October, 2020 | Live a Life By Design

Elections Have Consequences

Posted on October 30, 2020October 30, 2020 by westhartproductions

No, I am not referring to the presidential election. I am concerned about your financial future! You have opportunities, during times of disruption in life, to make decisions that will forever impact your family’s security. I am referring to retirement plan, life insurance and Individual Retirement Account elections.

For example, many of our clients are participants in the Oklahoma Teachers Retirement System (OTRS). When counseling these outstanding educators and administrators about their future, we provide guidance on the appropriate decisions that must be addressed. One of those decisions is to receive a larger current monthly benefit payment or to consider your spouse’s needs should you predecease him or her. It is difficult to make decisions when all of the facts are not known. Our role is to model different scenarios that will help them consider the probabilities of certain acts occurring in the lives of the couple.

Once an election has been filed with the OTRS, you are barred from changing the election for spousal survivor benefits. What a tragedy if your family were subjected to a considerable decrease in financial security at a time when you need it most. This is an important decision that should not be made without consultation of an experienced retirement planning specialist.

Another election is the use of your lifetime assets for immediate cash flow needs. This year has been different for all of us. Congress and the president have given individuals, under the age of 59½, the option of taking funds from their IRA without incurring a premature distribution penalty of 10% of the amount received. Although this relief granted IRA owners is generous, your lifetime retirement assets should be the last resort for purposes of funding an immediate need. For example, you may incur federal and state income taxes on the distribution amount which may be taxed, at a minimum, for a total of 20%. There are many other options where interest rates are lower than this percentage.

One of the most damaging elections one can commit is failing to review beneficiary designations. Let me explain with a story. One of our clients had divorced his long-term spouse and remarried. When experiencing a life change such as marriage, divorce, birth of a child, change of a career, etc., it is important to be aware of the collateral impact of other factors in life. In this instance, our client was asked, on several occasions, to provide us copies of all of his beneficiary designations for his retirement plan, life insurance, bank accounts and other joint tenancy property so that we may confirm their current status.

Citing his understanding of estate law and, now much bravado over his finances, he failed to bring us the beneficiary statements for review. Unfortunately, he suffered a terminal heart attack after a year of marriage to his second wife. While administering his estate, his son, the successor trustee of the decedent’s trust, discovered a shocking document! His father had not changed the beneficiary designation on a substantial life insurance policy. The sadness and desperation in the voice of this man was evident. I recommended he consult with the trust’s attorney but informed him, under federal and Oklahoma law, the beneficiary designation will stand counter to any verbal wishes or intentions of his father.

There is a happy ending to the story. Well, happy for the decedent’s first wife. The assets he attempted to shield from her during the divorce awarded her upon his death. Our newest client was a lady that we had known for many years that just inherited $2,000,000 tax free! Just like a fable in a children’s novel, there are always happy endings. The question is, will you be the one that is happy? See a CERTIFIED FINANCIAL PLANNER™ professional to help you create a happy ending to your future security story.

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The Millennial Perspective: Workplace Woes

Posted on October 23, 2020May 13, 2021 by Ashley Stieb

We all face several issues in the workplace at one point or another, but sometimes it feels like millennials get the shortest end of the stick. Lazy. Know-it-all. Entitled. Inexperienced. Job-hopper. These are some of the stereotypes that you may hear uttered about millennials in the workplace. We cannot say for sure why these are the stereotypes assigned to our generation, but we have certainly grown resilient and can roll with the punches. Some may call out those that use their stereotypes and receive, “well, you’re different than other millennials,” but is that really the case?

No two millennials have the same experience, so I reached out to others in my generation to gain their perspective of this ongoing issue. I had many respond with similar, unsurprising answers including a lack of respect from colleagues and being the person that everyone seeks for technology challenges. The lack of respect can stem from many reasons. The most common reason that I have seen is because of our “young age.” Yes, we are young, but I think that the fact that much of our generation is heading into their forties often gets forgotten. Because of this issue, we find ourselves fighting to prove our worth even though we already hold the job. The lack of respect can also come from this idea that millennials are lazy and entitled. However, in reality, many millennials work one or more jobs just to make ends meet due to lower wages, or worked while in school just to pay for school due to higher tuition than the generations before us, two subjects I have covered in previous articles.

When job searching, many millennials come across as inexperienced and unfit on job applications because they recently joined the workforce or they have changed jobs many times. Although, the bulk of our generation has most likely been in the workforce for at least a decade. Some may even argue that recently graduating from college should be sufficient experience to gain entry considering they have the most up-to-date education in terms of technology, techniques, and possibly laws or regulations. This is where we start to get into the know-it-all and job-hopper stereotypes though. As a young girl, I was taught to believe in myself and work hard for what I deserved. If someone feels that they are being treated unfairly because of their young age, despite their true work ethic, why should they continue working for that company? This is where many millennials see stagnation in current work situations and feel that they are being forced to change jobs to improve their standing. The era of companies being loyal to workers and offering pensions, benefits, and achieving middle class status has largely disappeared. It can be a difficult choice to stay with a company when you barely earn enough money to live. This of course, does not apply to all companies. Occasionally millennials will find themselves working with an employer that pays decently, respects their employees, and provides a good working environment, in other words, they put their employees first. This is type of position is practically a “needle in a haystack” in today’s society. Most hard-working millennials will move around because they know that companies would let them go if needed and it is our own responsibility to do what is best for ourselves, especially in today’s turbulent economy.

Millennials feel that the stigma placed upon us, just because of the years in which we were born, should not hold us back from the same opportunities the generations before us experienced. Stereotypes are rarely true for an entire group of people and should certainly not be something that affects someone’s livelihood. Give your millennial employees and job candidates a chance to show you that they can work just as hard as anyone and can bring real value to your teams. You will be glad you did.

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The One Secret to Retiring Successfully

Posted on October 16, 2020October 16, 2020 by Jimmy J. Williams, CPA/PFS, CFP®

We are asked many questions about the strategies to retirement and enjoyment of life. This article will reveal the secret success criteria that many of our clients have implemented over the past 20 years to change their lives. Let’s think about the word “retirement” for a moment. Too often the word has negative connotations to individuals who are ill prepared for the next phase of life. Others see the word as an opportunity to begin a new hobby, career or volunteer service life. What is your understanding of the word “retirement”?

Most of our challenges in life give us opportunities to exercise our philosophy toward the pending decision. There are many inclinations to a decision and the result you choose may have life-altering consequences. Wouldn’t you want to tip the scales of success in your favor on this type of decision? Of course! If you were to find a method of decision-making that supported greater probabilities of success, you would use that method for all decisions.

Sadly, immediate wisdom is not bestowed on us humans. No, we learn by the old-fashioned method of trial and error. However, if you were to seek out someone to assist in your resolution process that had experience and specialized training in the area of retirement planning, you could attribute that person’s wisdom as your own.

The one secret to retiring successfully is to change your philosophy of life. I know this sounds like an indomitable task, but it does not have to be. For example, there are, at least, two options for every decision in life – positive and negative. You could think like some people that hate to pay income taxes. However, when I frame it in the context of what their income had brought them in terms of life, family, charity and other aspects of their choosing, they quickly see the difference in philosophy I hold toward paying taxes. Am I saying you should throw a party because you pay a significant amount of taxes to the government? Sure, if you want. Hey, this is America! Do what you wish with you own time, talent and treasure.

Your philosophy toward investing for your future requires that you look through the lenses of potential and desire. Do not retire to simply quit working. This philosophy will produce poor long-term results. Instead think of the contributions you could make to your community, church or other civic groups that require your expertise to continue supporting constituents.

We use the term “reFIREment” to describe the next phase of your life. To us this is a new beginning with excitement and vigor. By changing your philosophy toward retirement, you will find yourself changing your investment philosophy. Think about the joys and/or challenges you wish to, or may, experience after your career. If you desire to travel, relocate to another state, start another career – all have funding needs that must be addressed during your work life. By defining your ultimate purpose in life, through a sound philosophy, you will be empowered to fund your retirement in a manner that allows you to accomplish a more rewarding life. Your outlook for the future will be much brighter and more positive when you have a plan that focuses on something other than “not working”.

Seek out help if you are unclear on how to define your future in monetary or philosophical terms that give you the greatest opportunity for success. A retirement specialist can serve many roles for your family. The best resources you will receive from a Certified Financial Planner™ professional are independent, tailored planning and honest feedback on the best approaches to reach your goals. You have far more to contribute to the world. Do not stop giving just because your work life has converted to your beach life. See you on the golf course!

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The Importance of Year-End Tax Planning

Posted on October 9, 2020October 9, 2020 by Jimmy J. Williams, CPA/PFS, CFP®

This is an optimal time to review your potential income tax liability for 2020. Most individual filers under U.S. jurisdiction are calendar-year, cash-basis taxpayers. This means that many of the options to lower your tax liability for 2020 are eliminated simply by the passage of the year. Just like Cinderella in the historic Disney movie of the same name, your world immediately changes for tax filing purposes at the stroke of midnight on December 31 each year.

A few simple strategies you should consider before the end of the year are presented in this article. First, review your withholding on your year-to-date pay stub to determine if adequate amounts have been withheld. This is a simple fix if you need additional withholding before the end of the year. Provide your employer or Human Resource Department a new Form W-4 to reflect your additional or less withholdings. Also, consider that you may experience a refund for federal taxes and owe a balance for state taxes. To mitigate this issue, provide your employer with a Form W-4 specific to each tax agency. This would be accomplished by conspicuously marking one of the Forms W-4 with “Oklahoma Only” or the name of your appropriate state at the bottom of the form below your signature.

Another area of planning that is simple, yet considerably effective, is your deferral to your retirement plan, Health Savings Account or IRC Section 125 “Cafeteria Plan” to lower your current federal and Oklahoma taxable incomes for withholding purposes. Remember, most plans provide a matching component for your employer-retirement account that aids in the growth of your retirement assets without consideration of market activity.

If you are utilizing a cafeteria plan for pre-tax qualified medical expenses, consider making an appointment with your medical providers to determine if you could schedule any procedures before the end of the year to mitigate the need for paying more deductible after the start of a new year. Many families have met, or are close to meeting, their insurance deductible by this time of year. Don’t allow this opportunity to pass if you are needing a medical procedure. Be proactive and seek out your medical providers’ attention to complete the procedure prior to December 31. The keys to success is to complete the procedure and the billing date of the procedure is properly noted in 2020.

Personal strategies such as increasing your tax deductible charitable donations may help you reduce your current year tax liabilities. Review your current level of itemized deductions and see if you can “bunch” your deductions every other year to allow you to itemize when you can exceed the standard deduction. By itemizing your deductions you may save additional state income taxes, depending upon your particular state’s law.

If you are wishing to reduce your estate by making inter vivos gifts to heirs, consider completing the gifts prior to yearend. You can gift each heir or donee $15,000 without the requirement of filing an annual gift tax return (Form 709). This is good news for both the donor and the donee. The donor will reduce their gross estate by the amount of the gift, provided the person lives for three years beyond the date of the gift, and the recipient owes no tax on the receipt of the gift. This is a win/win!

What happens if someone gifts you $1,000,000? Do you owe taxes on the gift? No! Isn’t the U.S. Tax Code a beautiful thing? As a recipient of a gift, of any size, where the intent of the donor was to transfer property or cash to you, without the requirement for reciprocal value or services, you will not owe income tax on the gift. I know what you’re thinking. You may have found a reason to eat Thanksgiving Dinner with your estranged, but rich, Uncle Charlie to discuss this important strategy for lowering his estate. Enjoy the giblet gravy!

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What is Risk?

Posted on October 2, 2020October 2, 2020 by Jimmy J. Williams, CPA/PFS, CFP®

So many people that I meet seek a panacea for their retirement assets. It is one of those facts of life that if anything yields a return, it also inherently contains risk. Let’s explore what risks are applicable in our everyday lives.

Market risk is most common among individuals that meet with us. People will look for a “happy median” and mitigate as much risk as possible while retaining enough risk to allow their investments to earn a targeted rate of annual return. How do you mitigate risk in the market? You have heard this word many times in this column but it is worthy to mention it again – diversification.

The distorted belief of market risk is that it is the overall risk of the market. However, we should look at the various types of risk contained in this general category of risk. For example, market risk can be further defined as currency risk, equity risk or interest rate risk depending on the type of investment you are considering. Should you wish to invest in a security that is issued from a foreign company, you may be subject to potential risks in the difference between the U.S. Dollar and the currency of the domicile country of the target investment. Again, there are measures to mitigate this risk. When we use the term “mitigate” you must understand that it does not mean the risk is eliminated, merely lessened or mollified.

Interest rate risk should be heeded when purchasing debt or bond instruments. Remember, the interest rate of a bond has a direct impact on the value of the holding. For example, bond market prices drop when interest rates rise and vice-versa. The longer the bond term to maturity will also be a consideration when looking at risk exposure.

Equity risk is the presence of risk when you invest in stocks or equity instrument shares and the value of the shares may decrease. This is the most prevalent of risks to investors. Every session the markets are open, and trading is occurring, is a day that equity risk is present.

Concentration risk may be a new term for many people. This type of risk is explained within its name – concentration. Executives of publicly-traded companies are given shares of the company stock for incentives of compensation. Presumably the executives’ efforts to create profit, increase market share, etc. will cause the stock share price to increase which, in turn, will give the executives greater earnings from the ultimate sale of the stock. Risk is inherent in this type of compensation when the executive is ready to retire and their portfolio consists of the employer’s stock for more than half of the total value of their account. Tax ramifications and other considerations should be analyzed to determine the least costly method of diversifying the portfolio to reduce concentration risk.

Liquidity risk is a significant issue when holding shares or bonds that you can’t sell for a profit when you wish to sell. You may be required to sell your positions for a loss to meet a cash flow need of your family.

One of my favorite quotes by Will Rogers, which seems very appropriate in an article on investment risks, is “I’m not so much interested in the return ON my money as I am the return OF my money.” Oklahoma’s Favorite Son was always reliable for a good turn of the word.

The types of risk listed above do not fully explain all risks an individual may encounter. However, with the acceptance of a certain level of risk, mitigating the presence of risk by utilizing diversification and other measures, you may feel more comfortable and confident about your future. One method of determining the current level of risk in your portfolio is to request a complimentary analysis or “stress test” from a Certified Financial Planner™ professional. I recommend that you consider a balance between risk and return not simply the elimination of all risk. By eliminating all risk, you may not achieve your goal of exceeding inflation with your investments. See you on the golf course!