Wealth Planning Archives | Page 21 of 22

Do bonds still work?

Many of our clients have been concerned lately about where they can find income in today’s environment of low interest rates. They ask us questions like:

• If rates remain low for several years, what changes will we need to make with our fixed-income holdings?

• Will fixed-income holdings continue to help my portfolio be diversified — and will bonds add return?

The bond market has been relatively quiet with Treasury yields trading near historic lows. Some worry that if markets become volatile and stocks face a large decline again, bond yields don’t have much room to fall, and therefore, they won’t provide as much protection as they have in the past. In March, both stocks and bonds fell simultaneously for several days before the Federal Reserve stepped in to calm the markets. We view this as an anomaly and not a financial crisis, since the entire economy was shut down due to the pandemic.

To be clear: We firmly believe that fixed income plays a critical role in portfolio diversification.

The right mix of assets depends on an individual’s capacity and tolerance for risk and reward. The traditional portfolio of 60% stocks and 40% bonds was designed as a starting point, understanding that stocks and bonds move differently over time, and the correlation between the two asset classes is not constant. The chart below shows the correlation over time between stocks and Treasury bonds, illustrating that bonds can provide diversification from stocks during market downturns.

Source: Charles Schwab Investment Advisory, Inc. Historical data from Morningstar Direct, as of 3/31/2020. Indexes representing the investment types are: **U.S. stocks** = S&P 500 Total Return Index (1990 onward); **U.S. Treasuries** = Bloomberg Barclays 3-7 Year Treasury Index (1992 onward) and FTSE U.S. Treasury Benchmark 5-year USD (1990-1991). **Past performance is no indication of future results.**

Looking beyond diversification, with yields currently low and expected to remain low for several years, the high returns seen so far this year in the bond market are not likely to be repeated over the next few years. Our expectation is that if the economy continues to improve, inflation will gradually move higher. Another round of stimulus could provide an additional boost to growth. This could lead to falling bond prices as intermediate and longer-term bond yields would rise, or steepen, as seen below.

*Source: Bloomberg. Market Matrix U.S. Sell 5 Year & Buy 30 Year Bond Yield Spread (USYC5Y30 Index). Daily data as of 10/12/2020.*

We continue to recommend that investors maintain a broad diversification among stocks and bonds, and we expect returns for both stocks and bonds to be lower for the next 10 years compared to the last 10 years, as we are starting at a higher valuation point. Investors will need to maintain a broad exposure to global asset classes to help manage risk and provide a broader set of investment opportunities. Depending on each individual risk tolerance, the level of fixed income and equity exposure may vary. We believe that if you are a conservative investor, fixed income will continue to be a critical component of the portfolio and will offer opportunities for return.

So, what can we learn from all this?

We don’t believe that the diversification benefits from owning fixed income have changed. We believe that bonds still play an important role for diversification from stocks and provide income to boost portfolio returns. We will continue to look for opportunities in the fixed-income sector to provide diversification, income and total return. Riding out future market volatility in addition to having a diversified portfolio means staying the course and not trying to time the market.

It all starts with a solid financial plan for the long run that understands the level of risk that is acceptable for each client. With regards to investments, we believe in diversification and in having different asset classes that allow you to stay invested. The best option is to stick with a broadly diversified portfolio that can help you achieve your own specific financial goals – regardless of market volatility. The economy, and therefore, the market, is bigger than the direction the political winds are blowing. Ultimately, it’s the long-term fundamentals that matter.

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Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

S&P 500 Index is an unmanaged group of securities considered to be representative of the stock market in general. You cannot directly invest in the index.The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. Kestra IS and Kestra AS are not affiliated with CD Wealth Management.

Click here for additional investor disclosures.

3 strategies for tax savings, no matter who wins the election

With the presidential and congressional elections less than three weeks away, many investors are wondering if a new administration and a new Congress might pass tax reforms that alter the current tax landscape. After the Nov. 3 elections, we will get a better sense of the potential for tax reform, but in the interim, we continue to look for opportunities to bolster tax savings for our clients, regardless of who takes office in 2021.

Strategy No. 1: Tax Loss Harvesting

Under current tax law, it’s possible to offset current capital gains with capital losses you’ve incurred during the year or carried over from a prior tax return. Capital gains are the profits you realize when you sell an investment for more than you paid for it, while capital losses are the losses you realize when you sell an investment for less than you paid for it. Short-term capital gains are taxed as ordinary income rates, whereas long-term capital gains are taxed at a lower capital gains rate. The chart above displays the historical gap between maximum individual tax rate and maximum capital gains tax rate, including the 3.8% tax on net investment income.

As seen in the chart, the current spread between the two tax rates is not that wide. However, the ability to reduce the tax on both short-term and long-term capital gains by harvesting losses can help offset the gains one incurs from taking profits. Harvesting the loss has no effect on the portfolio value, as one can use the proceeds from the sale to buy a similar investment. This allows the investor to maintain similar asset allocation and reduce federal income taxes, as seen in the example below. Throughout the year, we continue to look for opportunities to harvest losses and take profits, all while maintaining the current risk tolerance.

Tax-loss harvesting and portfolio rebalancing can provide nice synergies as they play different roles in portfolio management. When we rebalance a portfolio, we are managing risk in the portfolio by selling holdings that have outsized their target holdings and adding those gains to positions that may have losses or not grown as much. Often in rebalancing, the portfolio will experience sizeable capital gains. That’s where tax-loss harvesting helps reduce the gains and brings the risk of the portfolio back to its target allocation.

Strategy No. 2: Converting to a Roth IRA

A traditional IRA/401K is funded with pre-tax contributions. Future withdrawals from your IRA/401K are then taxed at ordinary income rates. A Roth IRA/401K is funded with after-tax dollars and the withdrawals are tax-free, if the qualifications are satisfied. Individuals who have a majority of their retirement assets in traditional IRA/401K might consider converting a portion of those assets to a Roth retirement account for “tax diversification.” With tax rates currently at historically favorable levels, now might be an opportune time to do a Roth conversion as the IRS treats Roth IRA conversions as taxable income.

Strategy No. 3: Increasing charitable contributions

The Tax Cuts and Jobs Act passed in 2017 increased the deduction limit for cash contributions made to public charities to 60% of Adjusted Gross Income from 50%. The CARES Act, passed earlier this year due to the global pandemic, provided additional tax relief to those individuals donating to charity in 2020. For this tax year, taxpayers can elect on their 2020 income tax return to deduct up to 100% of adjusted gross income for cash gifts made to public charities.

Also, under the CARES Act, taxpayers can gift long-term appreciated securities to public charities (including donor advised funds) up to 30% of their adjusted gross income while also making cash gifts to public charities totaling up to 70% of adjusted gross income. For those who are charitably inclined, 2020 offers an opportunity to donate more to your favorite charities and potentially reduce your taxable income.

What does this mean for you?

We will continue to monitor the financial plan and the portfolios to look for opportunities to tax-loss harvest, discuss Roth IRA conversions and potentially donate appreciated stock to your favorite charities. We remain hypervigilant going into the election and will make tweaks to the portfolios when necessary.

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This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

S&P 500 Index is an unmanaged group of securities considered to be representative of the stock market in general. You cannot directly invest in the index.The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. Kestra IS and Kestra AS are not affiliated with CD Wealth Management.

Click here for additional investor disclosures.

A deeper look at the stock selloff

Last week was a good reminder that stocks cannot go up all the time. The previous five weeks saw signs of investor exuberance after both Apple and Tesla announced stock splits and market volatility continued to drop at the same time.

The same stocks that led the NASDAQ and S&P 500 higher were the same ones that fell the most last week. As seen in the chart below, Large Cap Growth stocks and the NASDAQ, since the market bottom in March, have significantly outpaced value stocks, and the selloff last week is an effort to reduce the spreads between growth and value stocks.

The reasons for the market pullback were the usual reasons: slowing recovery, tech stock bubble and an upcoming election. We do not think that the selloff last week is the beginning of a correction.

When stock valuations get stretched, as they recently have in the technology sector, they tend to snap back, much like a rubber band. If markets move too far in one direction, either oversold or overbought, they typically need to “reset” before moving higher, what many call profit taking. However, much of the volatility last week is being blamed on offshore funds option trading that led to large amounts of technology stock options being purchased. If this is the case, we expect this to be nothing more than a short-term move down in the markets.

The VIX Index, which is a measure of forward volatility for the next 30 days, is flashing higher volatility than normal. The election is a big reason that the forward curve of the VIX index is steep as seen below. After we know who the next president will be, volatility is expected to level off.

While the market sold off last week, we saw interest rates rise and gold prices fall. This is not typical behavior of a market correction. Employment data continues to improve as the unemployment rate fell to 8.4 percent, well below expectations, and down from the high of 22 percent back in April.

The improvement in the labor market has been an unexpected source of strength for the economy. The expectation is that the pace of the rebound will begin to moderate, however, the pace of recovery remains ahead of forecast.

What to watch next

Now that Labor Day is behind us, the focus for the markets turns to stimulus talks and the election. Last week, Congress passed a resolution on the budget to avoid a government shutdown. It also may mean that stimulus talks may be stalled for the rest of the year. The markets will be watching the political scene closely and will dominate the news well beyond Nov. 3.

So, what can we learn from all this? Staying the course during periods of market volatility is critical for the long-term success of your financial plan. We will continue to closely track the markets, the sector rotation and continue to tweak the portfolios as necessary.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS. Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

Summer doldrums? Not this year

As we near Labor Day weekend, the typical summer doldrum has been anything but typical: NBA and NHL playoffs in August on TV and summer vacations in the backyard instead of the Hamptons for stock and bond traders.

Normally, the markets plod along in August, waiting for Labor Day and the return of vacationers back to work. The summer of 2020 continues to see markets drive higher while the economy plods along, waiting for another stimulus package to help struggling small businesses.

The average S&P 500 return in August over the past 15 years has been -.17 percent. In 2020, the S&P 500 return through Aug. 25 is 5.13 percent. Historically, volatility accompanies the meager market returns during the month of August. The chart below reflects that current one-month realized market volatility is 10.2 percent. With the current economic circumstances and global macro environment, the current level of volatility is historically mild.

S&P rolling one-month realized volatility

We are just a few months removed from volatility being at all-time highs, and as the markets have recovered, volatility has receded. The most widely known measure of implied volatility is the CBOE Volatility Index (VIX).

The VIX is a measure of the market’s expectation of future volatility. Year-to-date volatility remains higher than normal as measured by the VIX Index, however, well off the high set on March 20. Risks remain in the economy and the market with the global pandemic, upcoming presidential election, trade tensions and geopolitical tensions.

The market feels complacent and continues to shake off these risk factors. Oil price and interest rate volatility have disappeared for the time being, largely in part to government intervention. The Federal Reserve stimulus programs will remain in effect through 2020, and we believe that Congress will pass an additional relief package before year’s end. Multiple vaccines are in human trials, and we continue to see additional monies flow into vaccine candidates.

So, what can we learn from all this? Accurately predicting the next market move and timing the market is extremely difficult and can adversely affect the long-term performance of your portfolio. Riding out future market volatility in addition to having a diversified portfolio means staying the course.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. Kestra IS and Kestra AS are not affiliated with CD Wealth Management.

4 Reasons to Introduce Your Children to Your Financial Planner

It’s safe to say that anyone who spends a lifetime building wealth wants to ensure that it’s managed well for generations to come, to have a plan in place not only for the next generation, but for the ones that follow as well.

For families with adult children – especially those who are transitioning into a new life phase, such as graduating, beginning careers or even starting families of their own – it’s important to plant the seeds of financial planning early.

“We have clients we’ve worked with since the mid-1990s, when the kids were tweens,” said Scott Cohen, CD Wealth Management’s principal, founder and CEO. “As the kids became adults, the parents brought them in and passed on a gift to work with our firm. These former kids now work independently with us and with their own nuclear families.

“It’s really special because now the third generation is growing up, and they know who we are, too.”

If you’re contemplating the best way to help a young adult in your family get started on financial planning, consider these arguments for doing so:

1. Starting early gives you an advantage: The earlier you start planning, Cohen says, the higher the likelihood of success.

“Take two 22-year-olds – one who maxes out his 401(k) for 40 years and one who waits,” he said. “The one who waits never catches up. Getting an early start gives you an advantage no matter what kinds of recessions come and go.”

2. Sharing a plan makes transitions easier: When an entire family uses the same financial planner, it’s easier to move through the seasons of life together.

“As the older generation starts to age, you want an easier transition where everyone knows what the plan is for all of the assets,” Cohen said. “Kids have to grow up fast sometimes, and picking up the pieces without knowing what to do ahead of time is not a pretty picture.”

3. It’s good to have everything in one place: Think of your financial planner as a hub for all records, account access and measurements against goals – and during times of transition, there will be less upheaval.

“When we work with multiple generations of a family, we manage the transparency so people know what they need to know when it’s appropriate,” Cohen said. “There is usually no need for the youngest generation to have the whole picture, for example, until they’re more mature.

“The key is to have a plan, and it’s our job to carry that plan out.”

4. You will need a neutral party to help you: The best financial planners are experts at dealing with human emptions and the psychology of money, and their focus is on making the right choices from an objective point of view.

“We didn’t earn your money, so we don’t feel the same way you do about it,” Cohen said. “We can act in a way that is not clouded by emotion. Sometimes, people have a hard time making investment decisions on their own.

“We always tailor our approach to each person with logic, objectivity and reason.”

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Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. Kestra IS and Kestra AS are not affiliated with CD Wealth Management.

The adjustments we made in the most volatile month ever

As we are in this for the long haul, we know there will be peaks and valleys, and our plan is to continue to stay the course. From a portfolio perspective, we continue to actively monitor your portfolio. In late March, we made the following adjustments:

1. Increased large cap exposure, through additional exposure to technology and healthcare.

2. We funded the increase in large cap stocks by selling out of small and mid-cap stocks as well as real estate.

3. For fixed income, we sold emerging market debt and added to our U.S. bond portfolio through additional exposure to high quality corporate bonds.

From a planning perspective, we remain focused on tax loss harvesting, postponing Required Minimum Distributions for those clients who do not need the income from their IRAs, and repositioning the portfolio when appropriate.

Over the weekend, the Wall Street Journal relayed that markets are reacting not just to where the economy is, but also to the range of outcomes for where it could be going. Many factors are driving this recession with two prominent themes being the lockdowns and social distancing, which is in turn driven by the pandemic. The best minds in our country are working around the clock to help us get past this pandemic. The continued fiscal and monetary policy stimulus of epic proportions have pumped trillions of dollars into our economy. Medical experts continue to collaborate to provide a cure.

As of April 16^th, the curve has flattened as the U.S. had fewer new reported cases than it did 12 days prior.

The continued movement in the markets, paired with all the economic headlines you see daily, can leave you searching for facts to try and make sense out of all the information we see and hear. It has been roughly 2 months since the S&P 500 hit an all-time high, and about one month since it hit a low we have not seen since 2017. This made March the most volatile month in U.S. history and the S&P 500’s 34% drop between February 19 and March 23 the fastest decline from a record bull market to a bear market. Thanks to a massive government stimuli package, combined with discussions of upcoming plans to ease some restrictions due to COVID-19, the markets have rallied the last few weeks. The S&P 500 is now just 15% below its pre-pandemic high and the Nasdaq 100 is positive (1.1%), as of Friday, April 17.

Furthermore, earnings season kicked off last week giving a glimpse into how the pandemic affected the financials of key corporations during the first quarter, with many companies even stating their expectations for the remainder of 2020. The markets showed optimism last week for two potential reasons:

1. Talk of steps to begin to reopen the economy.

2. Flattening of the curve of new COVID-19 cases (see above graph).

Volatility has continued this week, with the markets coming down Monday and Tuesday and then rallying back on Wednesday. This shows that uncertainty continues to drive this market. While our views are to stay the course, we will continue to monitor and make necessary updates to your portfolio.

^{Wall Street Journal –}^www.wsj.com

^{The source for any S&P 500 Index (Daily) Data, will be Yahoo Finance (^GSPC). It will be shown assuming historical dividends are reinvested and in U.S. Dollar terms.}

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Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. Kestra IS and Kestra AS are not affiliated with CD Wealth Management.

Taking Advantage of Employer-Sponsored Retirement Plans

Understand your employer-sponsored plan

Before you can take advantage of your employer’s plan, you need to understand how these plans work. Read everything you can about the plan and talk to your employer’s benefits officer. You can also talk to a financial planner, a tax advisor, and other professionals. Recognize the key features that many employer-sponsored plans share:

Your employer automatically deducts your contributions from your paycheck. You may never even miss the money — out of sight, out of mind.
You decide what portion of your salary to contribute, up to the legal limit. And you can usually change your contribution amount on certain dates during the year or as needed.
With 401(k), 403(b), 457(b), SARSEPs, and SIMPLE plans, you contribute to the plan on a pre-tax basis. Your contributions come off the top of your salary before your employer withholds income taxes.
Your 401(k), 403(b), or 457(b) plan may let you make after-tax Roth contributions — there’s no up-front tax benefit but qualified distributions are entirely tax free.
Your employer may match all or part of your contribution up to a certain level. You typically become vested in these employer dollars through years of service with the company.
Your funds grow tax deferred in the plan. You don’t pay taxes on investment earnings until you withdraw your money from the plan.
You’ll pay income taxes (and possibly an early withdrawal penalty) if you withdraw your money from the plan.
You may be able to borrow a portion of your vested balance (up to $50,000) at a reasonable interest rate.
Your creditors cannot reach your plan funds to satisfy your debts.

Contribute as much as possible

The more you can save for retirement, the better your chances of retiring comfortably. If you can, max out your contribution up to the legal limit (or plan limits, if lower). If you need to free up money to do that, try to cut certain expenses.

Why put your retirement dollars in your employer’s plan instead of somewhere else? One reason is that your pre-tax contributions to your employer’s plan lower your taxable income for the year. This means you save money in taxes when you contribute to the plan — a big advantage if you’re in a high tax bracket. For example, if you earn $100,000 a year and contribute $10,000 to a 401(k) plan, you’ll pay income taxes on $90,000 instead of $100,000. (Roth contributions don’t lower your current taxable income but qualified distributions of your contributions and earnings — that is, distributions made after you satisfy a five-year holding period and reach age 59½, become disabled, or die — are tax free.)

Another reason is the power of tax-deferred growth. Your investment earnings compound year after year and aren’t taxable as long as they remain in the plan. Over the long term, this gives you the opportunity to build an impressive sum in your employer’s plan. You should end up with a much larger balance than somebody who invests the same amount in taxable investments at the same rate of return.

For example, say you participate in your employer’s tax-deferred plan (Account A). You also have a taxable investment account (Account B). Each account earns 6% per year. You’re in the 24% tax bracket and contribute $5,000 to each account at the end of every year. After 40 years, the money placed in a taxable account would be worth $567,680. During the same period, the tax-deferred account would grow to $820,238. Even after taxes have been deducted from the tax-deferred account, the investor would still receive $623,381. (Note: This example is for illustrative purposes only and does not represent a specific investment.)

Capture the full employer match

If you can’t max out your 401(k) or other plan, you should at least try to contribute up to the limit your employer will match. Employer contributions are basically free money once you’re vested in them (check with your employer to find out when vesting happens). By capturing the full benefit of your employer’s match, you’ll be surprised how much faster your balance grows. If you don’t take advantage of your employer’s generosity, you could be passing up a significant return on your money.

For example, you earn $30,000 a year and work for an employer that has a matching 401(k) plan. The match is 50 cents on the dollar up to 6% of your salary. Each year, you contribute 6% of your salary ($1,800) to the plan and receive a matching contribution of $900 from your employer.

Evaluate your investment choices carefully

Most employer-sponsored plans give you a selection of mutual funds or other investments to choose from. Make your choices carefully. The right investment mix for your employer’s plan could be one of your keys to a comfortable retirement. That’s because over the long term, varying rates of return can make a big difference in the size of your balance.

Note: Before investing in a mutual fund, carefully consider the investment objectives, risks, charges, and expenses of the fund. This information can be found in the prospectus, which can be obtained from the fund. Read it carefully before investing.

Research the investments available to you. How have they performed over the long term? How much risk will they expose you to? Which ones are best suited for long-term goals like retirement? You may also want to get advice from a financial professional (either your own, or one provided through your plan). He or she can help you pick the right investments based on your personal goals, your attitude toward risk, how long you have until retirement, and other factors. Your financial professional can also help you coordinate your plan investments with your overall investment portfolio.

If you can’t max out your 401(k) or other plan, you should at least try to contribute up to the limit your employer will match.

Know your options when you leave your employer

When you leave your job, your vested balance in your former employer’s retirement plan is yours to keep. You have several options at that point, including:

Taking a lump-sum distribution. Before choosing this option, consider that you’ll pay income taxes and possibly a penalty on the amount you withdraw. Plus, you’re giving up the continued potential of tax-deferred growth.
Leaving your funds in the old plan, growing tax deferred. (Your old plan may not permit this if your balance is less than $5,000, or if you’ve reached the plan’s normal retirement age — typically age 65.) This may be a good idea if you’re happy with the plan’s investments or you need time to decide what to do with your money.
Rolling your funds over to an IRA or a new employer’s plan (if the plan accepts rollovers). This may also be an appropriate move because there will be no income taxes or penalties if you do the rollover properly (your old plan will withhold 20% for income taxes if you receive the funds before rolling them over, and you’ll need to make up this amount out of pocket when investing in the new plan or IRA). Plus, your funds continue to potentially benefit from tax-deferred growth.

Saving for Retirement and a Child’s Education at the Same Time

Know what your financial needs are

The first step is to determine your financial needs for each goal. Answering the following questions can help you get started:

For retirement:

How many years until you retire?
Does your company offer an employer-sponsored retirement plan or a pension plan? Do you participate? If so, what’s your balance? Can you estimate what your balance will be when you retire?
How much do you expect to receive in Social Security benefits? (One way to get an estimate of your future Social Security benefits is to use the benefit calculators available on the Social Security Administration’s website, www.ssa.gov. You can also sign up for a my Social Security account so that you can view your online Social Security Statement. Your statement contains a detailed record of your earnings, as well as estimates of retirement, survivor’s, and disability benefits.)
What standard of living do you hope to have in retirement? For example, do you want to travel extensively, or will you be happy to stay in one place and live more simply?
Do you or your spouse expect to work part-time in retirement?

For college:

How many years until your child starts college?
Will your child attend a public or private college? What’s the expected cost?
Do you have more than one child whom you’ll be saving for?
Does your child have any special academic, athletic, or artistic skills that could lead to a scholarship?
Do you expect your child to qualify for financial aid?

Many on-line calculators are available to help you predict your retirement income needs and your child’s college funding needs.

Though college is certainly an important goal, you should probably focus on your retirement if you have limited funds. With generous corporate pensions mostly a thing of the past, the burden is primarily on you to fund your retirement. But if you wait until your child is in college to start saving, you’ll miss out on years of potential tax-deferred growth and compounding of your money. Remember, your child can always attend college by taking out loans (or maybe even with scholarships), but there’s no such thing as a retirement loan!

Figure out what you can afford to put aside each month

After you know what your financial needs are, the next step is to determine what you can afford to put aside each month. To do so, you’ll need to prepare a detailed family budget that lists all of your income and expenses. Keep in mind, though, that the amount you can afford may change from time to time as your circumstances change. Once you’ve come up with a dollar amount, you’ll need to decide how to divvy up your funds.

If possible, save for your retirement and your child’s college at the same time

Ideally, you’ll want to try to pursue both goals at the same time. The more money you can squirrel away for college bills now, the less money you or your child will need to borrow later. Even if you can allocate only a small amount to your child’s college fund, say $50 or $100 a month, you might be surprised at how much you can accumulate over many years. For example, if you saved $100 every month and earned 8% annually, you’d have $18,415 in your child’s college fund after 10 years. (This example is for illustrative purposes only and does not represent a specific investment. Investment returns will fluctuate and cannot be guaranteed.)

If you’re unsure about how to allocate your funds between retirement and college, a professional financial planner may be able to help. This person can also help you select appropriate investments for each goal. Remember, just because you’re pursuing both goals at the same time doesn’t necessarily mean that the same investments will be suitable. It may be appropriate to treat each goal independently.

Help! I can’t meet both goals

If the numbers say that you can’t afford to educate your child or retire with the lifestyle you expected, you’ll probably have to make some sacrifices. Here are some suggestions:

Defer retirement: The longer you work, the more money you’ll earn and the later you’ll need to dip into your retirement savings.
Work part-time during retirement.
Reduce your standard of living now or in retirement: You might be able to adjust your spending habits now in order to have money later. Or, you may want to consider cutting back in retirement.
Increase your earnings now: You might consider increasing your hours at your current job, finding another job with better pay, taking a second job, or having a previously stay-at-home spouse return to the workforce.
Invest more aggressively: If you have several years until retirement or college, you might be able to earn more money by investing more aggressively (but remember that aggressive investments mean a greater risk of loss). Note that no investment strategy can guarantee success.
Expect your child to contribute more money to college: Despite your best efforts, your child may need to take out student loans or work part-time to earn money for college.
Send your child to a less expensive school: You may have dreamed your child would follow in your footsteps and attend an Ivy League school. However, unless your child is awarded a scholarship, you may need to lower your expectations. Don’t feel guilty — a lesser-known liberal arts college or a state university may provide your child with a similar quality education at a far lower cost.
Think of other creative ways to reduce education costs: Your child could attend a local college and live at home to save on room and board, enroll in an accelerated program to graduate in three years instead for four, take advantage of a cooperative education where paid internships alternate with course work, or defer college for a year or two and work to earn money for college.

If you have several years until retirement or college, you might be able to earn more money by investing more aggressively.

Can retirement accounts be used to save for college?

Yes. Should they be? That depends on your family’s circumstances. Most financial planners discourage paying for college with funds from a retirement account; they also discourage using retirement funds for a child’s college education if doing so will leave you with no funds in your retirement years. However, you can certainly tap your retirement accounts to help pay the college bills if you need to. With IRAs, you can withdraw money penalty free for college expenses, even if you’re under age 59½ (though there may be income tax consequences for the money you withdraw). But with an employer-sponsored retirement plan like a 401(k) or 403(b), you’ll generally pay a 10% penalty on any withdrawals made before you reach age 59½ (age 55 or 50 in some cases), even if the money is used for college expenses. There may be income tax consequences, as well. (Check with your plan administrator to see what withdrawal options are available to you in your employer-sponsored retirement plan.)

What You Should Do If You Gain Sudden Wealth

Evaluate your new financial position

Just how wealthy are you? You’ll want to figure that out before you make any major life decisions. Your first impulse may be to go out and buy things, but that may not be in your best interest. Even if you’re used to handling your own finances, now’s the time to watch your spending habits carefully. Sudden wealth can turn even the most cautious person into an impulse buyer. Of course, you’ll want your current wealth to last, so you’ll need to consider your future needs, not just your current desires.

Remember, there’s no rush. You can put your funds in an accessible interest-bearing account such as a savings account, money market account, or short-term certificate of deposit until you have time to plan and think things through.

Once you’ve taken care of the basics, set aside some money to treat yourself to something you wouldn’t have bought or done before, It’s OK to have fun with some of your new money!

It’s important not to deprive yourself entirely of any enjoyment. You’ll want to build the occasional reward into your budget.

Answering these questions may help you evaluate your short- and long-term needs and goals:

• Do you have outstanding debt that you’d like to pay off?
• Do you need more current income?
• Do you plan to pay for your children’s education?
• Do you need to bolster your retirement savings?
• Are you planning to buy a first or second home?
• Are you considering giving to loved ones or a favorite charity?
• Are there ways to minimize any upcoming income and estate taxes?

Note: Experts are available to help you with all of your planning needs, and guide you through this new experience.

Impact on insurance

It’s sad to say, but being wealthy may make you more vulnerable to lawsuits. Although you may be able to pay for any damage (to yourself or others) that you cause, you may want to re-evaluate your current insurance policies and consider purchasing an umbrella liability policy. If you plan on buying expensive items such as jewelry or artwork, you may need more property/casualty insurance to cover these items in case of loss or theft. Finally, it may be the right time to re-examine your life insurance needs. More life insurance may be necessary to cover your estate tax bill so your beneficiaries receive more of your estate after taxes.

Impact on estate planning

Now that your wealth has increased, it’s time to re-evaluate your estate plan. Estate planning involves conserving your money and putting it to work so that it best fulfills your goals. It also means minimizing your taxes and creating financial security for your family.

Is your will up to date? A will is the document that determines how your worldly possessions will be distributed after your death. You’ll want to make sure that your current will accurately reflects your wishes. If your newfound wealth is significant, you should meet with your attorney as soon as possible. You may want to make a new will and destroy the old one instead of simply making changes by adding a codicil.

Carefully consider whether the beneficiaries of your estate are capable of managing the inheritance on their own. For instance, if you have minor children, you should consider setting up a trust to protect their interests and control the age at which they receive their funds.

It’s probably also a good idea to consult a tax attorney or financial professional to look into the amount of federal estate tax and state death taxes that your estate may have to pay upon your death; if necessary, discuss ways to minimize them.

Giving it all away — or maybe just some of it

Is gift giving part of your overall plan? You may want to give gifts of cash or property to your loved ones or to your favorite charities. It’s a good idea to wait until you’ve come up with a financial plan before giving or lending money to anyone, even family members. If you decide to give or lend any money, put everything in writing. This will protect your rights and avoid hurt feelings down the road. In particular, keep in mind that:

If you forgive a debt owed by a family member, you may owe gift tax on the transaction
You can make individual gifts of up to $15,000 (2020 limit) each calendar year without incurring any gift tax liability ($30,000 for 2020 if you are married, and you and your spouse can split the gift)
If you pay the school directly, you can give an unlimited amount to pay for someone’s education without having to pay gift tax (you can do the same with medical bills)
If you make a gift to charity during your lifetime, you may be able to deduct the amount of the gift on your income tax return, within certain limits, based on your adjusted gross income

Note: Because the tax implications are complex, you should consult a tax professional for more information before making sizable gifts.

Adjusting to Life Financially After a Divorce

Assess your current financial situation

Following a divorce, you’ll need to get a handle on your finances and assess your current financial situation, taking into account the likely loss of your former spouse’s income. In addition, you may now be responsible for paying for expenses that you were once able to share with your former spouse, such as housing, utilities, and car loans. Ultimately, you may come to the realization that you’re no longer able to live the lifestyle you were accustomed to before your divorce.

Establish a budget

A good place to start is to establish a budget that reflects your current monthly income and expenses. In addition to your regular salary and wages, be sure to include other types of income, such as dividends and interest. If you will be receiving alimony and/or child support, you’ll want to include those payments as well.

As for expenses, you’ll want to focus on dividing them into two categories: fixed and discretionary. Fixed expenses include things like housing, food, and transportation. Discretionary expenses include things like entertainment, vacations, etc. Keep in mind that you may need to cut back on some of your discretionary expenses until you adjust to living on less income. However, it’s important not to deprive yourself entirely of any enjoyment. You’ll want to build the occasional reward (for example, yoga class, dinner with friends) into your budget.

If you have debt, try to put a plan in place to pay it off as quickly as possible: Keep track of balances and interest rates Develop a plan to manage payments and avoid late fees Pay off high-interest debt first Take advantage of debt consolidation/refinancing options

Reevaluate/reprioritize your financial goals

Your next step should be to reevaluate your financial goals. While you were married, you may have set certain financial goals with your spouse. Now that you are on your own, these goals may have changed. Start out by making a list of the things that you now would like to achieve. Do you need to put more money towards retirement? Are you interested in going back to school? Would you like to save for a new home?

You’ll want to be sure to reprioritize your financial goals as well. You and your spouse may have planned on buying a vacation home at the beach. After your divorce, however, you may find that other goals may become more important (for example, making sure your cash reserve is adequately funded).

Take control of your debt

While you’re adjusting to your new budget, be sure that you take control of your debt and credit. You should try to avoid the temptation to rely on credit cards to provide extras. And if you do have debt, try to put a plan in place to pay it off as quickly as possible. The following are some tips to help you pay off your debt:

Keep track of balances and interest rates
Develop a plan to manage payments and avoid late fees
Pay off high-interest debt first
Take advantage of debt consolidation/refinancing options

Protect/establish credit

Since divorce can have a negative impact on your credit rating, consider taking steps to try to protect your credit record and/or establish credit in your own name. A positive credit history is important since it will allow you to obtain credit when you need it, and at a lower interest rate. Good credit is even sometimes viewed by employers as a prerequisite for employment.

Review your credit report and check it for any inaccuracies. Are there joint accounts that have been closed or refinanced? Are there any names on the report that need to be changed? You’re entitled to a free copy of your credit report once a year from each of the three major credit reporting agencies. You can go to annualcreditreport.com for more information.

To establish a good track record with creditors, be sure to make your monthly bill payments on time and try to avoid having too many credit inquiries on your report. Such inquiries are made every time you apply for new credit cards.

Review your insurance needs

Typically, insurance coverage for one or both spouses is negotiated as part of a divorce settlement. However, you may have additional insurance needs that go beyond that which you were able to obtain through your divorce settlement.

When it comes to health insurance, make having adequate coverage a priority. Unless your divorce settlement requires your spouse to provide you with health coverage, one option is to obtain temporary health insurance coverage (up to 36 months) through the Consolidated Omnibus Budget Reconciliation Act (COBRA). You can also look into purchasing individual coverage or, if you’re employed, coverage through your employer.

Now that you’re on your own, you’ll also want to make sure that your disability and life insurance coverage matches your current needs. This is especially true if you are reentering the workforce or if you’re the custodial parent of your children.

Finally, make sure that your property insurance coverage is updated. Any applicable property insurance policies may need to be modified or rewritten in order to reflect property ownership changes that may have resulted from your divorce.

Change your beneficiary designations

After a divorce, you’ll want to change the beneficiary designations on any life insurance policies, retirement accounts, and bank or credit union accounts you may have in place. Keep in mind that a divorce settlement may require you to keep a former spouse as a beneficiary on a policy, in which case you cannot change the beneficiary designation.

This is also a good time to make a will or update your existing one to reflect your new status. Make sure that your former spouse isn’t still named as a personal representative, successor trustee, beneficiary, or holder of a power of attorney in any of your estate planning documents.

It’s important not to deprive yourself entirely of any enjoyment. You’ll want to build the occasional reward (for example, yoga class, dinner with friends) into your budget.

Consider tax implications

You’ll also need to consider the tax implications of your divorce. Your sources of income, filing status, and the credits and/or deductions for which you qualify may all be affected.

In addition to your regular salary and wages, you may have new sources of income after your divorce, such as alimony and/or child support. If you are receiving alimony, it will be considered taxable income to you. Child support, on the other hand, will not be considered taxable income.

Your tax filing status will also change. Filing status is determined as of the last day of the tax year (December 31). This means that even if you were divorced on December 31, you would, for tax purposes, be considered divorced for that entire year.

Finally, if you have children, and depending on whether you are the custodial parent, you may be eligible to claim certain credits and deductions. These could include the child tax credit, and the credit for child and dependent care expenses, along with college-related tax credits and deductions.

Consult a financial professional

Although it can certainly be done on your own, you may want to consider consulting a financial professional to assist you in adjusting to your new financial life. In addition to helping you assess your needs, a financial professional can work with you to develop a plan designed to help you address your financial goals, make recommendations about specific products and services, and monitor and adjust your plan as needed.