Whenever I meet another financial advisor, I usually look them up at brokercheck.finra.org to learn about their history and see if they have any disclosures. Disclosures are things like personal bankruptcies, IRS tax liens, customer disputes and payments to settle disputes. The advisors I most respect have clean records with zero disclosures (as do I), but not all advisors do. One well-known guy in Colorado has nine disclosures involving the payment of over $2.5 million to settle customer disputes!
Avoiding bankruptcy and paying income taxes are expected of everyone, certainly of financial professionals acting as fiduciaries. A great question I am asked when providing advice is “What do you and your family do?” This month, I will answer that question for a few different categories and finish this topic next month.
Cashflow Planning is the foundation of rock everything else is built on. Sharon and I sit down on the last Saturday of every month to finalize our upcoming budget, which always begins with the giving and saving categories. We take the previous month’s plan and add any seasonal considerations such as vacations, holidays or major purchases. We use eMoney, which is the same professional-grade cashflow and budgeting tool that we provide to our clients. There are also many good retail cashflow tools available such as Mint, Every- Dollar and Quicken.
It takes three to four months to create the habit of cashflow planning and get the categories dialed in. It took longer for Sharon and I to realize the advantages of consolidating all our discretionary spending into a single “discretionary” category, splitting it 50-50 between us. This keeps the budget simple and eliminates the need for us to agree on all purchases. We discuss all major purchases and are generally flexible with the rest.
Income Protection is critically important for most people, since earned income is the basis for financial security and long-term planning. I bought the maximum amount of personally owned Disability Income (DI) coverage that I qualified for years ago when I was doing some independent contracting and had no group benefits. Since then, there have been periods where I did have group coverage, but I have continued to keep it in force. Sharon bought personally owned, tax-free DI coverage about 10 years ago to augment her group benefits, and we also directed additional payroll deductions to max-out the amount of group coverage available. We are at the point now where it probably makes sense to consider dropping the coverage, but it feels good to know that if one of us gets hurt or sick, we have a source of inflation protected, tax-free income available that will last until age 65.
Life Insurance: We bought term-to-age- 70 life insurance right after Sharon became pregnant with Hannah and bought additional 20-year term policies when her siblings arrived, qualifying for the best rates. Our goal was to each have enough coverage to pay off the mortgage, fund college and provide a few years of monthly income needs. That way, the surviving family would be financially secure and have many options rather than be forced to make hasty lifestyle changes.
The 20-year term expired and we have kept the other term and added some whole life coverage for both of us from a highly rated mutual insurance company. Permanent insurance is not for everyone and I will write a future article to explain why this made sense for us.
Retirement Saving has been a priority since early on when we decided to max-out our 401(k) plan contributions and put this critical accumulation strategy on autopilot. Our goal is to end up with an equal balance of Roth and Traditional IRA dollars to provide a hedge against future tax increases. Roth is an excellent way to pass money on to heirs and avoids RMDs as well. We also created an emergency fund with three months of expenses and a separate escrow account that we use to smooth out seasonal expenses.
College Planning: After our liquidity event in 2000, we took the opportunity to fund long-term goals such as college expenses using 529 plans, and grandparents made contributions over the years. We saved enough for each kid to fund the most expensive in-state education using the 529 plan’s moderate, age based portfolios. For the leftover funds, we plan to invest them aggressively, thinking they could be used for grandchildren someday.
Long-Term Care Planning: We bought traditional LTC insurance 10 years ago. Our coverage currently provides about $10k per month in tax-free benefits for each of us that increases annually by 5 percent. The idea is to both gain leverage and tax efficiencies and remove the financial “tail risk” of a devastating, long LTC event. Those contracts are no longer offered, so if I were buying now, I would get an asset based plan that had a lifetime benefits rider for the same reasons.
Next month, I will share with you the evolution of my thinking when it comes to investments and estate planning including a few words about multi-generational planning.
Can We Help You? Most people who find us have a strong desire to get financially organized and figure out how to optimize their family finances to be prepared for the future. Everyone wants to feel financially ready for life’s transitions, both the planned ones (home ownership, starting a family, college funding, weddings, vacation homes and a dream retirement) as well as the unplanned transitions.
We offer an introductory, two-meeting financial planning process at no charge to allow us to get to know each other and to start to get organized with a plan of action. Go o meetme.so/StewardshipColorado and schedule a virtual or face-to-face meeting to get started on your journey, or give us a call in the office at 303.500.1930.