsibility to find reliable tenants, hopefully with little downtime between rentals. Learn about landlord/tenant rights, which differ by state. You could choose to hand those duties over to a management company, but that will cut into what may be a slim profit margin.
On the positive side, there are tax advantages for real estate investors that can play into your favor. Remember that tax laws change and are complicated and getting professional guidance may pay off in maximizing your benefits and avoiding problems.
Finally, decide what kind of “investment” you are after: Will your profit come from buying and selling often, or will you hold on to a property long-term for a regular, monthly income stream?
The retirement property
Maybe you’re starting to think about retirement and you’d like to spend those years in a new place. Are there advantages to buying a retirement home while you’re still working?
The short answer: yes. You’ll have an easier time getting approved — and securing the best rate — while you’re still drawing an income. The Equal Credit Opportunity Act makes it illegal for lenders to discriminate against retirees, but they can consider your income.
Purchasing your retirement home while you’re still working also gives you the chance to get to know the area better. And you won’t have to dip into your retirement funds for upgrades and maintenance. Depending on when you buy it, you’ll build equity in your second home that could come in handy later or turn into an asset for your children.
Some advisors recommend buying your retirement home only when you’ve paid off your existing mortgage. That’s undoubtedly the best scenario. If the option is to carry two mortgages, be sure that’s a cost you can absorb. You don’t want to impact your financial plan negatively, especially your retirement savings. What good is a great retirement home if you don’t have the money to enjoy it?
As with vacation homes, know the location. After all, this is where you’ll spend many years, with a lot of free time. If it’s a place you regularly visit in summer, experience it in winter. You don’t want to be surprised when it’s too late to do anything about it.
And common to all three
Here are some things you need to consider, regardless of how you’ll use your second home:
- It may be more difficult to qualify. Lenders will look at your debt-to-income ratio: the ratio of your debts compared to your income. Most lenders require a DTI of 36% or lower, so determine if your mortgage payments put you over that threshold.
- Lending rates will be higher. This is especially true for investment properties, with the assumption that the transaction includes higher risk: It’s easier for borrowers to walk away from a failed business venture than it is from their own homes.
- You’ll need furniture and housewares. Enough said, but a cost that many people don’t factor in.
- Houses need regular maintenance. As an existing homeowner, you already know this. But you may not know what it’s like to care for a property that you don’t live in, that may be hours away, and that other people are living in.
As you dig deeper into the details of second homeownership, don’t lose sight of your original dream. If the numbers add up, a second home can provide decades of family gathering memories, additional income, or a place to enjoy your well-deserved retirement. The more you know now, the better the chances that your dream will become a reality.
This content and information was created by a third party and not The College. The College assumes no legal liability for the accuracy, completeness, or usefulness of any such content and information and the views expressed therein do not necessarily represent the views of The College.
What Should You Do With an Old 401(k)?
However, with the average American holding more than 12 jobs before the age of 52, you’re unlikely to have just one 401(k) during your career — and that can leave you unsure of what to do.
In order to make good choices with older 401(k)s, you first need to understand that every dollar you put into a 401(k) is your money. The plan may be attached to an employer, but they cannot remove or interfere with any money you’ve contributed. Some employers make matching contributions that they are allowed to take back if you leave your job before being fully vested (i.e., you weren’t at the company long enough), but your contributions belong solely to you.
So, what should you do with the money that’s sitting in an old 401(k)? There are several options:
Roll it Over
For many people, moving the money from an old 401(k) to a new investment account is the best choice because it gives you more control over your money and limits the number of accounts you have to manage. If you want to roll over a 401(k), there are two options that allow you to avoid any taxes or penalties.
First, you can simply roll an old 401(k) into the one attached to your current employer. Not all employers permit this but, if yours does, the process is fairly simple and your employer may even help you out. Just make sure you opt for a direct rollover. The money should move from one 401(k) to the other without passing through you.
Your second option is to roll the money into an IRA. This is also a simple process. You’ll choose a financial provider, open a rollover IRA, and ask your old 401(k) for a direct rollover.
So, which choice is right for you? That depends. If you really like the investment options provided by your new employer and want to manage as few accounts as possible, rolling an old 401(k) into a new one makes a lot of sense. However, if you prefer the wider range of investment options offered by most IRAs and don’t want to end up with yet another old 401(k) should you leave your current job, you’ll likely be happier moving your money into an IRA.
One thing to remember is that, while you can take a loan out of a 401(k), you can’t take a loan from most IRAs. So, if you think you may need to borrow from your retirement savings, keeping your money in a 401(k) will offer more options.
Do Nothing
You don’t have to do anything with an old 401(k) if you don’t want to. You can let the money sit there until you reach 70½, at which point you must start taking annual required minimum distributions.
The problem with not doing anything is that you’ll have little to no control. You won’t be able to add money to the plan and, if you need to withdraw from it, your options could be limited. It’s also difficult to manage the investment strategies of multiple 401(k)s, particularly when you no longer have regular, employer-granted opportunities to adjust your plan.
That said, keeping the money in an old 401(k) is far preferable to cashing out. By doing nothing, your money can still grow tax-deferred and will be available for your retirement.
Donate to Charity
If you don’t think you’ll need the money in a 401(k), you can withdraw it, pay the taxes and penalties, and give the money to charity. However, if you want to maximize the gift, you should include the donation in an estate plan. By donating your 401(k) upon your death, the money will transfer tax-free, providing the charity with more funds overall.
Try Not to Cash Out
You always retain the right to convert money that’s in a 401(k) into cash. However, it’s a poor strategy unless you’re of retirement age or need the money for an emergency and have no other options.
The problem with withdrawing early from a 401(k) is that you’ll have to pay income taxes on the entire amount you withdraw and you’ll likely face an early withdrawal penalty of as much as 10%. If you’re 59½ years old, you can avoid the penalty, but you’ll still owe the taxes immediately. Of all the ways to handle a 401(k), cashing out is the worst financial option.
How you handle an old 401(k) is up to you and your personal needs and preferences. The important thing is that you make your decision based on good information. Your retirement is too important to ignore.
This content and information was created by a third party and not The College. The College assumes no legal liability for the accuracy, completeness, or usefulness of any such content and information and the views expressed therein do not necessarily represent the views of The College.
How to Help Aging Parents With Their Financial Planning
While a lot has been studied and written about raising a child, we know less about the dynamic between adult children and their aging parents. At what point does the traditional caregiver role switch from parent to child? That question becomes even more critical when one parent dies.
The major issues that adult children and aging parents need to confront have one thing in common: finances. From physical health to aging in place to declining cognition, how to help parents live out their final years with dignity is tied to their financial resources.
How can you ensure that your parents’ financial health is sound? What protections and support can you put in place without overstepping boundaries? What resources are available to you and them to have productive discussions about issues of aging in place, wills, and related topics?
Here are five steps that can help you navigate this challenging, but ultimately rewarding, responsibility.
1. First, talk with other family members
Start by talking with siblings and close relatives. If you don’t have those connections, there may be someone who knows you and your parents, maybe a neighbor or family friend, who can fill the role.
Figure out the best way to begin the parental discussion, including who the best spokesperson is. It doesn’t have to be all of the children. It may be best to limit the initial dialogue to one person to avoid a sense of “ganging up.”
And have the talk early—earlier than you think you need to.
Studies indicate that the ability to make complex decisions like those involved in financial planning starts to diminish after age 60. Michael Finke, professor of Wealth Management and program director of the Wealth Management Certified Professional® (WMCP®) program at The American College of Financial Services, studies the relationship between cognitive decline and financial decision-making.
As Finke told Kiplinger, “Often, by the time parents have lost their ability to make sound financial choices, they’ve also lost the ability to evaluate who they can and can’t trust.” That can open the door for ill-intentioned family members or outsiders posing as financial advisors.
2. Provide help, not control
It’s possible, and perhaps likely, that your parent or parents won’t see any need for your advice, at least not initially. So don’t give advice or try and take control — offer help instead.
If your parents are still doing in-person banking, offer to drive them and take them out to lunch — an unforced way to meet their banker and transition to money talk afterward. If paying bills is becoming a chore, either because of vision challenges or forgetfulness, volunteer to step in. (And if you have a child who is old enough to take this on, even better).
Another tactic: give the gift of technology, a tablet or laptop that they’ll need help to set up and learn. What begins as a great way to create and share photos of the grandchildren can transition to viewing their portfolio online and managing their bills.
Gradually, you’ll become a natural part of the financial management “team.”
3. Set up efficient systems
With your foot in the door, you’ll get a better sense of what you’ll need to do next and how much responsibility you’ll need to take on. Simple observation can help: if you notice unpaid bills and collection notices on the kitchen counter, it’s time to become more involved.
Set up automatic payments for essential ongoing services; credit card and bank statements can give you an idea of what these are and which may be redundant and/or unnecessary. Consolidate multiple accounts. As part of a volunteer spring cleaning, make sure you know where documents like wills and life insurance policies are located (and don’t forget the lockbox key).
Finally, make sure that your parents are receiving every benefit they’re entitled to, from employer benefits to Medicare.
4. Anticipate what’s next
At some point, and depending on your parents’ health, you’ll need to assess the potential for long-term care. Check out options when there’s no immediate medical emergency to deal with, and include your parents in the process if they’re open to the possibility.
You will also want to obtain a durable power of attorney, which gives you a broad range of responsibilities such as paying bills, managing assets, and filing taxes. A durable power of attorney remains in place even if your parents become incapacitated, and avoids the delay of going to court to be appointed the legal guardian.
5. Enlist the help of a financial advisor
If involvement in your parents’ financial affairs is problematic, enlisting the help of a neutral, outside expert may be best for you. Given the complexity of financial management, the amount of time it takes, and the emotional toll involved, it may be the preferred course of action, regardless. A credentialed advisor can provide your parents and you with the financial peace of mind that only comes with professional experience.
While you’re at it, start thinking about your retirement years so your children won’t go through the same experience you have. If you’ve found a good financial advisor for your parents, they might be a good fit for you too.
This content and information was created by a third party and not The College. The College assumes no legal liability for the accuracy, completeness, or usefulness of any such content and information and the views expressed therein do not necessarily represent the views of The College.
Managing Finances in Uncertain Times
While our concerns will depend mainly on our individual situation — our age, job security, financial situation, and family obligations to name a few — here are some common areas to consider when we’re forced to manage finances in uncertain times.
Check in on Your Monthly Budget
Before you can judge the effect on your monthly budget, you’ll need a monthly budget. If you have one, great. If not, this is the perfect time to create one.
If you have a budget:
- Evaluate your spending habits. Even if your personal situation is secure — job, health, savings, and long-term planning — things outside your control are volatile. Now’s the time to cancel that monthly subscription service you never use or the landline phone you don’t need. Eliminate any credit card debt to free up money in the future.
- Assess your emergency fund. Experts say that, ideally, we should have anywhere from three to nine months stored away in an easy-to-access emergency fund — money in a savings account that you could live on if your income suddenly stopped. If you have an emergency fund, check on the balance. If not, take the money you saved from your monthly budget-cutting and start one.
If you don’t have a budget:
- Start one. Keep it simple but comprehensive. Include all of your expenses and income. Monthly credit card statements come in handy here.
- Evaluate your spending habits. See above. If you’re new to the budgeting world, you’ll likely be surprised at some of what you’re spending.
- Start an emergency fund. If you didn’t have a budget, it’s unlikely you had an emergency fund. That’s okay — start one now. If you can set aside $25 a week, you’ll have more than $1,300 in the fund by this time next year.
If your job is secure and you have adequate health insurance for you and your family, you won’t have to adjust your habits radically.
But remember: leaking roofs and faulty transmissions have their own timelines. If you’re faced with an unexpected major expense, you may need to use your credit card as a fallback option.
The Impact on Your Investment Strategy
One of the biggest shocks from occurrences like the coronavirus is the instability they cause in the markets. Markets don’t like uncertainty, and large-scale buying and selling is more the result of panic than strategy.
The best advice? Do nothing at the outset.
That doesn’t mean that you shouldn’t reassess your investment strategy periodically. If you’re retired or near retirement age, you’re counting on your savings. Hopefully, your investments have shifted to a lower risk balance over time, which will enable you to weather the current storm.
And while you may be tempted to sell stocks as prices drop, remember that the market has always bounced back (see below). Also, remember the tried-and-true adage: buy low and sell high. If you need immediate cash, it’s better to draw from bonds and give your stocks a chance to rebound.
If you’re a ways from retirement, stick with your plan. And stop looking at your portfolio every day.
Remember That We’ve Been Here Before
In the middle of a global crisis, it’s easy to think that we’re in uncharted territory. No doubt there are unique aspects to what’s happening, but we’ve faced the unknown before. And we not only survived, we came back stronger.
Beginning with HIV/AIDS in 1981, there have been 12 epidemics that have impacted the markets, including SARS, H1N1, and Ebola. The impact of these outbreaks on market drawdowns averaged less than 2 months, with the exception of AIDS (5.1 months).
Although epidemics can spur market corrections, their impacts are finite. That said, it’s difficult, if not impossible, to predict exactly how long it will take the market to recover when we’re still dealing with a pandemic. That’s why a steady, calm, and patient financial course is best.
How to Move Forward
It’s difficult to be a rational, calm investor in turbulent times. The best way to become one is to have a strong plan in place before the next roller-coaster ride comes along and stick with it.
Because the ups-and-downs and complexities of investing can be overwhelming even in the best of times, consider working with a financial advisor who is trained in retirement income planning or wealth management planning, which means they will have the expertise to help you weather the storm with confidence. In the end, that may be your surest route to a smoother ride.
This content and information was created by a third party and not The College. The College assumes no legal liability for the accuracy, completeness, or usefulness of any such content and information and the views expressed therein do not necessarily represent the views of The College.
The Best Ways to Pay for Your Child's College Education
At the same time, college is expensive. Here’s the average cost of tuition and fees in the 2019 — 2020 school year, as reported in the U.S. News annual survey:
For private colleges: $41,426
For public colleges:
- In-state residents: $11,260
- Out-of-state residents: $27,120
Those costs don’t cover room and board. Also, consider that tuition tends to rise every year, with increases between four and 10%. Depending on your child’s age, you may be looking at a cost that’s considerably higher than what parents face today.
Given everything that’s at stake — your child’s future and your financial stability — it makes sense to understand all of your options to pay for college.
529 Plans
529 plans, or “qualified tuition plans,” are savings plans sponsored by states, state agencies, and educational institutions. These plans offer tax-advantaged savings for educational expenses and come in two categories:
- Prepaid tuition plans. These plans enable you to purchase credits at public colleges and universities at current prices. The money can only be used for tuition and fees, not room and board, and most have state residency requirements. You receive the full value of the benefit only if your child attends the participating institution. Otherwise, you will only receive a portion of the benefits you paid.
- Education savings plans. These plans can generally be used to cover expenses at any college or university, including some foreign institutions. These savings can also be applied to room and board. Also, under the revised 2017 tax code, education savings plans can be used for private elementary and high school tuition for up to $10,000.
- Private plans. This is a prepaid tuition plan for approximately 300 participating private colleges and universities.
529 plans offer a range of tax benefits. The compound savings are tax-free, and some states offer tax deductions and matching contribution incentives. However, some fees may apply to 529 plans, such as account applications and maintenance fees.
The College Savings Plan Network provides links to all state 529 plans.
Grants
The federal government, state governments, and colleges and universities provide grants based on financial need. Unlike loans, grants don’t have to be repaid.
To qualify for a grant, you’ll need to fill out the Free Application for Federal Student Aid (FAFSA) form. Colleges and universities also use this information to determine what need-based aid your child may be eligible for, including institutional scholarships.
Loans
Families turn to loans to finance approximately 20% of the cost of college. Educational loans are available from the government and from private lenders. Federal loans include more protection and better rates, so consider those first. Again, you’ll need to fill out the FAFSA to qualify.
Students can take out federal loans, with first-year undergraduates able to borrow up to $5,500 and an additional $1,000 for every subsequent year. Direct PLUS loans are targeted to parents. While these loans come with a higher interest rate than student loans, the amount you can borrow is determined by the college and is intended to cover the full cost of attendance, minus any scholarships your child may be offered.
$2,500 Tax Credit
The American Opportunity Tax Credit is a benefit for parents whose adjusted gross income is less than $90,000, or $180,000 if filing jointly. You can reduce your taxes after paying tuition, fees, books, room, and board by up to $2,500 a year per child.
Other Options
You may want to consider other savings and funding options, including:
- Roth IRAs
- Traditional IRAs
- FDIC-insured savings accounts
- A home equity line of credit
Whatever option, or combination of options, you choose, it’s best to start as early as possible. And know that you’ll seldom pay the college’s advertised “sticker price.” According to the College Board, undergraduate students in 2018-19 received an average of $15,210 in aid.
To maximize your savings and ensure you’ve got the best possible plan in place, consider working with a financial advisor who specializes in long-term planning. Your child’s future is worth it.
This content and information was created by a third party and not The College. The College assumes no legal liability for the accuracy, completeness, or usefulness of any such content and information and the views expressed therein do not necessarily represent the views of The College.
Insurance & Risk Management Insights
The Ultimate Guide for Choosing the Best Type of Life Insurance Policy
Even well-respected experts have opposing viewpoints on life insurance. 14 million listeners tune into Dave Ramsey's podcast on personal finance each week. Ed Slott is a respected tax advisor and keynote speaker on tax planning. Both men have decades of experience. Both are also authors of best-selling personal finance books.
Dave Ramsey fiercely defends that life insurance protection should never be permanent. He believes term insurance is the best type of life insurance, period. Ed Slott believes that permanent life insurance should be the "bedrock of any serious financial plan." He believes permanent life insurance is an attractive asset due to its favorable tax treatment.
Why would two knowledgeable experts have completely opposing viewpoints? Which expert should we listen to? An in-depth Google search often leads to more confusion. You definitely don’t feel like you are receiving the full picture when you speak to a life insurance agent.
Researching life insurance facts should not have to be so tedious and overwhelming. After 13 years in the insurance industry, I decided I had had enough of seeing one-sided arguments. I became fed up with hearing professionals and media preach that only one type of life insurance was best for all.
This guide provides a balanced perspective of each policy type, so you can make a wise decision. Your specific situation, needs, and goals should dictate what a wise decision is. This guide includes insights from over a decade of industry experience. Reading this guide will give you a clear understanding of your options. You will have the knowledge to secure a policy that is best suited for you today. You will also learn how to position your family for success in the future.
- Here is what you are about to learn:
- The basics of each type of life insurance
- The advantages and disadvantages of each policy type
- Who each policy type is most suitable for
- Unique policy provisions and features to look for to maximize the value of your policy
- How to create a plan that provides the greatest flexibility in the future
Term Insurance
Basics of Term Insurance
Term insurance is the most straightforward type of life insurance policy to understand. When setting up a term policy, you select your desired coverage amount and duration. The duration of your coverage will determine when your coverage expires.
Advantages
Term life is the most cost-effective type of life insurance in the marketplace. Most term policies have premiums that will remain the same for the entire term duration. This transparent setup makes term policies predictable and easy to manage. Your beneficiaries will receive the full insurance benefit if you die before your policy expires.
Disadvantages
Although very affordable, over 97% of term life policies end up not paying out a death benefit. According to the statistics, you have a high likelihood of outliving your term policy.
If you decide you want to extend your term coverage, you will need to apply for a new life insurance policy. At this point, you will be applying based on your age and health when submitting your new application. If you are still very healthy, you will still pay higher coverage rates based on your older age. If you are no longer as healthy, your policy may receive a lower health rating or get declined.
Who Term Insurance is Most Suitable For
Term insurance is most suitable for individuals or families with a limited budget. Many families have a hard time finding more money to save. Additionally, young families often need higher life insurance coverage for the following reasons:
- Higher amounts of debt (student loans, consumer debt, mortgages)
- More years of income to replace
- Children are younger
- Low amount of assets saved
This combination makes term life insurance the easy choice for most younger families.
Term insurance may also be most suitable if you need coverage for a finite period. This assumes you have already accounted for other factors, such as income replacement and education costs. Some examples include protection while paying down your mortgage or business debt. Since you have a clear idea of when you will pay the debt off, you can select an appropriate term duration.
Key Considerations
Convertibility feature
Most term life policies include a conversion feature. The conversion feature allows you to convert your term insurance to permanent insurance. When converting to permanent insurance, you are purchasing a new policy. The key advantage here is you will not have to take a new medical exam. Instead, you will be able to apply the same health rate class from your term policy to your new permanent policy. This can be very impactful if you are no longer as healthy as you were when you started your term policy.
You do not have to convert your entire term to permanent insurance. A partial term conversion may be affordable and make perfect sense.
Although your health rate class remains the same, your age is not locked in for your new policy. You will pay insurance rates based on your age when you convert to a permanent insurance policy. Since insurance costs more as you age, converting at a younger age can help you save on insurance costs.
Make sure your term policy has a conversion feature if you plan to buy permanent insurance in the future. You can ask your insurance agent to run options to convert your term during your annual review. You will be able to weigh costs and benefits to make a wise decision for your family.
You can only exercise your term conversion with the carrier you placed your term policy with. For this reason, you'll want to know if the permanent policies offered are in alignment with your goals. Be clear on when your policy's term conversion period expires, as it varies among carriers.
Unique Policy Features
Some carriers offer innovative features that may be valuable for some policy owners. Be sure to ask your agent about options available to you based on your goals.
A few carriers offer a term policy with return of premium. These policies may cost 20-30% more than a traditional term policy. If you outlive your term policy, you can receive a full refund of all premiums at the end of your term duration.
One carrier offers a policy that allows you to keep coverage beyond the term duration. You will have the option to pay the same premium for a reduced amount of life insurance coverage. If you are no longer as healthy or can't afford a new term policy, this feature can benefit you.
Some carriers even offer term policies with an accelerated death benefit. Qualifying trigger events may include chronic, critical or terminal illness.
Life insurance bands (cheaper cost at certain benefit amounts)
Many life insurance buyers are not aware of face amount bands, also known as premium bands. Face amount or premium bands offer a lower cost for coverage at higher insurance amounts. Although rate bands vary among carriers, a standard rating band may look like this:
- Band 1: 100,000-249,999
- Band 2: 250,000-499,999
- Band 3: 500,000-999,999
- Band 4: 1,000,000+
This knowledge will help you get the best value for your life insurance premium dollars.
Permanent Insurance
Basics of Permanent Insurance
Permanent life insurance protection lasts for your entire life. Unlike term life, permanent insurance policies do not expire. Your death benefit is guaranteed to pay out as long as you pay enough premiums. Since you have lifetime protection, premiums are much higher for permanent policies.
Most permanent life insurance policies have a cash value component. Cash value is the equity you build within your policy during your living years. You can draw money from the policy's cash value while you are still alive.
Permanent Insurance Policy Types
There are variations of permanent life insurance policies, each having unique features. This summary covers each permanent insurance policy type, along with its unique features.
Whole life
A whole life policy is generally considered the most secure form of insurance. Whole life policies have more rigid premium payment requirements than universal life policies. As long as scheduled premium payments are paid, the cash value is guaranteed to increase each year. A whole life policy may be most suitable for you if you are seeking the greatest predictability in your future policy values.
Universal life
Universal life policies provide more flexibility in premium payments. These policies offer more transparency around fees and expenses as well. There is a premium schedule of minimum payments to cover annual insurance costs. Premiums paid above the required amount are added to the cash-value account and earn interest. A universal life policy may be suitable if you are seeking premium flexibility.
The life insurance company determines the interest rate credited to the universal policy. Factors that impact interest rates include expenses, mortality rates, and investment experience. An indexed universal life policy is a variation of a universal life policy. Interest rates credited in these policies are based on annual returns of one or more indices selected. A universal life policy may be suitable if your income fluctuates. Flexibility in your premium payment schedule can be a valuable feature. IUL policies may be suitable for those seeking upside potential from linking cash value returns to a stock market index. It is important to consider other nuances (i.e. cap and participation rates) when buying an IUL policy.
Guaranteed universal life
Guaranteed universal policies work similarly to term insurance policies. Instead of lasting for a specific amount of years, you select an age to have protection through. Policies will remain in force as long as premiums are paid. Since GUL policies have little to no cash value buildup, premiums are much lower than traditional permanent policies. A GUL policy can be suitable if you are looking to make minimal premium payments to have pure protection.
Variable universal life
A variable universal life policy provides the policy owner more control. You can select from a list of sub-accounts (similar to mutual funds) to create a portfolio. You can also adjust investment allocations to align with your investment objectives. Your cash value returns directly correlate to your investment allocations. One key difference is that you risk the potential for loss of cash value in a VUL policy. VUL policies generally have a minimum death benefit guarantee as long as you continue to pay premiums. VUL policies may be suitable for those seeking more control over policy performance, while accepting the accompanying investment risk.
Overfunded permanent policy
An overfunded policy refers to extra premiums paid into a permanent insurance policy. The surplus premiums buy more coverage and increase cash value in the policy. You can choose to overfund either whole life or universal life policies. This can be an attractive strategy if you want the option to withdraw cash from your policy in the future. A knowledgeable agent may be helpful in designing and servicing an overfunded policy.
Advantages of Permanent Insurance Protection
The main advantage of a permanent insurance policy is the security it provides. There is certainty that your life insurance will pay out when you die, not if you die during the term duration. The certainty of a death benefit provides flexibility to your financial plan.
One example is having a paid-up permanent insurance policy during retirement. A paid-up policy is when no more premiums are due for the rest of the policy owner's life. This policy can provide peace of mind for a family in many ways. Here are some reasons a couple may value a permanent insurance policy:
- What if there is a major stock market or real estate correction before the insured dies? The beneficiary may avoid selling a depreciated asset at a bad time.
- What if the couple spends more than they originally planned while enjoying retirement? The surviving spouse will have some assets replenished through life insurance proceeds.
- What if there is still debt outstanding when the insured dies? The surviving spouse will have the option to pay down the debt.
- What if their goal were to leave an inheritance behind for the next generation? Life insurance proceeds pay out in a lump-sum, tax-free at the time of death.
The instant liquidity life insurance provides leaves beneficiaries with options and flexibility. This peace of mind can be invaluable for many families during retirement.
Permanent life insurance provides an efficient way to pass wealth to future generations. If you know how much to expect your policy to pay out, you can spend down your retirement assets with confidence. Since the death benefit is income tax free, you will know the exact amount of wealth that will pass to future generations when you die.
Having access to the cash value in a permanent insurance policy while you are alive can be a major benefit. You can access the cash value in a permanent policy while you are still alive. Assuming you've selected the right type of policy, you can expect your cash value to exceed the premiums paid into your policy over time.
Life insurance policies experience unique tax treatment. Cash value grows on a tax-deferred basis. This means taxes are not paid on interest earned within a permanent insurance policy. You can access cash value in any policy year on a tax-favored basis.
Here are some examples of when having access to cash value can be beneficial:
- You have an emergency that requires immediate cash.
- You want to make a major purchase.
- You want to make a major investment.
You may prefer to avoid liquidating existing investment holdings or incurring debt. In these instances, you may find the access to cash value in your policy to be an attractive option to have.
Disadvantages
Permanent insurance policies require much higher premiums than term insurance policies. This factor in itself makes permanent insurance unaffordable for many households.
Properly funding a permanent life insurance policy is a long-term financial commitment. You need to pay premiums for many years to sufficiently fund a permanent policy. Stopping premium payments early will result in lower cash value and death benefit. Sometimes, you may lose life insurance protection altogether. This commitment may become a challenge if your income becomes disrupted.
Permanent insurance policies are more complex to understand and manage. Ongoing monitoring is necessary with policy components such as cash value and policy loans. Two examples that may need attention are outstanding policy loans or changes to policy interest rates.
Who Permanent Insurance is Most Suitable For
A permanent insurance policy is suitable for one seeking a permanent death benefit.
A permanent insurance policy is suitable for you if one or more of the following applies to you:
- You are seeking a permanent death benefit
- You are looking to build cash value
- You are a disciplined saver with a long-term time horizon
Key Considerations
Life insurance receives unique tax treatment.
It is important to understand the different ways you can access your cash value. Options such as surrendering your basis or policy loans can avoid incurring taxes. It is important to understand the impact of withdrawals have on your policy values. Be sure to work with a knowledgeable agent or financial planner when you decide to withdraw cash. A professional can help create a plan to avoid a policy lapse or tax consequences.
Adding a disability rider to your policy is worth considering. Also called a waiver of premium rider, this rider waives your premiums in a disability event. According to the Social Security Administration, a 20-year old has a one in four chance of becoming disabled during their working years. For this reason, the cost of the rider may be worthwhile for many professionals.
Some carriers offer an optional long-term care rider. This rider gives you access to your death benefit in the event you need long-term care. Studies show over 66% of 65-year-olds will need long-term care in their lives. With LTC costs being a major financial risk during retirement, this rider has gained popularity. Unlike a standalone LTC policy, you will not lose unused benefits with a rider.
Conclusion
At this point, you have learned that the best type of life insurance policy for you today depends on factors such as your:
- Budget and savings habits
- Expected future income
- Length of protection desired
- Desire for living benefits such as accumulating cash value
- Financial plan
If you have a limited budget, chances are a term life insurance policy will be the most suitable for you today. There are some important considerations to keep in mind as you set up your term policy.
Your life insurance program does not have to be 100% term or permanent insurance. Having a combination of both policy types can make great sense for many policy owners. It may be affordable to complement your term policy with a smaller permanent policy. Setting up a permanent policy today locks in the lower cost of insurance at a younger age. This results in more efficient growth of policy values.
Change is the one constant we are guaranteed to experience in our lives. Most professionals find that their income peaks in their early 50s. What is most suitable for you today may change in your future. Your future may not play out according to your original plans, for better or for worse. The best type of life insurance program should suit your needs today, while providing flexibility for your future. Work with an insurance expert to set up a term policy through a carrier who provides strong conversion options.
Last but not least, be sure to review your policy once a year. If you need to increase or lengthen coverage, make the changes while you are young and healthy.
This content and information was created by a third party and not The College. The College assumes no legal liability for the accuracy, completeness, or usefulness of any such content and information and the views expressed therein do not necessarily represent the views of The College.