Advisors, Counselors, and Planners…Oh My!

One of my least favorite tasks as a homeowner is vetting and hiring contractors for a project. Like many others, I start out by asking friends in the area. I feel pretty good when I receive consistent opinions, but when the opinions differ, I reluctantly turn to Google; hoping to find reliable and legitimate information to help with my decision.

Unfortunately, many folks face a similar dilemma when trying to choose the right financial professional. We often receive suggestions from friends and family; however, many financial professionals have specific focus areas or only offer certain services, making the decision very personal. The following will briefly summarize each type of financial professional, and hopefully, help to narrow down your options.

  • Financial Advisors – generally speaking, Financial Advisors are found locally, work at for-profit financial institutions, and are licensed to buy/sell financial products (i.e., stocks, mutual funds, insurance, etc.). Financial advisors can be an option for individuals who prefer a little extra assistance with their finances, and they can be vetted here.
  • Financial Counselors – Financial Counselors often work at universities, non-profit organizations, and/or government agencies. Financial counselors tend to focus on financial education and behavioral changes, empowering the client to make her/his own informed decisions. Accredited Financial Counselors can be found here.
  • Financial Planners – Financial Planners typically bring the highest level of experience and education to the table. They often have experience as a Financial Advisor/Counselor, may still work for a larger financial institution, or an independent firm, and typically offer the most comprehensive list of services. Certified Financial Planners can be found and vetted here.

One final note..…financial professionals can hold dual-certifications, specialize in numerous areas of personal finance, and have varying compensation structures (i.e., commission-based, fee-only, salaried, or charge asset under management [AUM] fees) – adding to the complexity – but many offer free consultations to see if the service they provide is a good fit. Our Extension Financial Educators also offer free, confidential, and unbiased consultations!

Ryan Stuart

Ryan is a Human Sciences Specialist in Family Wellbeing and an Accredited Financial Counselor®. He focuses on educating and empowering all Iowans to independently make positive financial decisions throughout their life course.

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Thinking About Retiring Early? Things to Consider…Part 2

Welcome back for the second part of “Thinking About Retiring Early? Things to Consider”. Last month’s post focused on what happens to your income when retiring prior to the more common retirement ages of 55, 59 ½, 62, etc. This month will focus on how expenses are impacted when you decide to retire before you reach one of the ages mentioned above.

Historically speaking, “average” retirees may need approximately 80% of their pre-retirement income to maintain their current standard of living. The rationale behind this theory is that you will no longer have to pay for things like commuting, work attire, payroll taxes, certain employer-sponsored benefits, etc. While this may seem like a plus, things get a little tricky when you are looking to retire decades earlier than normal. Many retirees already have a difficult time stretching their funds over the course of a 20-year retirement (depending on your anticipated life expectancy) and tacking on another 20 years will only add to the complexity. This is primarily due to the additional estimation required in the retirement planning process, but also because of healthcare.

Managing the cost of healthcare

According to recent statistics from the Centers for Medicare and Medicaid Services, National Health Expenditures grew nearly 10%, or approximately $12,500 per person, in 2020 (partially due to the Covid-19 pandemic), and are projected to grow at an average annual rate of 5.4%, which outpaces inflation in most years. The problem for early retirees is that some of those costs are currently subsidized through their employer and/or the federal government; they will likely lose that subsidy with an early retirement. One option is the Healthcare Marketplace; however, eligibility for subsidies is impacted by income. The Health Insurance Marketplace Subsidy Calculator from the Kaiser Family Foundation can help to estimate your premium costs.

Whether you want to retire early or not, please remember that the decision is very personal, specific to your individual needs, and should not be based upon general guidance or the decisions of others. To learn more about the basics, visit our website at https://www.extension.iastate.edu/humansciences/money.

Ryan Stuart

Ryan is a Human Sciences Specialist in Family Wellbeing and an Accredited Financial Counselor®. He focuses on educating and empowering all Iowans to independently make positive financial decisions throughout their life course.

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Thinking About Retiring Early? Things to Consider…Part 1

This is not a new phenomenon, but the Financial Independence, Retire Early (FIRE) Movement gained quite a bit of momentum over the past few years. As the pandemic raged on, many people started to question their quality of life, workplace satisfaction, and their connection to family, friends, and the outside world in general. For most of us, this was a normal reaction to an extremely stressful situation; however, a handful throughout society decided they had had enough and hit the road for greener pastures.

Depending on which article you read on the internet (there are hundreds!), this may sound like a reality anyone can achieve, but I noticed quite a few details were either left out or not applicable to the general population. In order to cover this topic in full, I decided to break it up into two posts – one focusing on income, and the other focusing on expenses – so if you are thinking about retiring early…read on!

Income…. Where will it come from now?

News flash – your cash flow will be significantly impacted by retiring early. Gone are the days of receiving a regular paycheck from an employer. So, how do people make it work when we think of the typical “early retirement” age as 59 ½ or 62 (for Social Security purposes)?

  1. For starters, it is a little-known fact that there are MANY ways to retire before the age of 59 ½ without being hit with the dreadful 10% tax penalty, but you must qualify for it.
  2. You may read that some FIRE-achievers received severance packages, inheritances, own rental properties, and/or save upwards of 75% of their income (primarily in taxable brokerage accounts).
  3. And most importantly, many continue to work. Unlike their previous career, however, they typically work part-time through the gig/freelance/app economy, and/or their new work finally enables them to follow a passion.

Come back next month for the discussion on expenses (hint: it has a lot to do with the cost of healthcare!).

Ryan Stuart

Ryan is a Human Sciences Specialist in Family Wellbeing and an Accredited Financial Counselor®. He focuses on educating and empowering all Iowans to independently make positive financial decisions throughout their life course.

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Are Annuities Good For Everyone?

After reading through previous blogs to help brainstorm for this week’s post, I found myself reflecting upon personal experiences that led me down the path to becoming a Financial Counselor. One such instance – that admittedly, I did not fully understand for several years after entering this profession – occurred when my father retired ten years ago.

He only had a small sum of money in his company’s 401(k). This was completely fine considering he also had a pension, Social Security, and little to no debt. In this situation, he received more than enough money from his “guaranteed” sources of income – the pension and Social Security – to cover his necessary living expenses and could use his 401(k) as a flexible source of income, if needed. This is ultimately what my mom did last year when she retired, but unfortunately, this is not what happened with him…

Like many families, my parents worked with an advisor at a local, for-profit financial institution. They ultimately decided to roll his 401(k) into a Traditional IRA that also included the following:

  • A deferred-annuity contract that allowed him to annuitize (turn the money into a lifetime stream of income) or pay a surrender fee if he later changed his mind – he did.
  • It offered a guaranteed 5.5% rate of return on the base amount of the rollover and a guaranteed death benefit; however, each of these “riders” cost 1.25%, which was deducted annually from his IRA balance.
  • The IRA balance was invested in four different mutual funds, all of which had an expense ratio over 1.0%.

Did he lose money because of this? Technically, no – last decade’s market return was quite impressive; however, those annual fees were costly for a financial product he never used. Am I judging my family, or their advisor’s decision? NO!! I was not a part of the conversation and do not know what factors played into it. My only goal here is to provide education on a very complex, and specific, financial product and how it should fit in to a retirement plan. You can also read this AARP article for a much more detailed summary on annuities.

Ryan Stuart

Ryan is a Human Sciences Specialist in Family Wellbeing and an Accredited Financial Counselor®. He focuses on educating and empowering all Iowans to independently make positive financial decisions throughout their life course.

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Emergency Savings: How Much Do I Need?

Prior to the Covid-19 pandemic, approximately 30-50% of adults in the United States (depending on the study) would struggle when faced with an unexpected or emergency expense. While the percentage of affected adults improved with the arrival of COVID relief programs, recent data shows that the numbers may be trending back down toward pre-pandemic levels. The aggregate data will continue to show these fluctuations over time depending on the macroeconomy, significant policy changes, etc., so a more immediate question for consumers is:  How much do I need in my emergency savings account? $400…$1,000…3-6 months of expenses? The answer is not concrete and completely depends on your own personal situation, but here are some things to consider:

  1. How large is your household? – the necessary living expenses for a single individual will likely look much different than a household of four.
  2. Do you own a home or rent? – homeowners face the risk of repair costs, which increases their need for emergency savings. The recent derechos are a perfect example.
  3. What are your insurance deductibles? – this is an often-overlooked aspect of emergency savings. Auto insurance deductibles tend to be around $250 or $500, while health insurance and homeowner’s insurance deductibles could be in the thousands. A higher deductible provides lower premium costs, but does increase your need for emergency savings.
  4. How stable is your income? – are you self-employed or an independent contractor? Do you work in a high-turnover industry or face occasional government shutdowns? How likely you are to need those savings to make up for lost income should also factor into the amount saved.

This is not meant to be an exhaustive list, but rather a starting point for your emergency savings plan. For the DIY-ers, I encourage you to utilize PowerPay, Utah State University Extension’s free, online, personal finance tool to create your emergency savings plan; otherwise, you can contact your local Iowa State University Extension and Outreach Financial Educator for a free, confidential, 1:1 Financial Consultation!

Ryan Stuart

Ryan is a Human Sciences Specialist in Family Wellbeing and an Accredited Financial Counselor®. He focuses on educating and empowering all Iowans to independently make positive financial decisions throughout their life course.

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Planning for 2022 and Beyond

A new year provides many of us with the opportunity to try something different or reflect upon what we accomplished during the previous year, but it is also a great time to revisit our plans for the future. This could not be more relevant for my family as we have spent the past week mourning the loss of a loved one, while concurrently going through the painstaking process of executing a will, finding proper long-term care for a disabled surviving spouse, and carrying out final wishes for a family spread out all over the country.

And while this certainly is a difficult time, I cannot express how much easier it has been due to the basic estate planning conversations we coincidentally had earlier in 2021. Talking about the end of life’s journey is never fun; however, we were able to take care of a lot over the past few days because of these prior conversations, and with very little legal assistance.

I encourage you to take action soon to ensure that you have made appropriate preparations for your own death, as well as to encourage or assist those you care about to do the same. At the bare minimum, the following documents should be in place for each individual:

  • Advance Medical Directive – this allows a person to decide in advance who will make health care decisions for them if they become incapacitated and are unable to make their own decisions.
  • Durable Power of Attorney – in this document, the writer appoints an individual he/she trusts to make other legal decisions, primarily financial, on their behalf if they become incapacitated.
  • Last Will and Testament – this document provides key information and instructions regarding the distribution of assets, disposition of remains, and other final wishes on behalf of a deceased individual. It also can include instruction on who should be the guardian of any minor children of the individual who has died.
  • Beneficiary Designations – perhaps the simplest part of the estate planning process, setting up beneficiaries for life insurance policies, retirement accounts, etc. allows account owners to predetermine the distribution of those assets after their death, and also to avoid the probate process for those assets.

This is not meant to be an exhaustive list of things that need to be taken care of; however, having the above protections in place ahead of time will save your loved ones a lot of time, money, and stress when the unfortunate time of a loved one’s passing ultimately arrives. You can learn more by visiting the Iowa Legal Aid website, or by attending one of the many Iowa State University Extension and Outreach programs available for Aging and Caregiving. The Iowa Concern Hotline (800-447-1985) has an attorney on staff who can provide information on legal topics as well.

Ryan Stuart

Ryan is a Human Sciences Specialist in Family Wellbeing and an Accredited Financial Counselor®. He focuses on educating and empowering all Iowans to independently make positive financial decisions throughout their life course.

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The App Economy and Your Taxes

Like everything else, the pandemic also shifted how individuals earn income through various “side hustles.” Uber, Lyft, and other commonly used digital services took a temporary break during the shutdowns, while newer app-based options such as Robinhood (investing), Coinbase (cryptocurrency), and FanDuel (sports betting) – just to name a few – gained more and more attention. Much of that attention was focused on the ability to make money without ever leaving your couch; however, one little important detail is often left out – you will likely be responsible to pay taxes on some, or all, of that potential income. If you think you might be in that boat for 2021, then keep reading!

  • Investment and speculation apps have been significantly increasing in popularity, but the tax implications are among the least understood. The taxes are very similar whether you are dabbling in individual stocks, ETFs, or Bitcoin, with the big one being capital gains and losses. Other taxes may be due on investments that produce interest and dividends, or hold collectibles, real estate, and foreign property as the underlying asset. You may receive the proper tax forms if you use a more traditional brokerage company; however, you may be responsible for keeping track of your own cryptocurrency transactions.
  • Gambling and sports betting is not a new phenomenon; however, a recent Iowa law permitted the use of online sports betting apps without the need to visit a casino. This change increased sports betting across the state, but consumers may be unfamiliar with the tax consequences of betting on their favorite teams.

Always be sure to check with a tax professional, or contact your local VITA tax site, if you participate in the App Economy and are unsure about the tax implications!

Reminders: 1) If you have a sizable amount of income for which taxes are not withheld, you are supposed to pay quarterly installments to the IRS, and may face a penalty if you have not submitted enough tax payments throughout the year; and 2) For income earned from independent work, your earnings will be subject to self-employment tax as well as income tax.

Ryan Stuart

Ryan is a Human Sciences Specialist in Family Wellbeing and an Accredited Financial Counselor®. He focuses on educating and empowering all Iowans to independently make positive financial decisions throughout their life course.

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