Talking to your Partner about Money

There are not many topics that can create distress in a relationship, quite like money can. Disagreements can arise about how to spend, what to spend it on, what bills are necessities, how to use credit cards, when to use them – there are so many paths for potential conflict. But there are also opportunities to find common ground.

I don’t know that there is ever a “best” method of dividing financial responsibility in a household. In ours, I am the responsible party. I pay bills, manage bank accounts and investing, and prepare financial statements. But I do that because I enjoy all of those things. Together we determine the investments, review major purchases, and review our financial statements. That works for us. Something else may work for you.

The most important part of our financial life is that we talk about it. Sometimes every day, sometimes only quarterly, but we always talk about it. There are no secrets. No good comes from secrets kept in your combined financial life.

If you can’t pay a bill this month, it’s best if you both know that.

If you want to buy something that is priced above your threshold, it’s best if you both agree to that.

If a change in your income is imminent, it’s best if you both are informed.

It’s a simple concept, talk to each other. Making finances part of everyday conversation diminishes the power; it allows both parties to get comfortable with the topic.

To begin to get to that space, here are some recommendations.

Set some goals together. For example, save for the down payment on a new home. Calculate the amount needed, break it down into smaller chunks, celebrate as you reach milestones. You can apply the same concept to any major purchase – car, furniture, camera, boat. Just make sure you are both supporting the purchase, so neither are sabotaging the effort to get there.

Review your monthly bills together. Even if only one of you is responsible for getting them paid, at least both know what the minimum requirements are.

Reviewing that list also helps to identify bills that have outlived their usefulness and can be eliminated.

Review your financial statements quarterly. Include your full balance sheet and any other expenses that were out of the ordinary that quarter. While you’re at it, set some new goals – is there a credit card you want to eliminate by the end of the year?

We include our financial conversation as part of our State of the Union meeting. Each quarter we take time to discuss the State of the Union – our relationship; it’s a specific time to set out everything giving us trouble and celebrate wins. It helps us to remember the good things that happen in our lives too. You can access a worksheet to learn more about that conversation HERE.

Money doesn’t have to be the ultimate stressor; it certainly doesn’t have to be a detractor in a relationship. Embrace that it exists and how you view it personally so your partner can know what framework to work with.

Credit Scores

Each of us has a unique credit score; somewhere between 300 and 850 is a number that affects the price you pay for things. It’s not a government thing; there are three credit bureaus – Experian, TransUnion, and Equifax. They all do similar things; however, each has a more prevalent region depending on where you live. In the west, Experian tends to be the credit bureau of choice for most lenders.

And that’s really the difference, which lenders report to them. The other difference is the algorithm they use to determine the score. That’s the secret. You’ll likely find that if you received your credit score from all three bureaus, they would be in a relatively close range but would never be exactly the same.

As a consumer in the US, you have the right (and responsibility) to review your credit report once a year on all three bureaus. What you’re looking for is accuracy – if everything on them is true, then it’s just a matter of improving your credit score by other methods.

I know many who think I don’t plan on borrowing money; why does my credit score matter? I thought the same way until I saw it in action. Even though I wasn’t borrowing money, I still have to purchase insurance, and insurance companies base your premium, in part, on your credit score. I knew that but hadn’t really thought about it until I was buying insurance for a boat. The quote came in at X + $900, the actual premium was only X – after they ran my credit score. $900 was a significant savings and only based on my credit.

I’m going to use Experian in my discussion; again, know that the other credit bureaus are similar but may not be exact.

Credit scores are based on numbers – you’ll see them referred to as a FICO score. FICO stands for Fair Isaac Corporation, founded in 1956 by Bill Fair and Earl Isaac as a data analytics company focused primarily on measuring consumer credit risk.

800-850 is considered exceptional; 740-799 is Very Good, 670-739 is Good, 580-669 is Fair, 300-579 is Poor.

If you have no consumer debt, you likely have a Poor Credit Score. This seems counter-intuitive but is really just a reflection on not having any tools to measure you by.

The score comes from five sources: Payment History = 35%; Amount of debt = 30%; Length of Credit History = 15%; and Amount of New Credit + Credit Mix = 10% each.

If your credit score is not where you want it to be – here are some ways to help yourself.

• Review your reports for accuracy. Make sure all items on your report do belong to you, and the balances are current. You can refer to your balance sheet from Lesson 3 for help.
• Pay your debt on time – every time. This is worth 35% of your score. Reliably paying on time improves your score more than any other item.
• Use your credit cards, but don’t over-use them. Keep your balances at no more than 30% of your available credit.
• If you don’t have much credit, consider applying for Credit Boost. On Experian, that means you can add your utility payments to your account to show your reliability as a consumer. Only do this if you have exceptional payment history. If your history is sketchy, this will hurt you rather than help you.
• Get better about timely payment of your bills.
• Don’t apply for unnecessary credit. Hard inquiries on your credit often make you look unreliable.

Like most items in our arsenal, this is a tool. It can be used to cut your interest rates or save you money on insurance products. It can help you buy a car or a house, credit scores need constant monitoring. You do not have to pay for that service, although each credit bureau will try to sell you tools for that purpose; just get signed up for the free service, they share enough information to help you without adding another subscription to your already long list.

Insurance

Different stages of our lives require different insurances. I use “require” lightly here, these are always choices, but something to consider depending on your age and assets.

Insurance is used to mitigate risk. If you can handle the risk, either financially or mentally, the choice is always yours.

Health Insurance

There are few choices in health insurance right now. If you are employed, you probably have the best choice – a full-service health plan, one that covers doctor visits, hospitalizations, pharmaceuticals, and more. If you can go this route, you have fewer risks. This is also an option for the self-employed and retired, but it’s an expensive one.

There is also a surge in Christian Health Ministries – CHM’s – these are a co-op that will pay your medical bills under certain circumstances. You have to meet certain criteria to join the co-op, but it provides a level of protection between a full-service plan and being self-insured.

Self-insurance is the riskiest of the options; some would call it uninsured. Self-insurance simply means you are responsible for your own health care needs. That might limit your ability to receive care for specific conditions.

If you are seeking health insurance, I’d recommend an independent broker; they often represent multiple companies.

Auto Insurance

Auto insurance is mandated by the states. While you can assume the risk for the cost of the vehicle itself, you must purchase liability coverage. This insures others on the road. Being caught without liability coverage is not worth the few dollars you’ll save – it could cost you your drivers’ license and everything else you own.

Each state has a minimum insurance amount, but if you hold many other assets, you may want to raise those minimums. There is nothing that prevents someone hurt in an accident from suing you for more than your insurance limits. Other changes you can make to your policy are based on your risk mitigation. If you don’t need towing service, you can eliminate that. If you can afford to replace your car if it’s damaged or stolen, you can eliminate that too. Make your deductible something you can afford, and your premiums will fall in line with what you need. It’s completely acceptable to adjust the recommended coverage to fit your needs.

What about cars that you aren’t driving? Most companies allow you to place a car on hold while it isn’t being driven, there will be a minimum charge for coverage, but it isn’t extensive. I recommend you continue coverage if the car is drivable; this would protect you by providing liability coverage if the car is stolen.

There are so many online brokers, but many communities and companies have independent brokers as well, work with one you are comfortable with.

Homeowner’s Insurance

If you have a mortgage on your property, this will be another required insurance. If you have paid off your mortgage, it’s still a really good idea. Especially with the value of homes these days.

Homeowner’s insurance is tricky, make sure you have the coverage that makes sense to you. You can choose between Replacement Coverage and Market Value coverage. Replacement means whatever it takes to rebuild a home of the same dimensions in the same location. It also generally means you have to rebuild to get paid for the loss. Value coverage means whatever it is worth at the time of the loss is what you get paid, but your policy generally tells you what it is insured for.

With the current run-up of the market and homes jumping $100K in a short time frame, you probably don’t have sufficient coverage at the moment.
If you’ve converted your home to a rental, you will want to convert your Homeowner’s policy as well. Liability and contents coverage change with conversion.

Life Insurance

It seems counterintuitive, but I recommend life insurance only when you have dependents. Once your kids have grown, it’s probably ok to eliminate life insurance. Of course, this is when you are least likely to die, but the consequences of your death are much bigger. Providing adequate support for your spouse and kids is much more important than providing funds that will be handed down to heirs.

The younger you are, the less life insurance costs. There are two types of life insurance, Whole-life and Term. Whole-life is a policy that builds cash value, at today’s interest rates that doesn’t mean much, but it used to be that a whole-life policy purchased and paid for consistently for a few years would take care of itself later through interest earned. Ten or twenty years of premiums would pay for a lifetime of coverage, that’s not quite the case anymore, but it could still be a good investment. Term-life means you have coverage as long as you are paying for it, whether a monthly or annual premium, when you stop paying, it goes away.

Accidental Death and Dismemberment

This coverage provides benefits if you lose a limb or an eye in an accident or are killed in an accident. It’s often offered through credit union membership or as an add-on to another policy. Not a bad investment if you are young and healthy.

AFLAC

Technically this is not insurance. It is aid to help you recover from an accident or illness. The coverage is paid to you, not a provider. It’s often offered through your employer, definitely worth looking at if it’s available. Just know that the policies vary every year, so you never know what they are offering currently; if you have a policy with them that you’ve had for years, it is probably best to hold on to it as converting to a new policy will likely lessen your coverage.

Umbrella Insurance

If your net worth has topped any of the liability coverages you carry, it’s time to consider an umbrella policy. An umbrella policy covers the gap between the standard policy and your net worth. Remember, insurance is risk mitigation. Understand your tolerance for risk.

Other Insurances

There are many other kinds of coverage that might be specific to your needs. I carry boat insurance, event insurance, and commercial insurance that are specific to my lifestyle. I have considered others, like Errors and Omissions, and chosen not to obtain them. I know my risk tolerance well; could it bite me? Of course – I know that too.

If you are NOT self-employed in any manner, read this:

If you are self-employed, you’ve got lots more work to do.

Simple is better.

Money makes the world go round – but maybe not in the way you’re thinking.

For every problem in the world, someone is trying to fix it. Many use the for-profit approach; they start a business and try to sell you the solution. Others are working from a non-profit approach; if the gains received aren’t taxable, more money can be spent solving the problem.

The IRS defines non-profits with tax code 501. The most familiar code number for most of us is a 501(c)(3)

“The generally accepted legal definition of “charitable” includes relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erecting or maintaining public buildings, monuments, or works; lessening the burdens of government; lessening neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; and combating community deterioration and juvenile delinquency.”

But charity and non-profit are not the same. Non-profit means no part of the income can inure for the benefit of the people running it.

Tax code 501(c)(4) refers to social welfare organizations, homeowners associations, and volunteer fire departments, (5) to labor unions, (6) to chambers of commerce.

Contributions to other than a 501(c)(3) are not deductible as a charitable contribution but may be deductible as a business expense. It is important to know the difference.

Contributions to a Go Fund Me account are unlikely to qualify for any kind of deduction.

Now that we know what it all means, what does it actually mean to you?

I recommend having a charitable giving plan established for each year. Know what your contributions are going to be, at least in total, so that you can make a rational decision rather than a heart-based decision as a request is presented.

Whether it is your church, your favorite charity, your niece who sells cookies, or a Go Fund Me for unexpected medical bills for a loved one, having a plan means you should have no guilt saying no and no buyer’s remorse if you say yes. You already know it is within your plan.

Some opportunities to give involve receiving goods or services – only the amount above and beyond the value of the item is deductible for tax purposes. So those Girl Scout cookies you enjoy in the spring unless you never took possession of them because they were being donated, that isn’t a charitable gift. That night out at the fundraiser, if the value of the meal and entertainment is what you paid for Adult Prom, that also isn’t a charitable gift, unless you bought the ticket and then didn’t attend.

From a business standpoint, if you donate an item from your inventory, the only deduction you get is when you value your inventory at the end of the year, and because you gave away an item, its value is less. You don’t also get a write-off for the donation.

Cash giving is the only thing that equals an additional write-off.

One of my pet peeves about charitable giving is the assumption that non-profits should not pay their people well. Working for a charity should not require the executives or employees to be paid less than they would be paid in the public sector. That would only ensure that the best people work for profit-making entities. If we pay great salaries in the charitable sector, we can ensure the best people work there. Putting our thought leaders into charities builds a better world for all. Don’t judge a charity by what their CEO is paid. Judge a charity on the percentage of their income that goes to their programming.

If you are unsure of an organization, check them out on one of the watchdog sites. Charity Navigator, Charity Watch, or Guidestar.

In addition to having an annual plan, consider a charitable giving plan as part of your estate plan as well. Many charities benefit greatly from gifts made when a donor passes.

Giving gifts of stock or art that have appreciated in value is a standard tactic to avoid estate taxes. If you annually make a gift to a specific charity, you may want to set a part of your estate up to continue supporting charities you believe in. The national organizations can usually assist you in the language needed to do that.

If you want to start your own non-profit – there are a number of resources available to you. Consider starting with the IRS Workshops and then follow that up with resources at the National Council of Non-Profits.

Real Estate Investing

Like the old joke goes, “buy land; it’s not like they’re making more of it!”

I’m a firm believer in real estate. Even my most hare-brained investments have eventually paid off. It may not have been in the timeline I had in mind, but it almost always worked out. Knowing that, though, you can save yourself a lot of heartache by sticking to a few rules.

Don’t overdo it. Just because something is worth the investment doesn’t mean it has to be yours. It’s tough to pass up a good deal, but it may be worth settling for something less if it is going to stretch your budget. Properties come on the market constantly; wait for the right time for you.

Don’t fall in love at first sight. You always have to be willing to walk away from a property that isn’t right for you. If it becomes too hard – inspections don’t go well, you have to concede where you don’t want to, bank loans get difficult – walk away. Regroup and start looking again. If it’s not meant to be, there is something better waiting for you.

Buyer beware. While the seller has an obligation to disclose what they know in most states, they may have specifically chosen not to investigate so they don’t know it all – you can’t reveal what you are never aware of. Assume there is something wrong with the property. Assume you will need to make repairs. It’s a given with real estate; even the most recently built homes will present a challenge to you. Stuff breaks; be prepared.

Now for some practical tips – if you are a first-time homebuyer, you might have some questions – here’s a list of the steps to expect. Different parts of the country have other actions or parties completing them – interchange title company for attorney anywhere east of the Mississippi, but in general, this is the standard. I spent 23 years in the real estate industry from the title and escrow side, audited thousands of files; this is second nature to me.  

Some things may be out of order – for example, if you are actively seeking a home, you will want to get pre-approved for a mortgage. If you are paying cash for a property, you may want to move the money around to facilitate the closing. If you are titling the property in a name other than your own, you will want to be sure you have the authoritative documents that grant that right. But, in general, this is how it will happen.

Buying a house is an investment in your future. In almost all cases, the value of a home increases over time. That means you build equity.  

The steps in a typical home purchase look like this:

• Seller lists home with a real estate agent
• Buyer makes an offer to purchase the home through a real estate agent
  • Buyer places earnest money on deposit
• Buyer makes an application with a bank to obtain a mortgage
• Seller accepts offer from buyer
• Bank approves mortgage
• Bank orders appraisal
• Bank orders title insurance from Title Company
• Real estate agents coordinate closing at title company
• At closing
  • Title company prepares all escrow documents
  • Buyer brings in money to close that includes
    • Down payment
    • Insurance
    • Portion of real estate taxes
    • Closing fees
  • Buyer signs closing documents and bank’s mortgage documents
  • Seller signs closing documents
  • Bank sends mortgage money to title company
  • Seller receives payment for price of the house less any costs necessary to close
    • Title insurance
    • Real estate commission
    • Closing fees
    • Prior mortgages and real estate taxes
  • Documents are recorded with the local courthouse showing Buyer as owner, bank as having a first lien on the property for the mortgage
• Seller moves out, buyer moves in.
• Buyer makes monthly payments to the bank (mortgage holder) including principal, interest, 1/12 of taxes, 1/12 of homeowners insurance for next 30 years (or less.)
• If buyer fails to make payments, the bank can foreclose on the property and take it away from the buyer. Buyer would be evicted and lose all payments they had previously made to either the seller or the bank for the house.
• If buyer continues to make payments, the principal of the loan reduces and eventually, no mortgage payment is due.
• At any time, the buyer could re-finance the house to 1) take some equity out of the house or 2) lower their interest rate, time to pay, or payment amount.
• The Buyer can also choose to sell the house, at the sale of the house, the Bank would be paid in full for the mortgage still owing, balance would pay any outstanding taxes then go to the buyer as equity.

All of the above works well for a primary residence. There are lots of other types of real estate to purchase.

Each comes with caveats.  

If purchasing a property to flip – buy in your neighborhood. Make sure you can afford the repairs, and the repairs will add value. 

Keep it close so you’ll keep working on it and can keep an eye on it. Buying out-of-state or out-of-town is not recommended. Flipping is hard work; you’ll be less motivated the further away you are.

If purchasing property to rent – the same rules apply. Keep it close, or plan to hire a property manager to be your eyes. Nothing is more effective when someone’s rent isn’t paid on time than knocking on their door.

If purchasing commercial real estate, know your local economy. I’ve never been so thankful not to be in office space as this year. I can’t imagine what that market will look like over the next five years as people readjust how much space they need.

If purchasing bare land, look at it in all kinds of weather. Does it flood? Is it buildable? Are there deed restrictions? Can you get water and power?

I have a ton of real estate agent friends all across the country who can guide your way. While I have bought real estate at auction, direct from the seller, and many other ways, I still recommend buying through an agent. They’ll have your back.

Right now, there are lots of other ways to invest in real estate, do your homework, and make sure it’s legit. Real Estate Investment Trusts (REITs) have been around for a long time, but there are many new models on the market. Like any investment, if it sounds too good to be true, it probably is.

Cryptocurrency – this is an opinion piece

Let me start with – I’m not a fan.

I know that’s an unpopular opinion, a lot of my friends are making money in cryptocurrency, but I just can’t wrap my head around the concept. That’s not because it’s new, I’ve been studying it for five years.

I understand the concept of blockchain, which is supposed to be the basis for crypto. I even understand the concept of mining. If you don’t – that’s ok – but I believe that cryptocurrency only has value because people value it. Like diamonds or unicorn feathers – it’s rare, so, therefore, must be of value.

In today’s market, cryptocurrency is pure speculation.

There’s money to be made, but the risks are significant too.

In 2018, several people I knew mortgaged their homes to invest in crypto. I listen to people who purchased Dogecoin because everyone on Robinhood was. Anytime you follow the crowd and don’t think for yourself, you aren’t using the Money Tools available to you.

So here’s my recommendation. Stay out of cryptocurrency as an investment.

If you want to put a few dollars there as play money, do it. Liken it to buying lottery tickets or playing the tables in Vegas; it’s gambling, not investment. As a strategy to manage money, there is still too much risk involved.

Here are the risks as I see them:

• Crypto is not regulated.
  I’m not a big fan of government regulation, but anytime we’re talking about money, someone has to be in charge. Not having it regulated allows the swindlers and the conmen to be in control. Recently a pair of brothers in Africa swiped all the coin from an exchange they set up, valued at $3.6 billion. Greed is a powerful thing.
• If you lose your password, or forget it, or get hacked, your cryptowallet is gone. There are no special safeguards like almost every other website, or app we use has to recover a password. Your coin is attached to a wallet that is entirely under your control. Lost, and it’s gone forever. I’m not that good at keeping my life organized enough never to forget something.
• There is no hard asset, there is no business you are investing in like the basis of a stock. Value is at the whim of others around you. I got an email last month from a podcaster who was excited to have set up his own crypto, and I had the opportunity to get paid that way. Again, it’s like unicorn feathers because he thinks it has value; he wants everyone to believe it has value.

I’m not saying it won’t find its way in the market, but today, it’s not for me, and I would ask you to consider it as play money until it’s been better sorted out. You may miss out on an opportunity, but you’ll likely sleep better too.

Investments are one of my favorite topics. It’s where my opportunity junkie gets to shine.

The official definition of investment is the action or process of investing money for profit or material result. That’s a little different from my definition.

An investment is investing money in something that should grow larger if another resource is applied consistently. That other resource may be time or effort, or sometimes, more money.

There is always a risk in investing, so let’s make sure we’ve taken care of our bills, our emergency funds, and our retirement savings before we begin down this path. Like gambling, if you can’t afford to lose it, you shouldn’t play the game.

Investments are opportunities.

Let’s start with the stock market. There are thousands of companies you can invest in, either directly or indirectly. If the company is growing, the price of its stock will likely increase. The problem lies in that we only know what is reported regularly. Unless you are working for the company you invest in, you never really know the inner workings and whether they are growing or shrinking. Fortunately, they are all required to file quarterly reports (10-Q) with the SEC. The key is reading them. When it comes to stocks, I believe in long-term investments. I buy and hold.

There are other ways to buy stocks; lots of people play with day-trading. I like to temper my risks. If you want to play in this arena, do your homework. Hell, do your homework no matter what you are investing in.

With stocks, the place to begin is with an investment firm – you can go it alone or through a Certified Financial Advisor. If you want to DIY this, set up an account with a major brokerage firm, e.g., Charles Schwab, Fidelity, Edward Jones, Robinhood. Then use all of their resources to learn and choose your stocks, bonds, EFTs, or Mutual Funds. Buy small and watch it grow. Again, never invest what you can’t afford to lose.

Don’t try to time the market, just make regular investments. When the market starts to drop, as it did in March 2020 – just hold on. It may appear you are losing money, but it is only a paper loss until you sell the stock and solidify it. If you can wait, you should and let it recover on its own. Back when I advised a 401(k) Plan, that was the number one advice I offered to employees. Don’t panic; it will recover.

The stock market needs time as the resource to do you any good.

Business opportunities are investments too. Often you’ll need time, money, and effort for these to materialize. Buying a business you don’t have the resources for is a sure way to failure. Sometimes it is a small investment, so it may be worth the gamble. Except for our core business, all of our others have been purchased for small monetary amounts, to begin with. Then we have invested time, money, and various amounts of effort to grow them. I love business, so this is my favorite. Finding the unique value proposition of a business and building on that.

There are lots of other opportunities for investments too.

You can invest in other peoples’ business outside of the stock market. Be sure you understand the business and your role in it if you do that. I recommend WeFunder for finding startups that can use some help. They will spell out exactly how you can expect to receive your return on investment.

I will address Real Estate as an investment in a future week but just know, I’m a big fan.

To give you an idea of how diversified your investments can be – here’s a list of things I’ve invested in throughout my lifetime (not all have been monetarily successful – but all were a learning experience.)

Businesses – as a limited partner, as a general partner, as a sole practitioner, as an LLC
Natural Resources – in a grove of trees, in oil and gas stocks
Stock Market – buying individual stocks, buying mutual funds, buying growth stocks, buying EFT’s, buying REITs
Real Estate – Residential real estate for flipping and rentals

Key takeaways:

• Do your research.
• Trust your instincts.
• Do not expect a quick or easy return.
• Everything takes more time than you expect it to.
• Don’t gamble more than you can afford.
• Slow and steady wins the race.

*If I used terminology that you aren’t familiar with, or you need a helping hand in understanding an investment please email me, I will be happy to help you determine pros and cons.

Estate Planning

Estate planning sounds like a topic for someone older, but surprise! It’s for everyone.

Estate planning is more than just determining who gets your stuff when you die: it’s identifying beneficiaries, it’s setting guardianship for minor children, it’s avoiding excess taxes. It’s all of that and more.

Every person should have a will. Period. End of Story.

Wills

Your will is the only way that anyone knows what your intentions are. Without having it in writing, everything is left up to interpretation, and unfortunately, the government in the form of the probate court will make the final decisions – and that could take months, if not years.

A will doesn’t have to be complicated but should include the following – as a minimum –

• Name the executor of your estate – this is the person you trust to handle things as you want them handled. It could be a family member, but it doesn’t have to be. Be sure to ask the person you are naming. Think about how organized they are, whether they have a knack for getting things done, are they trustworthy? Most people are flattered to be asked, but some may decline – that’s ok, pick someone else.
• If you have minor children, name a guardian for your children. Families are funny when people die, be sure you have identified someone, so the kids don’t get put in a home where you disapprove of the parenting skills. Protect them by naming a guardian. Again, it doesn’t have to be a family member, but you do need to ask.
• Identify where your assets go. If you don’t do it, the state will disperse your assets according to state law. It’s not enough to have tags on the assets in your home; put the list down in your will. While it is essential with the small stuff, it’s even more important with the big stuff. Real estate, cars, businesses, cash.  
• Your will is also a great place to identify your assets and liabilities. If you’ve done your balance sheet already, those are easily identifiable. Just remember, your will needs to be updated regularly to account for those items.

A couple things to keep in mind. If you name a beneficiary on a bank account or life insurance policy, that will supersede your will. Keep your beneficiaries consistent, or name your estate as your beneficiary on all documents, that way, your will directs the distributions. If you fail to properly execute your will, it won’t do anyone any good. 

A properly executed will requires two adult witnesses to the signature of the party. Neither witness can be a beneficiary of the will. This matters. Without those signatures, a will can be considered null and void, and everything goes back to just as if you didn’t have a will. Don’t do that to your family. Write your will and get it executed.

Trusts

In addition to a will, you could have a trust. There are many forms of trusts – revocable, irrevocable, etc. They all have the same basic parameters. A trust is a legal entity with a trustee who acts as a fiduciary** to ensure that the trust assets are distributed as established by the trust. 

Assets of your estate are transferred into the name of the trust at execution, and then further assets are titled in the trust as you acquire them.

The advantage of a trust is that it avoids probate. The trustee is already established to follow the instructions of the trust. Two things matter here – that the trustee is someone you trust implicitly. Similar to naming the executor of your will, the trustee has the responsibility of distributing the assets according to your written instructions. Second, that you keep all of your assets in the trust; each time you buy something new, the trust should be the owner, not you personally. 

Trusts are different from state to state, so you should use an attorney within your state to establish your trust.

One of the advantages to a trust that many people like is that because it avoids probate, your finances are not subject to court records. The added privacy is nice.

Taxes

Taxes are often a consideration at the death of a loved one. A final tax return will be required for the deceased, plus estate taxes may be due on a large estate. Currently, your estate would need to own assets in excess of $11,700,000 to be subject to estate taxes. The amount exempt changes annually and is subject to the whims of the federal administrations – always keep an eye on this.

If you fall in that category, quit trying to DIY your estate and hire a good attorney. For the rest of you, you should be fine.

There is good software available to get a will written, it is inexpensive and will walk you through the steps. If you are going with a trust – hire an attorney in your state of residence to assist.

**Fiduciary – a fiduciary is someone entrusted with assets of another.  This is a hot topic to me!  If you are entrusted with assets that belong to someone else, you have a duty to ALWAYS do the right thing with them. Employment taxes withheld from employees are held in trust by you. Down payments made for the purchase of a home or boat or anything else are held in trust. You can not use the funds personally, even just temporarily – they aren’t yours.  Fiduciaries must act for the benefit of the estate or beneficiaries – never for their own benefit!

There is always a lot of conversation about saving money for retirement, but talk about how much you need tends to fall in big sweeping percentages or large numbers that may feel unattainable today. It used to be that $1 million was the cool number, now they’ve increased that – but nobody will say to what.
The other number thrown around is 70% of your current income will be how much you’ll need annually in retirement, but, again, they never really tell us why. And let’s face it, we all live differently now; how do “they” know what we might need.

Let’s talk about our lives and the assumptions made.

Assumption #1: your home is paid for. In your 60’s, the assumption is you invested in your home in your 30’s, so your mortgage should be paid off. That works if you’ve followed a traditional path.

Traditions have been thrown out the window lately. If your 30-year mortgage won’t be paid by the time you reach retirement age, it might be time to refinance to a shorter term (only do this if your interest rate will significantly decrease) or increase the payments you make now.

Mortgages are amortized over a set period of time, if you pay timely and consistently, your mortgage will take as long as you signed up for. If you pre-pay, you can significantly lessen the interest amount paid and the length of term. No modifications are generally needed. Just be sure if you add additional amounts to your mortgage payment that you specify them as principal payments. Mortgage companies set their rules up to assume extra payments go into your escrow account (for taxes and insurance) unless you tell them differently.

Assumption #2: your commute is diminished.

The financial advisors still have most of us working a traditional job where we commute “downtown,” not to our living rooms or shops. With a commute comes auto expenses that are expected to lessen. If you don’t have that kind of commute now, you won’t save money on auto expenses when you quit working.

Assumption #3: the rest of your debt is completely paid for.

This should be the goal. Being burdened with excess debt is a bother now before retirement; imagine what it feels like when the paychecks stop rolling in. We talked about debt and how to get that paid off back in lesson 2A, go back and create a plan if you need to.

Assumption #4: Business expenses will change.

This one kind of goes along with #2 – the assumption is you have clothing needs for your job, lunches out, tolls, parking. All the things that go along with going to an office. If you don’t have these today. These expenses won’t reduce in the future.

All of these assumptions are supposed to add up to 30% of your income. I know when I apply it to my life, it’s hogwash. Nothing changes, I still need 100% of what I’m spending now, not 70%. But that doesn’t mean I can’t still prepare.

It’s time to look at what we spend our money on, not in terms of a budget, but in terms of what do we really need.

Now, if you know me and not all of you do, you know I live in an RV for part of the year and on a boat for the other part. I’ve already assumed “retirement” in terms of my expenses.

• I’ve eliminated a mortgage – or at least the one I still have is tied to rental income, so it is covered by income coming in for that purpose.
• I’ve got no “commute” now; although I do travel extensively, it is all business-related, and as an owner, it will be eliminated when I sell the businesses.
• I’m working on my debt elimination.
• I’ve got no lunch/clothing allowances that will change. I’ve still got to eat, and I’m wearing my activewear/yoga pants for the rest of my life.

Because we don’t live in a traditional home, I don’t have traditional expenses. There’s no cable TV, no landline, no internet service. I’ve got no power bill or heat bill, or trash service. I’ve replaced those with other things. My cell phone bill and fuel bill are higher than most. It’s a trade-off.

Now is the time to think about what you will need in retirement, and what you can do without.

Do you need all those annual subscriptions? Look closely at what you pay for monthly/annually and start to eliminate those you don’t need or aren’t using.

How are you paying for health insurance if you retire before age 65 and your Medicare eligibility?

Have you reviewed the Medicare options to see which parts you will be paying for?

If you have a hobby you intend to pursue after retirement, have you already acquired the tools?

Are there classes you’re going to want to take to pursue your hobbies?

What are your travel plans? Seeing friends and family or worldwide trip? Have you planned for that?

Recently I helped a family member review their expenses – even though they had been retired for a while, we looked at things they were paying for. We were able to find some savings. We eliminated the non-local paper subscription, adjusted the cable bill, added Netflix, and removed an extra cell phone.

If you are using something, keep it. Just be realistic about what you use and what you don’t, and then plan for their payments.

Eliminate your debt as best you can, add income streams. If you have a 2nd home you don’t use all the time, consider adding it to a vacation rental platform and earning a bit. I can help you get set up on Airbnb.

There are a few things to keep in mind as you prepare for retirement. One, your expenses will be more than you think they will. Two, your income will be less than you expect it to be. Third, keep your mind and body active now so you can continue to enjoy them in retirement. And finally, don’t be afraid of retirement – you will never have the money you think you need, because you will never know what that dollar amount actually is.

When I retired from my first career, I did it with the knowledge that I could probably find work in that field if I needed it. I think the same is true of most retirees.