Are You and Your Partner on the Same Retirement Page?

Contributed by: Matt Trujillo, CFP®

Retirement and Longevity

Many couples don't agree on when, where, or how they'll spend their golden years.

When Fidelity Investments asked couples how much they need to have saved to maintain their current lifestyle in retirement, 52% said they didn't know. Over half the survey respondents – 51% – disagreed on the amount needed to retire, and 48% had differing answers when asked about their planned retirement age.*

In some ways, that's not surprising – many couples disagree on financial and lifestyle matters long before they've stopped working. However, adjustments can become more complicated in retirement when you've generally stopped accumulating wealth and have to focus more on controlling expenses and dealing with unexpected events.

Ultimately, the time to talk about and resolve any differences you have about retirement is well before you need to. Let's look at some key areas where couples need to find common ground.

When and Where

Partners often have different time frames for their retirements, an issue that can be exacerbated if they are significantly older. Sometimes, differing time frames are due to policies or expectations in their respective workplaces; sometimes, it's a matter of how long each one wants – or can physically continue – to work.

The retirement nest egg is also a factor here. If you're planning to downsize or move to a warmer location or nearer your children, that will also affect your timeline. There's no numerical answer (65 as a retirement age just isn't relevant in today's world), and this may be a moving target anyway. But you both need to have a general idea on when each is going to retire.

You also need to agree on where you're going to live because a mistake on this point can be very expensive to fix. If one of you is set on a certain location, try to take a long vacation (or several) there together and discuss how you each feel about living there permanently.

Your Lifestyle in Retirement

Some people see retirement as a time to do very little; others see it as the time to do everything they couldn't do while working. While these are individual choices, they'll affect both of you as well as your joint financial planning. After all, if there's a trip to Europe in your future, there's also a hefty expense in your future.

While you may not be able to (or want to) pin everything down precisely, partners should be in general agreement on how they're going to live in retirement and what that lifestyle will cost. You need to arrive at that expense estimate long before retirement while you still have time to make any changes required to reach that financial target.

Your Current Lifestyle

How much you spend and save now plays a significant role in determining how much you can accumulate and, therefore, how much you can spend in retirement. A key question: What tradeoffs (working longer, saving more, delaying Social Security) are you willing to make now to increase your odds of having the retirement lifestyle you want?

Examining your current lifestyle is also a good starting point for discussing how things might change in retirement. Are there expenses that will go away? Are there new ones that will pop up? If you're planning on working part-time or turning a hobby into a little business, should you begin planning for that now?

Retirement Finances

This is a significant topic, including items such as:

• Monitoring and managing expenses

• How much you can withdraw from your retirement portfolio annually

• What your income sources will be

• How long your money has to last (be sure to add a margin of safety)

• What level of risk you can jointly tolerate

• How much you plan to leave to others or to charity

• How much you're going to set aside for emergencies

• Who's going to manage the money, and what happens if they die first

... and the list goes on. You don't want to spend your retirement years worrying about money, but not planning ahead might ensure that you will. Talk about these subjects now.

Unknowns

"Expect the unexpected" applies all the way along the journey toward retirement, but perhaps even more strongly in our later years. What will your healthcare costs be, and how much will have to come out of your pocket? Will you or your spouse need long-term care, and should you purchase insurance to cover that? What happens if the market suffers a severe downturn right after you retire?

While you obviously can't plan precisely for an unknown, talking about what might happen and how you'd respond will make things easier if the unexpected does occur. Included here is the reality that one of you will likely outlive the other, so your estate planning should be done together, and the day-to-day manager of your finances should be sure that their counterpart can take over when needed.

Communication is vital, especially when it comes to something as important as retirement. Almost all of us will have to make some tradeoffs and adjustments (as we do throughout our relationships), and it's important to remember that the earlier you discuss and negotiate what those are going to be, the better your chances of achieving the satisfying retirement you've both worked so hard to achieve.

*2021 Fidelity Investments Couples & Money Study

Matthew Trujillo, CFP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® A frequent blog contributor on topics related to financial planning and investment, he has more than a decade of industry experience.

Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment advisory services offered through Center for Financial Planning, Inc.® Center for Financial Planning, Inc.® is not a registered broker/dealer and is independent of Raymond James Financial Services.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the author, and not necessarily those of Raymond James.

Does It Make Sense to Pay Off Your Mortgage Early?

Contributed by: Matt Trujillo, CFP®

Owning a home outright is a dream that many Americans share. Having a mortgage can be a huge burden, and paying it off may be the first item on your financial to-do list. But competing with the desire to own your home free and clear is your need to invest for retirement, your child's college education, or some other goal. Putting extra cash toward one of these goals may mean sacrificing another. So how do you choose?

Evaluating the Opportunity Cost

Deciding between prepaying your mortgage and investing your extra cash is challenging because each option has advantages and disadvantages. But you can start by weighing what you'll gain financially by choosing one option against what you'll give up. In economic terms, this is known as evaluating the opportunity cost.

Here's an example. Let's assume you have a $300,000 balance and 20 years remaining on your 30-year mortgage, and you're paying 6.25% interest. If you were to put an extra $400 toward your mortgage each month, you would save approximately $62,000 in interest and pay off your loan almost six years early.

By making extra payments and saving all of that interest, you'll gain a lot of financial ground. But before you opt to prepay your mortgage, you still have to consider what you might be giving up by doing so—the opportunity to potentially profit even more from investing.

To determine if it makes more sense to pay off your mortgage with extra cash on hand or invest the cash, you first need to see the risk-free return rate. The risk-free rate of return is the return you could get on your money if you invested in a savings account at the bank, a CD, or a money market fund, something that has little risk of loss of principle. If that rate is lower than your current mortgage rate, then deploying your cash to pay down that debt makes sense. If the risk-free rate is higher than your mortgage rate, you may want to consider investing your money and paying your planned mortgage payments.  

Keep in mind that the rate of return you'll receive is directly related to the investments you choose. All investing involves risk, including the possible loss of principal, and there can be no assurance that any investment strategy will be successful. Investments with the potential for higher returns may expose you to more risk, so consider this when making your decision.

Other Points to Consider

While evaluating the opportunity cost is important, you'll also need to weigh many other factors. The following questions may help you decide which option is best for you.

• What's your mortgage interest rate? The lower the rate on your mortgage, the greater the potential to receive a better return through investing.

• Does your mortgage have a prepayment penalty? Most mortgages don't, but check before making extra payments.

• How long do you plan to stay in your home? The main benefit of prepaying your mortgage is the amount of interest you save over the long term; if you plan to move soon, there's less value in putting more money toward your mortgage.

• Will you have the discipline to invest your extra cash rather than spend it? If not, you might be better off making extra mortgage payments.

•  Do you have an emergency account to cover unexpected expenses? Making extra mortgage payments now doesn't make sense if you'll be forced to borrow money at a higher interest rate later. And keep in mind that if your financial circumstances change, if you lose your job or suffer a disability, for example, you may have more trouble borrowing against your home equity.

• How comfortable are you with debt? If you worry endlessly about it, give extra consideration to the emotional benefits of paying off your mortgage.

• Are you saddled with high balances on credit cards or personal loans? If so, it's often better to pay off those debts first. The interest rate on consumer debt isn't tax deductible and is often far higher than your mortgage interest rate or the rate of return you're likely to receive on your investments.

• Are you currently paying mortgage insurance? If you are, putting extra toward your mortgage until you've gained at least 20% equity in your home may make sense.

• How will prepaying your mortgage affect your overall tax situation? For example, prepaying your mortgage (thus reducing your mortgage interest) could affect your ability to itemize deductions (this is especially true in the early years of your mortgage when you're likely to be paying more in interest). It's important to note that due to recent tax law changes, specifically the increase in the standard deduction, many individuals aren't itemizing their taxes and are no longer taking advantage of the mortgage interest deduction.

• Have you saved enough for retirement? If you haven't, consider contributing the maximum allowable each year to tax-advantaged retirement accounts before prepaying your mortgage. This is especially important if you are receiving a generous employer match. For example, if you save 6% of your income, an employer match of 50% of what you contribute (i.e., 3% of your income) could potentially add thousands of extra dollars to your retirement account each year. Prepaying your mortgage may not be the savviest financial move if it means forgoing that match or shortchanging your retirement fund.

• How much time do you have before retirement or until your children go to college? The longer your timeframe, the more time you have to potentially grow your money by investing. Alternatively, if paying off your mortgage before reaching a financial goal will make you feel much more secure, factor that into your decision.

The Middle Ground

If you need to invest for an important goal but also want the satisfaction of paying down your mortgage, there's no reason you can't do both. It's as simple as allocating part of your available cash toward one goal and putting the rest toward the other. Even minor adjustments can make a difference. For example, you could potentially shave years off your mortgage by consistently making biweekly, instead of monthly, mortgage payments or by putting any year-end bonuses or tax refunds toward your mortgage principal.

Remember, no matter what you decide now, you can always reprioritize your goals later to keep up with changes in circumstances, market conditions, and interest rates.

Matthew Trujillo, CFP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® A frequent blog contributor on topics related to financial planning and investment, he has more than a decade of industry experience.

Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment advisory services offered through Center for Financial Planning, Inc.® Center for Financial Planning, Inc.® is not a registered broker/dealer and is independent of Raymond James Financial Services.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the author, and not necessarily those of Raymond James.

Advanced Estate Strategies for Surviving Spouses

Contributed by: Matt Trujillo, CFP®

You will need to consider the disposition of your assets at your death and any tax implications. Statistically speaking, women live longer than men. Wives will likely have the last word about the final disposition of all the assets accumulated during marriage. You'll want to consider whether these concepts and strategies apply to your specific circumstances.

Transfer Taxes

When you transfer your property during your lifetime or at your death, your transfers may be subject to federal gift tax, federal estate tax, and federal generation-skipping transfer (GST) tax. (The top estate and gift tax rate is 40%, and the GST tax rate is 40%.) Your transfers may also be subject to state taxes.

Federal Gift Tax

Gifts you make during your lifetime may be subject to federal gift tax. Not all gifts are subject to the tax, however. You can make annual tax-free gifts of up to $17,000 (in 2023) per recipient. Married couples can effectively make annual tax-free gifts of up to $34,000 (in 2023) per recipient. You can also make tax-free gifts for qualifying expenses paid directly to educational or medical services providers. And you can also make deductible transfers to your spouse and charity. Individuals can transfer $12,920,000 free of estate, gift, and GST tax during their lives or at death in 2023.  

Federal Estate Tax

Property you own at death is subject to federal estate tax. As with the gift tax, you can make deductible transfers to your spouse and charity. Again, up to $12,920,000 (in 2023) is protected from taxation.

Portability

The estate of someone who dies in 2011 or later can elect to transfer any unused applicable exclusion amount to their surviving spouse; this is called "portability". The surviving spouse can use this deceased spousal unused exclusion amount (DSUEA) and their own basic exclusion amount for federal gift and estate tax purposes. For example, if someone died in 2011 and the estate elected to transfer $5,000,000 of the unused exclusion to the surviving spouse, the surviving spouse effectively has an applicable exclusion amount of about $17,920,000 ($12,920,000 basic exclusion amount plus $5,000,000 DSUEA) to shelter transfers from federal gift or estate tax in 2023.

Federal Generation-Skipping Transfer (GST) Tax

The federal GST tax generally applies if you transfer property to someone two or more generations younger than you (for example, a grandchild). The GST tax may apply in addition to any gift or estate tax. Similar to the gift tax provisions above, annual exclusions and exclusions for qualifying educational and medical expenses are available for GST tax. You can protect up to $12,920,000 (in 2023) with the GST tax exemption.

Indexing for Inflation

The annual gift tax exclusion, the gift tax and estate tax basic exclusion amount, and the GST tax exemption are all indexed for inflation and may increase in future years.

Income Tax Basis

Generally, if you give property during your life, your basis (generally, what you paid for the property, with certain up or down adjustments) in the property for federal income tax purposes is carried over to the person who receives the gift. So, if you give your $1 million home (purchased for $50,000) to your brother, your $50,000 basis carries over to your brother — if he sells the house immediately, income tax will be due on the resulting gain.

In contrast, if you leave property to your heirs at death, they get a "stepped-up" (or "stepped-down") basis in the property equal to the property's fair market value at the time of your death. So, if the home you purchased for $50,000 is worth $1 million when you die, your heirs get the property with a basis of $1 million. If they sell the home for $1 million, they pay no federal income tax.

Lifetime Giving

Making gifts is a common estate planning strategy that can minimize transfer taxes. One way to do this is to take advantage of the annual gift tax exclusion, which lets you give up to $17,000 (in 2023) to as many individuals as you want, gift tax-free. As noted above, you can take advantage of several gift tax exclusions and deductions. In addition, when you gift property expected to appreciate, you remove the future appreciation from your taxable estate. In some cases, it may be beneficial to make taxable gifts to remove the gift tax from your taxable estate.

Trusts

There are a number of trusts used in estate planning. Here is a quick look at a few of them.

• Revocable trust: You retain the right to change or revoke a revocable trust. A revocable trust can allow you to try out a trust, provide for management of your property in case of your incapacity, and avoid probate at your death.

• Marital trusts: A marital trust is designed to qualify for the marital deduction. Typically, one spouse gives the other spouse an income interest for life, the right to access principal in certain circumstances, and the right to designate who receives the trust property at their death. In a QTIP variation, the spouse who created the trust can retain the right to control who ultimately receives the trust property when the other spouse dies. A marital trust is included in the spouse's gross estate with the income interest for life.

• Credit shelter bypass trust: The first spouse to die creates a trust sheltered by their applicable exclusion amount. The surviving spouse may be given interests in the trust, but the interests are limited enough that the trust is not included in their gross estate.

• Grantor retained annuity trust (GRAT): You have rights to a fixed stream of annuity payments for a number of years, after which the remainder passes to your beneficiaries, such as your children. Your gift of a remainder interest is discounted for gift tax purposes.

• Charitable remainder unitrust (CRUT): You retain a stream of payments for a number of years (or for life), after which the remainder passes to charity. You receive a current charitable deduction for the gift of the remainder interest.

• Charitable lead annuity trust (CLAT): A fixed stream of annuity payments benefits a charity for a number of years, after which the remainder passes to your noncharitable beneficiaries, such as your children. Your gift of a remainder interest is discounted for gift tax purposes.

Life Insurance

Life insurance plays a part in many estate plans. Life insurance may create the estate in a small estate and be the primary financial resource for your surviving family members. Life insurance can also provide liquidity for your estate, for example, by providing the cash to pay final expenses, outstanding debts, and taxes, so that other assets don't have to be liquidated to pay these expenses. Life insurance proceeds can generally be received income tax-free.

Life insurance you own on yourself will generally be included in your gross estate for federal estate tax purposes. However, it is possible to use an irrevocable life insurance trust (ILIT) to keep the life insurance proceeds out of your gross estate.

With an ILIT, you create an irrevocable trust that buys and owns the life insurance policy. You make cash gifts to the trust, which the trust uses to pay the policy premiums. (The trust beneficiaries are offered a limited period to withdraw the cash gifts.) If structured properly, the trust receives the life insurance proceeds when you die, is tax-free, and distributes the funds according to the terms of the trust.

As you can see, this area can get very complicated very quickly, and in many cases, the various approaches have pros and cons. If you are considering employing one of these strategies or want more information on how they work, I encourage you to contact a qualified estate planning attorney for further guidance.

Matthew Trujillo, CFP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® A frequent blog contributor on topics related to financial planning and investment, he has more than a decade of industry experience.

Opinions expressed in the attached article are those of Matt Trujillo, CFP®, and are not necessarily those of Raymond James. Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment advisory services offered through Center for Financial Planning, Inc.® Center for Financial Planning, Inc.® is not a registered broker/dealer and is independent of Raymond James Financial Services.

How to Read Your Credit Report

Contributed by: Matt Trujillo, CFP®

Identifying Information

Credit reports contain a certain amount of personal information. This is called identifying information and, among other things, allows the credit-reporting agency to distinguish between one Robert Smith from California and another Robert Smith from California. Typically, identifying information includes your name, address, Social Security number, previous addresses, employers (past and present), phone number, spouse, and date of birth. This information usually appears at the beginning or end of your report. If any of it is wrong, it should be corrected.

Under the Fair and Accurate Credit Transactions Act of 2003 (FACTA), you can request that the credit bureaus truncate your Social Security number on disclosures they send you, including your credit reports. This step may help prevent identity theft.

Account Information

Account information usually composes the largest part of a credit report. The lender's name, the account number, a description of the account, when it was opened, what the high balance was, what the outstanding balance is, the loan terms, your payment history, and the account's current status are typically included.

Under FACTA, when reporting information furnished by a medical provider, the credit bureaus can only include financial information on your credit report--they are prohibited from disclosing the identity of the medical provider or the nature of the services.

Public Record Information

Credit bureaus collect information from courthouse records and registries. Thus, you may find bankruptcies, tax liens, judgments, and even criminal proceedings listed in your credit file.

Credit Report Inquiries

Whenever someone requests a copy of your credit history, it is recorded as an inquiry in your report. Typically, these appear at the end of the report. They remain on your report for 24 months. These entries allow you to see who has been checking on you and whether unauthorized persons have obtained your credit file.

Occasionally, you will see an inquiry identified as being made pursuant to a prescreening program. Typically, this is a credit card company that has contacted the credit-reporting agency and asked for a list of consumers who meet certain credit criteria. The credit card company has yet to actually see your credit report, but they have received a list of names and addresses from the credit bureau with your name on it. Do not be alarmed. This only means that you will likely receive an offer in the mail for a preapproved credit card. You can ask to be taken off the solicitation list.

Under the Fair Credit Reporting Act (FCRA) and FACTA, you have the right to opt out of prescreen programs and block unwanted solicitations for a period of five years.

Consumer Statement

If you have requested that a consumer statement be included in your credit file, then an abbreviated version of your statement will appear on your report.

What does this information mean?

Each creditor uses its own credit evaluation standards. If you are looking at your credit report now, you may be trying to determine why you just got turned down for the loan you recently applied for. Alternatively, you may intend to apply for a loan and want to see how your credit looks. In either case, you have the report and can read the information, but you probably want to know what it means. You want to see whether you are creditworthy or not.

Each creditor has its own system. Some use credit scoring, and some don't. Some have severe credit standards, whereas others are more flexible. Some even make loans to consumers who have recently filed for bankruptcy. It is difficult to know what any creditor looks for or sees when they look at your credit report. Your credit-reporting agency does not even know. However, there are some general rules of thumb.

A history of late payments and bad debts means you are a high-risk borrower

The three major credit-reporting agencies provide information about payment performance over the last 12 to 24 months. Charge-offs and judgments up to seven years old may appear on your credit report. Generally, this is not good.

If you have a history of late payments and/or bad debts, it means you are a high credit risk. The lender figures that it will have to wait for its money, work hard to get its money, or not get its money at all. Therefore, the lender is unlikely to give you the benefit of the doubt or the loan.

Alternatively, the lender may offer you credit, but at terms less favorable than those offered to most of the consumers it serves.

Under FACTA, if you are extended credit, but because of your credit report, you were offered less favorable terms, you must be notified of that fact.

Too many inquiries mean you are shopping around too much

When you apply for credit, the lender will request a copy of your credit history. The lender's request appears as an inquiry on your report. More inquiries in a short period of time make loan officers nervous. They assume that you are shopping around for one of two reasons:

• You were turned down everywhere you went but kept trying, or

• You are up to something

In the first case, you appear desperate, but the loan officer does not want to take a risk if none of the other banks in town will. In the second case, the loan officer sees someone who is on a credit spree, shopping for all the credit they can get. They may be financing a bad habit, borrowing to pay off another debt, or just foolish about the amount of credit they need. In any case, the loan officer is unlikely to take the risk by giving you a loan.

Under FACTA, the credit bureaus must notify you if too many inquiries are having a negative impact on your credit report.

A brief credit file means you have insufficient experience with credit

You may have good credit but not enough. Suppose you have five local department store charge cards with a credit limit of $500 on each. You have always paid as agreed, but the highest balance you have ever carried on any particular card is $100. You have had no other credit accounts. Now you are applying for a $16,000 loan to buy a car with only $1,000 down, but nothing on your credit report indicates you have the experience or ability to handle a $450 per month car payment for four years. Your lender knows that everyone must start somewhere, but it doesn't want to be at risk if you make mistakes. You need to build up more credit credentials before you are creditworthy enough to take on this kind of debt.

In these situations, the bank may lend you less money for a less expensive car, agree to lend you a lesser amount if you decide to put more money down or make you the loan if someone cosigns the loan with you.

Errors mean that the lender really cannot evaluate your credit history

Errors on your credit report are bad, even if they are not particularly derogatory when viewed in isolation. Loan officers often compare your loan application to your credit report. If inconsistencies exist, they may become suspicious. They may wonder if you are hiding something. Alternatively, they may become skeptical, assuming that if there is one error, there will likely be more. If there are more errors, there is no way to evaluate your application. Rather than take the time to call you up and sort it all out, a typical loan officer may reject the application and avoid the risk. If the errors indicate that you have bad credit, you are in even more of a pickle. If you see them, you should take action to correct the mistakes on your credit report. Contact your financial advisor with any questions - we are always happy to help!

Matthew Trujillo, CFP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® A frequent blog contributor on topics related to financial planning and investment, he has more than a decade of industry experience.

Any opinions are those of Matt Trujillo, CFP® and not necessarily those of Raymond James. Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc.Any opinions are those of Matt Trujillo, CFP® and not necessarily those of Raymond James. Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete the CFP Board’s initial and ongoing certification requirements.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, and it does not constitute a recommendation.

Celebrities That Didn't Have Proper Planning

Contributed by: Matt Trujillo, CFP®

The importance of proper estate planning cannot be overstated, regardless of the size of your estate or your stage of life. Nevertheless, it's surprising how many American adults haven't implemented a plan. You might think that those who are rich and famous would be way ahead of the curve when it comes to planning their estates properly. Yet plenty of celebrities and people of note have passed away with inadequate or nonexistent estate plans.

Michael Jackson

The king of pop died in June 2009 with an estimated $600 million estate. Jackson had prepared an estate plan that included a trust. However, he failed to fund the trust with assets prior to his death — a common misstep when including a trust as part of an estate plan. While a properly created and funded trust generally avoids probate, an unfunded trust almost always requires probate. In this case, Jackson's trust beneficiaries had to make numerous filings with the probate court in order to have the judge transfer assets to the trust. This process added significant costs and delays and opened what should have been a private matter to the public.

Trusts incur upfront costs and often have ongoing administrative fees. The use of trusts involves a complex web of tax rules and regulations. You should consider the counsel of an experienced estate planning professional and your legal and tax professionals before implementing such strategies.

James Gandolfini

When the famous Sopranos actor died in 2013, his estate was worth an estimated $70 million. He had a will, which provided for various members of his family. However, his estate plan didn't include proper tax planning. As a result, the Gandolfini estate ended up paying federal and state estate taxes at a rate of 55%. This situation illustrates that a carefully crafted estate plan addresses more than just the distribution of assets. With proper planning, taxes and other expenses could be reduced if not eliminated altogether.

Source: 2022 Wills and Estate Planning Study, Caring.com

Prince

Prince Rogers Nelson, better known as Prince, died in 2016. He was 57 years old, still making incredible music and entertaining millions of fans worldwide. The first filing in the Probate Court for Carver County, Minnesota, was by a woman claiming to be his sister, asking the court to appoint a special administrator because no will or other testamentary documents were filed. Since Prince died without a will, the distribution of his over $150 million estate was determined by state law. In this case, a Minnesota judge was tasked with culling through hundreds of court filings from prospective heirs, creditors, and other "interested parties." The proceeding was open and available to the public for scrutiny.

Barry White

Barry White, the deep-voiced soulful singer, died in 2003 without a will or estate plan. He died while legally married, although he'd been separated from his second wife for many years and was living with a long-time girlfriend. He had nine children, but because he had not divorced his wife, she inherited everything, leaving nothing for his girlfriend or his children. As a result, a legal battle ensued.

Heath Ledger

Formulating and executing an estate plan is important. It's equally important to review your documents periodically to be sure they're up to date. Not doing so could result in problems like those that befell the estate of actor Heath Ledger. Although Ledger had prepared a will years before his death, several changes in his life transpired after the will was written, not the least of which was his relationship with actress Michelle Williams and the birth of their daughter Matilda Rose. The will left nothing to Michelle or Matilda Rose. Fortunately, Ledger's family later gave all the money to his daughter, but not without some family disharmony.

Florence Griffith Joyner

An updated estate plan works only if the people responsible for carrying out your wishes know where to find these important documents. When Olympic medalist Florence Griffith Joyner died in 1998 at 38, her family couldn't locate her will. This led to a bitter dispute between her husband, Al Joyner, and Flo Jo's mother, who claimed her daughter had promised that she could live in the Joyner home for the rest of her life.

Feel free to contact your team at The Center with any questions about properly planning your estate. We're always happy to help!

Matthew Trujillo, CFP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® A frequent blog contributor on topics related to financial planning and investment, he has more than a decade of industry experience.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the author and not necessarily those of Raymond James. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. Examples used are for illustrative purposes only.

Retiring in a Bear Market Doesn’t Have to be Scary

Contributed by: Matt Trujillo, CFP®

Retiring in a poorly performing stock market can be scary, but here are some things to consider that may take some of the fear away:

• Bear markets come and go. However, while they are occurring, they are almost always uncomfortable for investors.

• Since 1950 there have been ten bear markets (defined as a 20% drop in major U.S. stock market indexes).

• Fortunately, as proven by history, they are also temporary.

• Investors can often weather the storm without changing their investment allocation much at all.

• If you are compelled to make changes, do so incrementally – avoid panic selling and major reallocations if you can. Patience can pay off since there is usually a bull market in the not-too-distant future!

Source: First Trust

It is also important to make sure you meet with your advisor at least once a year to review your circumstances and ensure your cash needs will be met for the next 24 months. You should also always be reviewing your asset allocation to make sure whatever cash needs are on the short-term horizon are set aside in more safe and stable investments. It would help if you also had some growth assets so your principal could keep pace with inflation and maintain purchasing power over time.

Our team at The Center is always here for any questions or concerns you may have. Please reach out to us anytime; we're happy to help!

Matthew Trujillo, CFP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® A frequent blog contributor on topics related to financial planning and investment, he has more than a decade of industry experience.

The information contained in this letter does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Matt Trujillo, CFP®, and not necessarily those of Raymond James. Expression of opinion are as of this date and are subject to change without notice. There is no guarantee that these statement, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Individual investor’s results will vary. Past performance does not guarantee future results. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Rebalancing a non-retirement account could be a taxable event that may increase your tax liability.

Matt Trujillo Captains The Center’s First Corporate Chess Team

Contributed by: Matt Trujillo, CFP®

October 7th marked the first day of the North American Corporate Chess League (NACCL). The league is relatively new, coming into existence in 2019, but has grown quite rapidly and expanded to 35 total teams this year for Season 3. This is the Center for Financial Planning’s first year competing in the league, and I’m pleased to report that we started off with a bang! 

To summarize the format, you play two games every week. The games are played at www.lichess.org and last approximately 30 minutes each. The pairing software for the league takes your chess rating and pairs you against an opponent from another team that is right around the same rating as you are. So, leading up to the games, you have no idea what team you’ll be paired against!

The team currently consists of 9 players of all strengths, with yours truly, Matt Trujillo, as the captain and first board (top-rated player). Week 1 saw us paired up against many different opponents, but a few notable names were Deloitte, Qualcomm, Peloton, AIRBNB, LendingTree.com, and SIG (Season 1 champions). There were some nerves on all sides, but the team still scored some nice wins. We ended the evening with a total score of 5 out of 8 possible wins and tied for 18th out of 35th overall. 

I’m looking forward to the rest of the season. The goal is to climb the leader board and break into the top 10, but the biggest goal is to have some fun and introduce new people to competitive tournament chess!

Matthew Trujillo, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® A frequent blog contributor on topics related to financial planning and investment, he has more than a decade of industry experience.

2 Easy Ways To Determine If Your 401k Is Too Aggressive

Contributed by: Matt Trujillo, CFP®

For the investor who’s unsure of how their retirement plan works…here are two easy ways to measure how aggressive or conservative your 401k is.

1. Determine your stock-to-bond ratio.

Most custodians offer a pie chart with this information. Login to your 401k account to view the percentage of your money that is invested in stocks and how much is in bonds. In general, it’s aggressive to invest 70% or more in stocks. Once you know your level of risk you should understand if you can handle the ups and downs of that risk emotionally, and also how much risk your long-term planning calls for. 

2. Check your balance at the end of each month.

For example, if an investor’s account jumped from $100K to $110K (10% growth in a month) then they probably have invested most of their money in stocks. This will feel great when things are going up, but that investor needs to be prepared to see some significant paper losses when we experience a downturn like what we just saw in March and April.

So, how can an investor strike a good balance? And when should an allocation change from aggressive to conservative?

As you get closer to taking distributions, it’s reasonable to scale back your stock exposure and move money into safe havens like highly rated corporate bonds and treasury bonds. I say “taking distributions” instead of “retirement” because your plan should be based on when distributions begin. Retirement is a type of distribution event, but not necessarily the only one.

However, if a client has most of their income needs satisfied from other sources and has the emotional appetite to handle the swings, I can see them continuing a more aggressive allocation even in retirement (70% or more in stocks). However, if a client is relying heavily on their portfolio then generally a more conservative allocation is recommended (50% or less in stocks).

Matthew Trujillo, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® A frequent blog contributor on topics related to financial planning and investment, he has more than a decade of industry experience.

---

401(k) plans are long-term retirement savings vehicles. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

Tax Reform Series: Changes to Standard Deduction, Personal Exemption, Misc. Deductions, and the Child Credit

Contributed by: Matt Trujillo, CFP®

The Tax Cuts and Jobs Act (TCJA) is now officially law. We at The Center have written a series of blogs addressing some of the most notable changes resulting from this new legislation. Our goal is to be a resource to help you understand these changes and interpret how they may affect your own financial and tax planning efforts.

Key Highlights:

• Personal exemptions, which were previously used to reduce adjusted gross income, have been eliminated entirely

• The standard deduction has been increased to $12,000 for single filers (previously $6,350) and $24,000 for joint filers (previously $12,700)

• Several deductions that used to be available to tax filers that itemized their deductions have been eliminated or reduced such as:

  • The deduction for state and local taxes is now capped at $10,000 as opposed to the unlimited amount that was deductible under previous tax law

  • Lowers the threshold for mortgage interest deductibility; now only the interest on debt up to $750,000 is eligible to be deducted as opposed to $1,000,000 under previous tax law

  • Miscellaneous itemized deductions have been eliminated entirely as a category; these deductions included things like unreimbursed business expenses, tax preparation fees, and investment fees.

• The child tax credit is expanded to $2,000 per child and is refundable meaning even if you have zero tax liability you can still get a check back from the IRS for this credit

  • This credit was previously $1,400 per child and would begin to phase out for joint filers at $110,000 of adjusted gross income; the credit now doesn’t begin to phase out until you reach $400,000 of adjusted gross income (for joint filers)

If you are curious to know more about how the changes may impact your specific situation please contact our office to discuss!

Matthew Trujillo, CFP®, is a Certified Financial Planner™ at Center for Financial Planning, Inc.® Matt currently assists Center planners and clients, and is a contributor to Money Centered.

---

Check out our other Tax Reform articles:

Changes to Federal Income Tax Brackets

Changes to Investments and the Financial Market

Changes to State and Local Tax Deduction

Changes to Mortgage Interest Deduction (including Home Equity Loans and LOC Implications)

Changes to Estate Tax Planning in 2018 and Beyond

Changes to Charitable Giving and Deductions

Changes to Medical Deductions

Changes to Business & Corporate Tax, and Pass-Through Entities

The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. This material is being provided for information purposes only. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.

Investing vs. Paying Off Debt

Contributed by: Matt Trujillo, CFP®

You can use a variety of strategies to pay off debt, many of which can cut not only the amount of time it will take to pay off the debt but also the total interest paid. But like many people, you may be torn between paying off debt and the need to save for retirement. Both are important; both can provide a more secure future. If you're not sure you can afford to tackle both at the same time, which should you choose?

There's no one answer that's right for everyone, but here are some of the factors you should consider when making your decision.

Rate of investment return versus interest rate on debt

Probably the most common way to decide whether to pay off debt or to make investments is to consider whether you could earn a higher after-tax rate of return by investing than the after-tax interest rate you pay on the debt. For example, say you have a credit card with a $10,000 balance on which you pay nondeductible interest of 18%. By getting rid of those interest payments, you're effectively getting an 18% return on your money. That means your money would generally need to earn an after-tax return greater than 18% to make investing a smarter choice than paying off debt. That's a pretty tough challenge even for professional investors.

And bear in mind that investment returns are anything but guaranteed. In general, the higher the rate of return, the greater the risk. If you make investments rather than pay off debt and your investments incur losses, you may still have debts to pay, but you won't have had the benefit of any gains. By contrast, the return that comes from eliminating high-interest-rate debt is a sure thing.

An employer's match may change the equation

If your employer matches a portion of your workplace retirement account contributions, that can make the debt versus savings decision more difficult. Let's say your company matches 50% of your contributions up to 6% of your salary. That means that you're earning a 50% return on that portion of your retirement account contributions.

If surpassing an 18% return from paying off debt is a challenge, getting a 50% return on your money simply through investing is even tougher. The old saying about a bird in the hand being worth two in the bush applies here. Assuming you conform to your plan's requirements and your company meets its plan obligations, you know in advance what your return from the match will be; very few investments can offer the same degree of certainty. That's why many financial experts argue that saving at least enough to get any employer match for your contributions may make more sense than focusing on debt.

And don't forget the tax benefits of contributions to a workplace savings plan. By contributing pretax dollars to your plan account, you're deferring anywhere from 10% to 39.6% in taxes, depending on your federal tax rate. You're able to put money that would ordinarily go toward taxes to work immediately.

Your choice doesn't have to be all or nothing

The decision about whether to save for retirement or pay off debt can sometimes be affected by the type of debt you have. For example, if you itemize deductions, the interest you pay on a mortgage is generally deductible on your federal tax return. Let's say you're paying 6% on your mortgage and 18% on your credit card debt, and your employer matches 50% of your retirement account contributions. You might consider directing some of your available resources to paying off the credit card debt and some toward

your retirement account in order to get the full company match, and continuing to pay the tax-deductible mortgage interest.

There's another good reason to explore ways to address both goals. Time is your best ally when saving for retirement. If you say to yourself, "I'll wait to start saving until my debts are completely paid off," you run the risk that you'll never get to that point, because your good intentions about paying off your debt may falter at some point. Putting off saving also reduces the number of years you have left to save for retirement.

It might also be easier to address both goals if you can cut your interest payments by refinancing that debt. For example, you might be able to consolidate multiple credit card payments by rolling them over to a new credit card or a debt consolidation loan that has a lower interest rate.

Bear in mind that even if you decide to focus on retirement savings, you should make sure that you're able to make at least the monthly minimum payments owed on your debt. Failure to make those minimum payments can result in penalties and increased interest rates; those will only make your debt situation worse.

Other considerations

When deciding whether to pay down debt or to save for retirement, make sure you take into account the following factors:

• Having retirement plan contributions automatically deducted from your paycheck eliminates the temptation to spend that money on things that might make your debt dilemma even worse. If you decide to prioritize paying down debt, make sure you put in place a mechanism that automatically directs money toward the debt--for example, having money deducted automatically from your checking account--so you won't be tempted to skip or reduce payments.

• Do you have an emergency fund or other resources that you can tap in case you lose your job or have a medical emergency? Remember that if your workplace savings plan allows loans, contributing to the plan not only means you're helping to provide for a more secure retirement but also building savings that could potentially be used as a last resort in an emergency. Some employer-sponsored retirement plans also allow hardship withdrawals in certain situations--for example, payments necessary to prevent an eviction from or foreclosure of your principal residence--if you have no other resources to tap. (However, remember that the amount of any hardship withdrawal becomes taxable income, and if you aren't at least age 59½, you also may owe a 10% premature distribution tax on that money.)

• If you do need to borrow from your plan, make sure you compare the cost of using that money with other financing options, such as loans from banks, credit unions, friends, or family. Although interest rates on plan loans may be favorable, the amount you can borrow is limited, and you generally must repay the loan within five years. In addition, some plans require you to repay the loan immediately if you leave your job. Your retirement earnings will also suffer as a result of removing funds from a tax-deferred investment.

• If you focus on retirement savings rather than paying down debt, make sure you're invested so that your return has a chance of exceeding the interest you owe on that debt. While your investments should be appropriate for your risk tolerance, if you invest too conservatively, the rate of return may not be high enough to offset the interest rate you'll continue to pay.

Regardless of your choice, perhaps the most important decision you can make is to take action and get started now. The sooner you decide on a plan for both your debt and your need for retirement savings, the sooner you'll start to make progress toward achieving both goals.

Matthew Trujillo, CFP®, is a Certified Financial Planner™ at Center for Financial Planning, Inc.® Matt currently assists Center planners and clients, and is a contributor to Money Centered.

---

You should discuss any tax or legal matters with the appropriate professional.