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Make your investments great again

Although every day is a new opportunity to begin again, there is something about the start of a fresh season that empowers people to take action. In addition to ushering in 2017, we are also welcoming a new President into the White House to lead our nation.

While rising interest rates are eminent and a 7 year bull stock market run are both cause for concern, the President has made promises that could strengthen our economy, thereby maintaining the stock market run for a bit longer than anticipated.

Throughout this season of change, the key to positioning oneself for the ebb and flow is to diversify and include alternative investments such as non-stock, non-bond assets. While it’s impossible to know what the future will hold, implementing a forward thinking strategy that works towards your individual goals will pay off in dividends.

5 Wealth Building Recommendations

Having been a CFP for 25 years, I am often asked what my top tips are for making smart investments. Here are my top 5 recommendations that everyone should consider when making strategic decisions to their wealth building strategy:

  1. Avoid Self Destructive Investor Behavior. Be an Investor…not a Trader. From 1994 to 2013, the average stock fund returned 8.7% per year while the average stock investor earned only 5%. We call the gap between these results “investor behavior penalty”. Driven by emotions like fear and greed, they succumbed to negative behavior such as: 1) Pouring money into the latest top performing fund or asset class expecting the winning streak to continue 2) Avoiding areas of the market that have performed poorly, assuming recovery will never return 3) Abandoning their investment plan by attempting to successfully time moves in and out of the market, a near impossible feat.
  2. Keep long term goals and objectives in mind while refusing to be swayed by emotions or “Hot Tips”.
  3. Diversify. There is something to the old adage “do not keep all of your eggs in one basket”.
  4. Consider adding Alternative Investments. These would be investments that are not stocks or bonds. Examples are Commodities, Real Estate, Reinsurance, Life Settlements, Managed Futures.
  5. Pay attention to your Bond holdings. Rising interest rates could have negative effect on the value of exiting bonds. There is no time like the present to take inventory of what works, what doesn’t and what can be improved upon.

Friends in their 40s Discussing Building Wealth

Last month, I wrote about the Top Ways to Build Wealth in Your 50s. This month, let’s talk about wealth building in your 40s. Dare I say that in your 40s, you’re hitting your mid-life stride?  40-somethings are kind of walking a tightrope with their wealth – maximizing earnings, minimizing debts, and prioritizing needs and desires.

There’s a lot to think about in your 40s: if you don’t have kids in college, chances are you’re at least thinking about saving for college. Usually, your late 40s into your 50s are your top earning years, so with your higher income, you might be thinking about buying a larger house, traveling, golf club memberships, or luxury cars. It’s easy to get distracted!

So, what’s a 40-something to focus on if you’re serious about building wealth? Here are my top tips:

Save 50% of every raise

In your 40s, you’ll likely have promotions and job opportunities that can lead to significant increase your income. Lifestyle creep is prevalent at this stage of life, and it’s tempting to adjust your lifestyle upward with each bump in income. Proceed with caution!

Instead, a smarter wealth building strategy is to save at least 50% of every raise. That may even seem generous to some, who might save an even larger chunk of their raises. Obviously, if you can save even more, that is even better. But if you’re wanting to travel, or do some fun things you couldn’t afford to do before, committing to only spending 50% of each raise will help you build a larger savings/401k and narrow the gap to retirement.

Create passive income streams

With the extra income you’re generating in your 40s, another wealth building strategy is to create a passive income stream. Passive income streams usually require an initial outlay of cash or investment money and time, but after some work, will bring you consistent income without a lot of effort on your part.

One good example of a passive income stream is a rental property. There are some dividend stocks you can invest in as well that can bring regular payouts. You can also turn a hobby into a business, or become a silent partner in a business. Every person’s path is different, but it’s something to consider in your 40s!

Curb the cost of kids

Did you know the cost of raising a child from birth to age 17 is $491,000 for families earning over $100,000 year? A significant portion of that cost (30%) is estimated to be clothing and “miscellaneous”.  If you’re saying “yes” to all of your kids’ requests, it might be time to start saying “no”. If not for the sake of your wealth building, for the sake of the kids.

For more in-depth info on that, I recommend “The Financially Intelligent Parent” by Eileen and Jon Gallo, who propose an 8 step strategy to raising successful, generous, and responsible children.

Get fit

Surprised by this one? Many people are! Yet, research shows that people who exercise at least three times a week earn 6% to 9% more than those who do not, according to research by Cleveland State University professor Vasilios Kosteas. Initially the correlation may not make sense to you, but diving in, Professor Kosteas cites growing evidence that fit employees are more productive and manage work-related stress better, which can lead to faster career advancement.

Get Life Insurance

This is another one that you might not think about as a wealth building strategy. And honestly, it’s more for your family than you. Buying a life insurance policy helps ensure that all the money you’ve worked hard to save for retirement is used for its intended purpose, should you pass away in the meantime.

For example, if you died without life insurance, your spouse or family members might have to dip into those accounts to pay off debt or assist in burial expenses. Life insurance helps ensure that your family is taken care of, and that they won’t have to spend your retirement money prematurely.

I recommend speaking with an insurance advisor on the type and amount of coverage to invest in. The point is, if you don’t have it, the time is now!

Friends In Their 50s Celebrating Building Wealth

When you reach 50, retirement is starting to seem within reach. But, you still have at least 10 to 15 years of work left, which is a good amount of time to positively impact your burgeoning retirement account. So, in your 50s, consider it a great time to assess where you’re at with your retirement accounts, your lifestyle, and your overall financial situation.

If you review your overall financial situation and find that you’re behind on your goals, or want to ratchet your savings up a notch, here are some great steps to take in your 50s:

Save your bonus check.

When you were younger, you might have spent your bonus on a vacation, a down payment on a new car, or other “wants”. Now, it’s time to sock away that extra money for the future. The same goes for commissions and pay raises. Basically it’s time to keep your income steady and save everything above what your “normal” income is.

Maximize retirement plan contributions.

If you’re not doing it already, now is the time to max out contributions to your retirement plan. Contribute the maximum allowed to your 401(k) as well as any IRAs.

In addition, when you turn 50, you’re allowed to start making catch-up contributions to your retirement plans. Specifically, contribution limits are relaxed a bit, so you can channel an extra $6,000 into your 401(k) and another $1,000 into your IRA. And it’s tax-free!

Don’t take money out of your 401(k).

If your kids are headed off to college, it can be tempting to want to withdraw from your 401(k) to help finance tuition and living expenses. But don’t do it! You’ll pay a hefty penalty, typically a 10% premature distribution penalty in addition to owing taxes on the money you withdraw. You’re much too close to retirement and have worked too hard to put yourself at risk by doing this.

Pay down your debt

Your 50s are typically your highest earning years, which makes it a great time to aggressively pay down your non-mortgage debt. Specifically think car loans, credit cards, and any other miscellaneous debts that are not good to carry into retirement.

Paying off a mortgage may or may not be a good strategy; it really depends on your personal situation. I recommend speaking with your wealth advisor before making a decision like this.

Implement tax-saving strategies

Higher earning years mean higher tax brackets, so this is also a good time to look at tax-saving strategies. Some possible options include:

  • Directing more money into tax-deferred savings vehicles like 401(k)s or traditional IRAs.
  • Consider donating appreciated assets to charities.
  • Discuss tax loss harvesting strategies with your wealth advisor

Happy Family Taking a Beach Selfie in Laguna Beach, CA

Earlier in the year I wrote a blog post with reasons why you should have a trust instead of a will. Now, I’m going to dive a little deeper into the different types of trusts and discuss the reasons why you might want to choose one that you might not be too familiar with.

As you probably know, the basic two types of trusts are living trusts and testamentary trusts. Living trusts are set up during the individual’s lifetime, while a testamentary trust is set up only after an individual’s death, when their will goes into effect.

For the purposes of my post today, we will be discussing the more complicated types of trusts that apply to specific situations. My goal here is to inform you of some different types of trusts that you may not know about, so if you are looking to set up a trust, you can choose the one best suited for your needs and goals.

 

Credit shelter trusts: A credit shelter trust is also sometimes called a bypass or family trust. It’s an irrevocable trust established after the death of a married spouse, to benefit the surviving spouse.

The main purpose of this trust is to limit estate taxes. If you have a multimillion dollar estate, this might be a trust that interests you. Assets specified in the trust agreement are transferred to the individual’s beneficiaries (usually the couple’s children) without estate taxes being levied when the surviving spouse passes away.

A key benefit to a credit shelter trust is that the surviving spouse maintains rights to the trust assets and the income they generate during the remainder of his or her lifetime.

 

Generation-skipping trusts: This type of trust is also called a dynasty trust. It allows you to transfer a substantial amount of money tax-free to beneficiaries who are at least two generations your junior – so this would typically your grandchildren and great-grandchildren.

 

Qualified personal residence trusts: This special type of irrevocable trust is created to remove the value of your primary residence or second home from your taxable estate. It can be particularly useful in situations where the home is likely to appreciate in value.

 

Irrevocable life insurance trusts: This trust is also sometimes referred to as an ILIT or a wealth replacement trust. This trust basically owns your life insurance policies for you, so you personally don’t own the life insurance and it won’t be included in your estate, thereby reducing your estate taxes. The caveat here is if you die within 3 years of the date of transfer to the trust, the trust is considered invalid and the life insurance will be included in your taxable estate.

 

Qualified terminable interest property trusts: You’ll probably hear this trust referred to as a QTIP. It’s particularly useful for individuals who have been divorced, remarried, or have stepchildren or other family members that you want to direct assets to.

Your surviving spouse receives income from the trust, but as an example, your children from a prior marriage will receive the principal or remainder of the trust after your surviving spouse dies.

 

It’s important to note again that these are very specialized types of trusts that do not apply to everyone. You should consult with an estate attorney and your finance and legal team to understand whether one of these trusts is right for your individual situation. As always, feel free to contact me if you have any questions.

 

Young Boy & Girl Collecting Coin in Piggy Bank

Parenting can be a tough job sometimes, but is also the most rewarding job you may ever have. Teaching our kids how to do things is a primary part of parenting. Sometimes, those lessons can be hard. Sometimes, they are a joy!

Regardless of what age your kids are, money is always a tough topic and one that can be difficult for parents, depending on their background and their own financial outlook. Nevertheless, teaching your kids about money is probably one of the most critical things you can do as a parent. Here are my top 6 lessons about money that every parent should be teaching their kids:

 

Money has to be worked for

In a recent study, Marty Rossmann of the University of Mississippi used data collected over 25 years to determine that doing chores instilled in children the importance of contributing to their families and gave them a sense of empathy as adults.

Those who had done chores as young children were more likely to be well-adjusted, have better relationships with friends and family and be more successful in their careers.

Though opinions on tying chores to allowance vary, having your kids work for at least part of their allowance teaches kids even as young as age 3 or 4 that money doesn’t come free. Regardless of what your decision is on giving an allowance based on chore completion, one thing is key: consistency!

 

Let them make their own purchasing decisions (or mistakes)

If you give your kids an allowance, it’s a good idea to set aside a certain amount of money that they can make decisions with about how to spend. As a parent, it’s our job to teach kids how to smartly spend their money, because no one else will. Sometimes this means letting them make mistakes. Or in other words, letting them buy a junky toy that you know will be tossed aside after a few hours of play. Yes, it can be hard to do, but that is a great learning opportunity!

 

Show kids how to spend within their means

Along with giving kids free reign with at least part of their allowance, make them stay within their budget. If they only have $20 to spend on a new video game, and the one they want costs $25, well…looks like they’ll have to save up that extra $5, right?

As parents, it can be extremely tempting to just give them that extra $5. After all, it’s only $5. But learning to spend within their means is one of the most critical lessons you can teach your child to set them up for a successful financial future.

 

Keeping track of their money

Piggy banks are a great financial tool for kids, as are savings accounts. For younger kids, a hands-on tool like piggy banks helps teach kids the value of keeping track of their money.

A great alternative to a piggy bank that I saw recently is using glass jars. Keep a separate glass jar for money that your child can spend, another for the money they are saving, and another for money the child can give – whether that is to a charity, church, or other. This is an easy way for the child to visualize and see how their money is either accumulating or being spent. Plus, it’s an easy way to teach money management and instill the practice of saving and giving.

 

Saving is valuable and brings gratification

Including your children in some of the financial decision making in your home can be a good way for them to learn the value of saving.

For example, say your family would like to take a trip to Disney World or Hawaii. Discuss as a family how much it will cost, and how much you collectively need to save up. Next come up with some ideas on how your kids can participate in the saving – perhaps odd jobs or ways they can earn extra money to put towards the trip. Have them save their part in a clear jar so they can see how the money grows as the trip gets nearer, and consider creating a colorful chart to track the family’s saving.

This teaches even young children the rewards and gratification of saving!

 

The uses, and the dangers, of credit

The basics of credit can be taught at a young age (around age 9 is a good time to start discussing it), but it is extremely important to really make sure your teen understands the proper uses and dangers of credit before they go off to college.

Credit card companies are increasingly marketing to teens at high school and frequently offer credit cards to students on campus at college. If teens are not properly educated about credit, using credit cards irresponsibly during their teenage and college years can really get them started out on the wrong foot financially.

Obviously not all credit is bad, but the average American household carries $15,310 in credit card debt alone. Ensure teen understands by using visual aids that show how interest can dramatically increase what they owe, and when the use of credit (debt) is appropriate.

 

 

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Bart A Zandbergen, CFP® is a Registered Investment Advisor with Optivest, Inc and a Registered Representative with Gramercy Securities, Inc. Investment advisory services are offered by Optivest, Inc. under SEC Registration and securities are offered through Gramercy Securities, Inc., member FINRA & SIPC, 3949 Old Post Road, Charlestown, RI, 02813, 800-333-7450.

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