What Women Need Know About Working with Financial Advisors | Tip #3

What Women Need Know About Working with Financial Advisors | Tip #3

I want to acknowledge that all women are wonderfully unique individuals and therefore these tips will not be applicable to all of us equally and may be very helpful to some men and nonbinary individuals. This is written in an effort to support women, not to exclude, generalize, or stereotype any group.

 

I was recently reminded of a troubling statistic: Two-thirds of women do not trust their advisors. Having worked in the financial services industry for nearly two decades, this is unfortunately not surprising to me. But it is troubling, largely because it’s so preventable.

Whether you have a long-standing relationship with an advisor, are just starting to consider working with a financial planner, or are considering making a change, there are some simple tips all women should be aware of to improve this relationship and strengthen their financial futures.

Tip #3 – Know the Difference Between Risk Aware & Risk Averse

Countless studies have shown that women are not necessarily as risk averse as they were once thought to be. As a group, we just tend to be more risk aware than men are. Why does this matter? First of all, I think it’s important to be risk aware. If you aren’t aware of the risk, you can’t possibly make informed decisions. But by not understanding the difference, women sometimes incorrectly identify as conservative investors and then invest inappropriately for their goals and risk tolerance. Since most advisors are well-practiced in helping people identify their risk tolerance, this is an important conversation to have with your advisor. During these conversations, risk-aware people can sometimes focus on temporary monetary loss and lose sight of the other type of risk: not meeting goals. If you complete a simple risk-tolerance questionnaire (there are many versions available online), women may be more likely to answer questions conservatively simply because they are focusing on the potential downside. Here is an example of a common question:

The chart below shows the greatest 1-year loss and the highest 1-year gain on 3 different hypothetical investments of $10,000. Given the potential gain or loss in any 1 year, I would invest my money in …

Source: Vanguard           

A risk-aware, goal-oriented person is much more likely to select A because the question is not in terms they relate to. It focuses on the loss (and gain) in a 1-year period without providing any information about the performance over the period of time aligned with their goal or the probability of the investment helping them to achieve their goal. A risk-averse person is going to want to avoid risk no matter the situation. A risk-aware person needs to know that while the B portfolio might have lost $1,020 in a 1-year period, historically it has earned an average of 6% per year, is diversified and generally recovers from losses within 1–3 years, statistically has an 86% probability of outperforming portfolio A in a 10-year period, and is more likely to help them reach their specific goal.

A risk-aware person needs to be able to weigh the pros and cons so when presented with limited information, they are more likely to opt for the conservative choice. Know this about yourself and ask for more information before making a decision based on limiting risk.

Having a conversation about your risk tolerance, the level of risk needed to meet your goals, and asking for more information is always easier when you follow tip #1—work with an advisor you like. There are many different considerations when hiring an advisor: Are they a fiduciary? Do they practice comprehensive planning? How are they compensated? What is their investment philosophy? They may check off all your other boxes, but if you don’t like them, you are unlikely to get all you need out of the relationship. If you’re looking for an advisor you’re compatible with, consider perusing our advisor bios.

Be sure to read our previous and upcoming blog posts for additional tips to help women get the most out of working with a financial advisor.

How Kids, Teens, and Parents Can Be Financially Smart—Together!

How Kids, Teens, and Parents Can Be Financially Smart—Together!

 

Why is it that when the words “children” and “finances” are mentioned in the same sentence, parents brace themselves like they are about to hear the punchline to a really bad joke? Well, it may be because children and finances are often characterized as two major topics that can cause stress and frustration.

This stress and frustration may be a roadblock, preventing parents from having an open dialogue about finances. Being a financially smart family is so important.

We want to tear down that roadblock and give you a road map to help you, your teens, and even young children develop great financial habits. When every member of your family understands basic finances and sets financial goals together, everyone feels more financially confident and accomplished.

Even doing something simple like money saving DIY activities together teaches them that saving can be fun and satisfying.

An American Psychological Association survey questioned parents on their relationship with their children and finances. The results revealed that only 37% talk often with their family members about the subject of finances.

Why is it that the vast majority of parents don’t talk about finances with their kids? Maybe most don’t know at what age to begin. Maybe they don’t know what to say. Or maybe they think talking about finances as a family isn’t important

Whatever the reason, you may find yourself as a parent in one of these three categories, needing an extra push to establish some basic familial financial habits. For you and all your children, let’s take a look at some ways to help everyone under the same roof get a better handle on the family finances without feeling the need to be an accounting professional.

 

Financial Tips for Young Kids: Show How Far Their Dollars Go

Do you often find yourself with your kids at the store having to say “no” to the many toys and candy bars that they have pulled off the shelf? Maybe you want to reward your kids with a little something, but they don’t always understand why that $40 limited edition Lego set may not be in the budget.

That’s because they are used to you being the gatekeeper of their spending. Instead, teach them how to be the gatekeeper of their own spending by giving them a bit of financial freedom under your supervision.

Financial freedom for an elementary- or middle-school-aged child should be exercised through simple, intentional actions. It can be as simple as giving them a small amount of money with the intention of letting them have the final say in how they spend it.

This simple action encourages thoughtfulness and awareness about the cost of something they want, which helps them feel a sense of financial freedom while still under your supervision.

Example: Say you want to reward your child by giving them $5 to spend at the store however they would like. Point them over to the dollar section or by the checkout, making note of the price tags that are displayed. Weigh the options of getting several small things versus one larger item.

They will feel empowered by the challenge of seeing how far their dollar can stretch. This sort of freedom helps them develop the habit of thoughtful spending, and it keeps Mom and Dad from always having to say, “No!”

Practical Goal: Take your child to a store of their choosing at the end of the week (if they’ve earned it) and give them a set amount of cash to spend however they would like. Help them weigh their options and select something that they are happy about.

 

Financial Tips for Teenagers: Responsibility Comes with Freedom

It’s time to make the pivot from the gatekeeper of all of your teenager’s expenses to a partner in their expenses. Teens are now at that stage of life where they are capable of earning a bit of income, and they need some extra help learning how to manage it.

Whether you and your spouse decide to give them a bit of weekly allowance or encourage a summer job, teens are entering the arena of earnings and need help with spending. It is important to establish basic habits now to help them feel confident in their spending habits in the future.

One of the most valuable skills that can help teens feel more confident with their money is helping them develop financial observational skills. This includes being aware of how much things cost, keeping track of where their money goes, and planning on how to save towards something they want.

This sounds basic, but these observational skills can help them become more thoughtful in their spending. The simple act of slowing down and thinking about how they should use their money will instill confidence and prevent impulsiveness.

Plus, you’ll be able to set financial boundaries with your teens while still giving them freedom to do what they want with their money.

Here is a list of different things you could do to help your teens become more financially observant and responsible.

#1 – Create a Savings Plan for Something Expensive

If your teen has their heart set on buying a more expensive item, brainstorm ways to make it happen. Help them make a savings plan or even suggest splitting the cost with you. Remember, you are their partner; you are there to encourage them, not control them.

#2 – Think of Their Money as a Budget, Not a Limit

Each week, take a few minutes at dinner to ask your teen about what they’ve spent that week. This will help them start thinking of money as a budget, not a limit. Ask them if they were happy with how they spent their money or if they wish they had used their money in a different way. All answers are great for learning.

#3 – Start Off with an Allowance at First

If your teen does not yet have any sort of income, consider giving them an allowance each month—an allowance that is contingent on something that you and your teen decide together. There is a sense of satisfaction that comes from earning money and choosing how to spend it that teens should begin to experience.

Practical Goal: Read these three examples together with your teen. Talk through how these examples can establish good spending habits, then select at least one of the examples to implement in the following week together.

 

Financial Tips for Parents: Take Charge of Your Finances and Give Wisdom

As parents, you and your spouse are in charge of leading financial conversations. Including your children in certain financial decisions can help you and your children be on the same page when it comes to money.

It’s not necessary for them to be aware of all financial decisions between you and your spouse. Kids and teens won’t understand high level concepts yet, but you can help your kids be more conscious of money when they have a say in casual, familial financial decisions.

A familial financial decision could be something like comparison shopping for family car insurance plans, but think of ways to involve the kids in that process that is appropriate for their level.

The first step to create an open dialogue with your children is to help them understand how their financial actions make a difference. When your kids feel like their voices are being heard and taken seriously, they will be more likely to actually want to talk about financial matters.

Just talking about how to spend your Saturday night together, weighing options and assessing price points of different activities, can help them better understand why sometimes the decision to do something is “no” and other times “yes.” Familial financial unity begins with frequent, honest discussions.

Example: Let’s say that you and your family decide to save up for a family vacation. Each member of the family decides how they are going to help contribute to this family goal.

Your youngest one may choose to eat at home instead of getting that after-school Happy Meal. Your teenager may volunteer to babysit the younger kids longer once a week so that a parent can get a few more hours in at their part-time job.

The parents can include a vacation savings allotment in the family budget as a way to slowly work up to the goal. With everyone playing a part in the goal, each family member can feel like they are contributing to the vacation.

Goal: Pick a family activity that appeals to everyone, figure out the estimated cost, then list out ways that everyone would be capable of contributing. Each week, check in on everyone’s progress to see how close you and your family are to that specific goal.

Now call your family together and set your goals in motion!

 

Written exclusively for Merriman.com by Madison Smith 

Madison Smith is a personal and home finance expert at BestCompany.com. She works to help others make positive financial strides in their lives by providing expert insight on anything from credit card debt to home-buying tips.

 

 

 

 

How to Help Your Adult Children Who Are Struggling Financially

How to Help Your Adult Children Who Are Struggling Financially

 

Co-written by: Aimee Butler & Moorea Monaco

 

COVID-19 has impacted jobs across all sectors, and State Unemployment Agencies are reporting an unprecedented backlog of claims. We have been hearing from our clients of a desire to assist their adult children financially. Many of the questions include how and what kind of support to provide and if it makes sense. If you are in this situation, here are some ideas on how to temporarily assist your adult children during a financial emergency.

 

DO

  • Start an emergency cash fund for your child.
    • Make a one-time deposit or smaller, more frequent deposits to a high-yield savings account (like Flourish).
    • Fun idea: Many banks or credit unions offer change deposit programs. They’ll round up your debit card purchases and transfer the extra change to a savings account. Think of it as a “Change Jar.” It adds up quicker than you think!
    • When your child encounters a financial emergency, make one-time distributions or loan them the money. Anything they payback can be put back into the savings account for future needs.
  • Gift them highly appreciated shares of stocks or mutual funds from your Non-Retirement accounts.
    • It could potentially benefit you by helping you avoid the capital gains tax if you sold the shares while they were still in your account.
    • After the shares are gifted to your child, they can choose when to sell the assets, and they will incur any capital gains tax on what is sold. Structuring your giving this way can potentially reduce taxes for the family.
    • Discuss this option with your Merriman Wealth Advisor to make sure it fits into your Financial Plan.
  • Offer small cash loans to cover emergency expenses.
    • Discuss a payment plan that can start once your child’s financial situation improves.
    • If mutually agreed upon, an interest-free loan with a small monthly payment is still more helpful than anything any bank could provide to them.
    • It never hurts to have the agreement in writing and signed by both parties.
  • If you can’t provide an infusion of cash, little gifts can still make a big difference!
    • Give gas or grocery store gift cards when you can.
    • Meal prep large casseroles or frozen meals that can be heated quickly and serve many portions.
    • Offer childcare when you can.
  • Help them review all options in their own financial life.
    • They may be able to take a special distribution from their own IRAs or 401(k)s for hardships due to COVID-19.
    • Introduce them to your Merriman advisor to help guide the review process.

DO NOT

  • Do not co-sign a loan for your child. As much as you want to help them, you could become liable for the loan, and it can negatively impact your credit history.
  • Do not ignore the tax ramifications of using retirement assets such as IRAs or annuities to give cash to your child. These assets can be taxed as ordinary income and have the potential of significantly increasing your income tax liability.
  • Do not stretch your own finances too thin. You need to protect your financial security first. We always recommend discussing large gifts with your Merriman Wealth Advisor, whether they be to charity or a loved one.

 

As parents, it can be extremely difficult to watch our children struggle financially and equally as hard to balance helping and overreaching. When making these types of decisions, we find that an objective third party like our advisors can help you make a decision that works for everyone. We encourage you to reach out if you need guidance with how best to help. We are here for you and your family.

 

New IRS Rollover Relief Update for Required Minimum Distributions (RMD)

New IRS Rollover Relief Update for Required Minimum Distributions (RMD)

What is the new Rollover guidance?

The IRS announced on Tuesday, June 23, 2020, via Notice 2020-51 (PDF), additional relief relating to Required Minimum Distributions (RMD), allowing you to return RMD funds withdrawn after January 1, 2020.

As it sits now, the CARES Act RMD waiver for 2020 is still in place, meaning that you are not required to take an RMD for 2020. This applies to defined-contribution plans such as 401(k) or 403(b) plans and IRA accounts. Those who have previously taken RMDs are likely familiar with the process; but for those who turned 70 ½ in 2019, this all may be brand new, and it’s important to understand the timeframes. This can easily be confused with the SECURE Act which passed toward the end of 2019, changing the RMD age to 72 going forward. Tuesday’s announcement extends relief to anyone who has previously taken an RMD in 2020 by extending the opportunity to return the funds up through August 31st, 2020. In addition, if you return funds under this new announcement, the notice states that the repayment is not subject to the one rollover per 12-month period or the rollover restrictions with inherited IRAs. This is particularly important because the SECURE Act changed the timeframe in which beneficiaries are required to withdraw inherited IRA funds. To find information about the SECURE Act changes, Paige Lee, CFA, wrote a great article which can be found here. There is a lot going on here, and the overall message is that you have more flexibility than ever on how you treat a 2020 RMD.

What was the original relief for RMDs?

The CARES Act (Coronavirus Aid, Relief, and Economic Security Act) was signed into law on March 27th, 2020, providing relief amidst the COVID-19 pandemic for many American taxpayers and businesses. We posted a blog that summarizes these changes which can be found here. In respect to RMDs, the CARES Act originally allowed individuals to forego taking a 2020 RMD and allowed you to return any RMD taken within the previous 60 days. Despite being a fantastic planning opportunity, anyone who took an RMD earlier that the previous 60 days was left out in the cold. Later in April, the IRS issued a follow-up notice that extended the time period to include those who took an RMD between February 1 and May 15 where the funds could be returned by July 15th. This is no longer the case with the most recent announcement, and now anyone who has taken an RMD from January 1st, 2020, can make the decision to return the funds.

How can you take advantage of this?

This offers a tremendous planning opportunity by providing households with the ability to shift income and take advantage of market conditions. Returning an RMD can lead to a host of strategic financial moves including the following:

  • Continued growth of tax-deferred assets
  • Opening room to make Roth IRA conversions
  • A chance to look at taxable accounts to see if it makes sense to withdraw funds at capital gain rates as opposed to marginal tax rates
  • Rebalancing—as the funds are returned, holdings can be adjusted to shore up your overall allocation

We help our clients make the best choices with the information available, and now that this new extension has been issued, we view this as an opportunity to review your circumstances, discuss the various options, and decide on whether or not to take action.

Connect with Merriman to discuss.

Here at Merriman, we are very excited about this announcement and strongly encourage you to contact us if you have already taken an RMD from your IRA or Inherited IRA this year. We’ll help you understand and explore your options and determine if taking advantage of this extended RMD relief makes sense for you.

 

Crafting A Family Legacy Letter

Crafting A Family Legacy Letter

 

As we’re experiencing such a strange and challenging time, many people find themselves wondering what their families did in the past to get through difficult economic times. We may remember little snippets of stories told by our elders or passed on through our family, but often wish we knew more.

As wealth advisors we know firsthand the importance of legacy planning through legal documents and also believe in the value of sharing the essence of who you are for future generations to come. In this document, we provide ideas on how to craft a Family Legacy Letter to share your life story, personal values, beliefs, and advice for future generations.

Now is a great time to pass on your values and share experiences with your heirs.

 

Must-Know Changes for Your Estate Plan After the SECURE Act

Must-Know Changes for Your Estate Plan After the SECURE Act

 

The Setting Every Community Up for Retirement Enhancement (SECURE) Act passed in late 2019, creating significant retirement and tax reforms with the goal of making retirement savings accessible to more Americans. We wrote a blog article detailing the major changes from this piece of legislation.

We’re going to dive deeper into some of the questions we’ve been receiving from our clients to shed more light on topics raised by the new legislation. We have divided these questions into six major themes; charitable giving, estate planning, Roth conversions, taxes, stretching IRA distributions, and trusts as beneficiaries.  Here is our third of six installments on the SECURE Act and how it could impact you.

 

Given the new rules for inherited IRAs, who should be considering changes to their estate plan?

IRA owners will need to evaluate how changes in the SECURE Act impact estate planning and beneficiaries. If you have a small Traditional IRA and plan to leave your assets to several beneficiaries, the accelerated income your beneficiaries will receive from distributing their share of your IRA within 10 years of your passing may not significantly affect their taxes. However, if you have a very large IRA balance or plan to leave your assets to only one or two people, distributions could push your beneficiaries into higher tax brackets. It will be important to evaluate your tax situation and potential taxes to your heirs to determine if it makes sense to accelerate IRA distributions or conversions during your lifetime.

 

Here are some strategies you might consider:

Leave IRAs to multiple beneficiaries: Here, each person receives income from a smaller portion of the account, which reduces the likelihood of pushing them into a higher tax bracket.

Make Roth conversions: IRA owners can evaluate their personal tax situation compared to their beneficiaries. For example, if large inherited IRA distributions would likely push beneficiaries into higher tax brackets like the 32% marginal rate, an account owner might have an opportunity to convert some assets to a Roth IRA now at a lower rate. Current owners may be able to convert at a lower tax rate if they have a more favorable tax situation (e.g. earning less ordinary income) or can spread out conversions. Planning Roth conversions throughout retirement at lower rates can reduce the taxable portion of future inherited IRAs.

Evaluate Trust structures: Many people name a trust as the beneficiary of their IRA, and they need to evaluate their trust structure following the implementation of the SECURE Act to make sure the trust is properly drafted to account for new provisions in the law. Commonly used trust structures like conduit and accumulation trusts, or those with “see-through” provisions, are affected by changes in the new law. Existing conduit trusts could face issues with how RMDs are distributed to beneficiaries, and accumulation trusts may need to include flexibility for discretionary distributions to allow tax-efficient planning. We can help facilitate a review with your estate attorney or recommend one of our trusted professionals to evaluate your plan.

As with all new legislation, we will continue to track the changes as they unfold and notify you of any pertinent developments that may affect your financial plan. If you have further questions, please reach out to us.

 

First Installment: I’m Planning to Leave Assets to Charity – How Does the SECURE Act Change That?

Second Installment: How to Optimize Your Accounts After the SECURE Act

Fourth Installment: How to Circumvent the Demise of the Stretch: Strategies to Provide for Beneficiaries Beyond the 10-year Rule

Fifth Installment: The SECURE ACT: Important Estate Planning Considerations

Sixth Installment: Inheriting an IRA? New Rules to Consider

 

 

Disclosure: The material provided is current as of the date presented, and is for informational purposes only, and does not intend to address the financial objectives, situation, or specific needs of any individual investor. Any information is for illustrative purposes only, and is not intended to serve as personalized tax and/or investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances.  Investors should consult with a financial professional to discuss the appropriateness of the strategies discussed.