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2800 W. March Lane, Suite 326
Stockton, CA 95219-8202

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Newsletter

    The Financial Insider

An Economic and Investment Update

 

Assessing Your Retirement Resources

How resourceful can you be during your retirement? Determining where your re­tirement money will come from is an integral part of planning for retirement. Most people draw on three main sources of income: Social Security, employer-sponsored plans, and personal retirement savings. Each offers im­portant resources that can help you fund the lifestyle you seek in retirement.

Social Security

Social Security offers a retirement benefit to workers and their spouses. You can start receiving benefits as early as age 62 (consid­ered early retirement) or wait until you reach the full retirement age of 65 to 67 (depending upon your year of birth). The benefits you receive are based on the income you have earned over the course of your life, subject to a maximum amount. You can calculate how much you can expect to receive by visiting the Social Security Administration (SSA) website at www.ssa.gov.

Social Security benefits will most likely fall short of meeting all of your retirement needs. The maximum benefit for a person who retires in 2019 at full retirement age is $3,770 per month; the benefit for a nonworking spouse is considerably less. For most people, Social Security provides only a base level of income. Therefore, you may require a retirement plan that includes additional sources of income.

Employer-Sponsored Plans

Employer-sponsored plans are a staple of retirement income for many individuals. Many employers offer benefit packages that include retirement savings options, such as defined benefit plans, 401(k) plans, 403(b) plans (for nonprofit organizations), and Savings Incentive Match Plans for Employees (SIMPLEs). Here's how the plans work:

• With a defined benefit plan (also called a traditional pension), retirement benefits are generally based on a variety of factors, including salary, length of service, and a ben­efit formula that averages the employee's earnings over a prescribed period of years. In some instances, you, as an employee, may make additional contributions. To receive benefits, you generally must be employed for a certain number of years and reach the normal retirement age, typically age 65. When you retire, you may have options as to how and when you collect your benefits, such as in monthly payments or in one lump sum.

• A 401(k) plan, offered by many private employers, provides you with the oppor­tunity to contribute part of your salary, with restrictions, into a retirement account. Your employer may match your contribu­tions, up to a predetermined percentage and subject to a maximum. For example, if your employer matches your contributions by 50%, for every dollar you put into the fund, your employer will add $.50. In 2019, you can contribute up to $19,000, and those age 50 and over can contribute an additional $6,000. Your contributions are pretax, and any potential earnings are tax deferred, so payment of taxes will not commence until you begin taking distributions. If you with­draw money from your 401(k) before age 59½, you will incur a 10% Federal income tax penalty, except under certain qualifying circumstances (such as death or disability).

• A 403(b) plan is a 401(k)-type plan designed for employees of certain educational and nonprofit organizations. Your contributions are pretax, and potential earnings grow tax deferred. The contribution limit in 2019 is $19,000, with catch-up contributions of up to $6,000 allowed for those age 50 and older. At retirement, you pay ordinary income tax on your distributions.

• The Roth 401(k), which is available through sponsoring employers, incorporates ele­ments of both traditional 401(k) plans and Roth IRAs, a type of personal retirement savings plan. Your contributions are made with after-tax dollars, but potential earn­ings grow tax free and distributions are tax free, provided you are at least age 59½ and have owned the account for five years. You may contribute a maximum of $19,000 per year ($25,000 for those age 50 and older); that limit includes any contributions to a traditional 401(k) account. Matching con­tributions made by your employer must be invested in the traditional side of the 401(k) account, not the Roth. Under the Small Business Jobs Act of 2010, participants in traditional 401(k) plans are now permit­ted to roll over funds into Roth accounts within their plans, if available. Any eligible funds transferred to Roth 401(k) accounts are taxed in the year of conversion. Some 403(b) plans may also offer a Roth option.

SIMPLEs are used by small businesses with 100 or fewer employees. A SIMPLE plan allows you to contribute up to $13,000 to a SIMPLE IRA or SIMPLE 401(k) in 2019. If you are age 50 or older, you may contribute an additional $3,000. Employer contributions, which are mandatory, can be in the form of either a 2% contribution to all eligible participants or a matching contribution that is generally 100% of the first 3% of compensation. Your contribu­tions are pretax, and you defer payment of taxes until you begin taking withdrawals.

Because retirement savings options often differ from one employer to another, it is important for you to understand the specifics of your company's benefit package. Contact your employer's benefit coordinator for more information.

Personal Retirement Savings

Personal retirement savings may be the key to achieving your financial goals. Common complements to Social Security and employer-sponsored plans include the following:

Traditional IRAs allow you to set money aside in a tax-deferred account. Depend­ing on your income and whether or not you participate in an employer-sponsored retirement plan, you may be eligible to take an income tax deduction. In 2019, the maximum contribution for all IRAs (traditional, Roth, or both) is $6,000, and those age 50 and older can contribute an additional $1,000. Even if you don't qualify for a deduction, your contributions have the potential to grow tax deferred; you pay taxes on withdrawals and avoid tax penal­ties if you are at least age 59½.

Roth IRAs permit earnings to grow tax free and distributions to be taken tax free, provided you have owned the account for five years and are at least age 59½. How­ever, your initial contributions are not tax deductible. The contribution limits are the same as with traditional IRAs, including the guidelines for “catch-up” contributions, in the aggregate. In 2019, only taxpayers whose adjusted gross income (AGI) falls below certain levels ($122,000 a year for single filers, and $193,000 for joint filers) are eligible to contribute after-tax dollars to a Roth IRA.

With a sound assessment of your income resources, you can begin to plan for the retire­ment you want. The choices you make today can influence your future financial indepen­dence. Starting now puts time on your side.

When Your Spouse Dies: Taking the Helm

One of the most difficult experiences in life is the loss of a spouse. In addition to grieving the loss of your partner, you may also feel overwhelmed by the need to make important financial decisions that could have a lasting impact on your financial future. While no one can ever be completely prepared to deal with loss, especially when compounded by legal and financial concerns, there are steps you can take to ease the burden of additional stressors that you may encounter at this time.

Seeking Support

It is important to realize that grief affects everyone differently. Depending on your rela­tionship with your spouse, whether you have children, your life experiences, your belief system, and many other factors, the griev­ing process can vary considerably from one person to another. There is no “right” way to grieve, and there is no time frame for recovery.

Some people find solace among others who have experienced a similar loss, such as a bereavement support group through a lo­cal hospital, place of worship, or community center. Others may find comfort and relief through work, exercise, a new hobby, or time spent with good friends. Reach out to those who have offered to help you. Whatever you do during this time, remember to take care of yourself and know that you are not alone.

Of course, certain matters will require your immediate attention, such as notifying family and friends; making funeral arrangements; and contacting your attorney to review the will and handle the legal aspects of your spouse's estate.

Let your family, closest friends, and trusted advisors help you with these details and short-term decisions, but proceed cau­tiously with major financial decisions, such as selling your home, borrowing or lending money, investing, making major purchases, or career changes. Consider the following financial checklist:

• Obtain several certified copies of the death certificate. They will be needed when claiming death benefits from insurance companies, as well as from Social Security.

• Consult immediately with the family at­torney, who will guide you through many of the legal and tax issues.

• File for death benefits. Call your local Social Security office, life insurance professional, and, if applicable, the Veterans Administra­tion or the employee benefits manager at your spouse's employer.

• Find out about medical coverage. If you depend on your spouse's insurance, con­tact his or her employer and exercise your right to keep that policy in force. Learn the options for either converting or acquiring new coverage.

• Keep detailed records, tracking all of the money that comes in and goes out in the first month or two. This information will be needed to create a budget.

• Manage assets wisely. Postpone some fi­nancial decisions that are less important and can wait. Later, you may be in a better frame of mind to make additional decisions.

• Start with short-term financial goals, and then tackle the more complex decisions, such as whether or not to sell the home and how to manage assets over the long term.

 

Taking Charge of Your Finances

If your spouse was the primary breadwin­ner and managed the family finances, it may take time to assess your financial situation. Your attorney, financial professional, or even a family member or friend can help you sort through important papers and documents and create a financial strategy that will work for you. During the first few months, pay the outstanding bills and monitor cash flow and liquidity. Keep a running list of financial questions as they arise and be sure to seek guidance and support.

As you begin to make decisions, there will be important issues that need to be addressed, such as determining your income needs, managing money on your own, re-evaluating insurance coverage, and continuing to meet the needs of your children. Some of your decisions will come easily, especially if they are based on financial need.

Others may be based on what you feel is best for you and your family. Will you want or need to work? If you are currently employed, will you stay in the same position? If you have not worked for some time, will you need to acquire more education or enhance your technical skills? It may take time to feel comfortable making major decisions on your own, but you can consult with professionals for help determin­ing the next steps you need to take.

Ideally, a family will have their financial affairs in order before a sudden loss occurs. However, life is unpredictable. Therefore, be sure to organize and safely file important papers, such as marriage and birth certifi­cates, tax returns, retirement account records, insurance policies, investment and bank state­ments, and estate planning documentation. Should such circumstances arise, you or your loved ones will be better prepared.

Making Life's Transitions More Manageable

Some life transitions, such as a career change or marriage, are planned, but a job loss or divorce can be sudden and unexpected. One common thread that accompanies all transi­tions, however, is the concern about whether there will be enough money to maintain your lifestyle. The timing involved with the unpre­dictability of certain life events is often the main cause of anxiety over personal finances.

One way of dealing with this problem is to determine your financial staying power at the outset. This exercise allows you to project how far your financial resources will carry you. Knowing how much time you have before additional resources will be needed can free you of more stress and anxiety and allow you to concentrate on accomplishing your goal in transition.

The process begins by examining how much it costs to maintain your current life­style. To do this, you need to review your check book or online account and credit card receipts to find out where your money has been going. Don't forget to include those cash expenditures and frequent ATM stops that you make on a daily or weekly basis.

Once you have an idea of your average monthly expenses, you can compare them to the financial resources you have committed to the transition. This may include cash on hand; any reliable cash inflows, such as a spouse's salary; investment or rental income; alimony or child support; a severance package or unemployment compensation, if applicable; and any investment assets you can liquidate in the event of a shortfall.

After recording your current expenses, you are ready to project a modified spending plan. You can curb your current spending by identi­fying areas where you can cut out unnecessary items without seriously compromising your lifestyle. These modifications may include seeking out less expensive alternatives for some of your current habits.

Now that you have modified your spending plan, it's time to create a “bare bones” budget. This will further reduce your cash outflow to pay for only necessary expenses, such as housing, food, transportation, etc.

At this point in the process, you have the information you need to decide how you will allocate your resources. You may choose to customize your plan, allowing you to continue funding your current lifestyle for a number of months, switch to a modified spending plan if you need more time, and implement your bare bones budget if an unexpected obstacle prevents you from your transition objective within the planned time frame.

Although life changes can be challenging, you can minimize the financial pressures by planning how you will allocate your resources during the time of transition. By determining how much it will cost you to get from point A to point B, you can tweak your plan to make it financially feasible.

Strategies to Sell Your Home

When you sell a home on your own, there is more required than just putting up a curbside sign and waiting for buyers to come to your door with money in hand. How­ever, doing a little “homework” and gathering all the facts can help you understand what is involved when you decide to sell your home.

Sellers, who are emotionally at­tached to their homes, often price them too high. To determine a more realistic price, compare your home with similar homes in your neigh­borhood or town. If houses are not selling quickly or if the price of your home is higher than those around you, you may have to set the price lower than you originally intended. You may choose to hire an appraiser to help you determine an appropri­ate selling price.

All too often, owners skimp on advertising. In addition to the “For Sale” sign in your front yard, post others where legally allowed. Com­pile a brochure or fact sheet listing the asking price, lot size, individual rooms and dimensions, heating and cooling systems (with monthly util­ity bills for the last year), appliances or other fixtures included, present financing, taxes, and any unusual or particularly attractive features. Don't forget to include a telephone number and show your property by appointment only. The Internet can also be a useful tool when selling your home. People who may be relocating to your area can view photos and a fact sheet, which could spark their interest.

It may be wise to screen potential buyers. If they seem interested, inquire about their potential down payment. If you are getting close to a deal, consider asking the buyer to supply a financial statement from a bank or mortgage lender. A serious buyer will be happy to provide the requested information. You may even ask buyers if they have obtained a “pre-approval” or “pre-qualification” letter from a bank or mortgage company, to ensure that the funds they are offering for your house would be available for them to borrow.

If you need assistance, a “hybrid” real estate company may prove a lower-priced alternative to traditional full commission brokers. These companies generally charge a flat fee—based on the asking price of the house—to screen prospective buyers, arrange appointments, suggest a price, and negotiate with buyers. However, showing the house would be the owner's job.

If you decide to sell your home on your own, remember the following tips:

1) Price It Fairly. Compare your house to others in your neighborhood that have recently been sold, and factor in any im­provements or unusual assets.

2) Advertise. Use more than just a “For Sale” sign on your lawn. Circulate brochures, run ads in the local newspapers, and post notices on bulletin boards and real estate websites.

3) Screen Buyers. Before accepting an offer, ask the buyer to provide a financial state­ment or obtain mortgage pre-approval or pre-qualification.

When should you decide to discontinue selling the home on your own? Assuming a house is properly priced and in a reasonably active market, a homeowner attempting to sell without professional assistance should allow for a predetermined time period without a written offer. If you find you want or need to move more quickly, consider using a hybrid real estate company or a professional broker.

Selling a home on your own can be a great deal of work, but you may save thousands of dollars that would otherwise be “lost” to real estate commissions. On the other hand, while the prospect of improving your financial posi­tion may be tantalizing, the task may be too time-consuming or otherwise beyond your expertise.

Professional real estate assistance, whether from a service or a broker/agent, may “save” you more than you realize as you prepare to sell your home. The decision of whether you should sell your house by yourself or with professional assistance is complicated. However, doing a little research and arming yourself with some information can help you decide the best strategy for you and your situation.

Are Good Grades the Key to College Admissions?

If you were asked how best to prepare your child for college, you might say that a well-rounded high school curriculum would be a good start. It may be true that your child needs to be a good student to compete for admission to a college or university. Today, however, get­ting into college and graduating are two distinct challenges.

Admissions: Increasing the Odds

Each college and university has admission guidelines that are followed when applica­tions are reviewed. Naturally, the first items most likely to be examined are your child's high school academic record and SAT or ACT scores. How­ever, academics are not the only items that catch the eye of an admissions officer.

Sometimes acceptance to a school depends on the ap­plicant's participation in ex­tracurricular activities and his or her civic involvement. Many admissions committees are as interested in grades as they are in the quality and character of individuals who may attend their college or university. Therefore, it is important for your child to include a résumé of achieve­ments, interests, and volun­teer efforts with his or her application

.Any of the following may enhance your child's college application:

Awards demonstrate formal recognition of an applicant's ability to excel in a particular area.

Sports participation demonstrates an ap­plicant's competitive spirit and winning attitude, along with the ability to be a team player.

Extracurricular activities highlight an ap­plicant's enthusiasm, leadership qualities, and specific interests.

Volunteering or religious involvement can often indicate that an applicant is active in the community and possesses moral character and integrity.

Political activity can demonstrate an applicant's strong leadership skills and awareness of current events.

Work experience may indicate motiva­tion, responsibility, and a strong work ethic.

Hobbies and special interests can provide a better understanding of who the appli­cant is, in addition to highlighting areas of knowledge.

Building the Foundation for Long-Term Success

Many children today are exposed to an array of social pressures that may be unfa­miliar to most adults. So parents and other role models may need to work harder to set positive examples and instill good values, in addition to teaching respect for others and emphasizing overall common sense.

Besides making the grade academically, a candidate for college needs to demonstrate a good attitude. Parents can help children recognize the value of learning and how education is often linked to future success. Learning to make sound choices is equally important. Being an individual rather than a follower isn't always easy, however, and your college-age children need ongoing encour­agement to continually examine themselves and strive to reach their goals.

Although you hope your child will use sound judgment while navigating the maze of activities associated with college life, remember that maturing is a process, and there may be mistakes made along the way. The key is to encourage your child to learn from those mistakes, rather than keep re­peating them. If you, as parents, and other role models can provide emotional support, encouragement, and guidance during these difficult years, the chances of your child transitioning smoothly to adulthood will be greatly enhanced.

The Importance of Domicile for Your Estate Plan

Increased mobility in today's society has changed the way we live, work, and play. Compared to previous generations, it is now quite common for work and recreational ac­tivities to cross state lines, resulting in owner­ship of property and formal relationships in more than one state.

When you consider the terms domicile, statutory residence, and residence, they may seem similar at first, but it is important to understand how they are different. Your domicile is the state where you maintain your permanent residence and intend to return to for prolonged periods. An individual can have only one legal domicile at a time.

A statutory residence is the place where you live and work; you are subject to the income tax for that state. If you are a statutory resident of one state, while claiming a domicile in another, your domicile state may also require you to file a tax return. Your residence is any place (or places) where you live; the term “residence” bears little or no legal significance.

Estate Planning

Where your will is probated is determined by your domicile. If your domicile is unclear at your death, several states may be able to claim you as a domiciliary and tax your estate accordingly. Keep in mind that estate tax laws vary by state, and state laws may differ from Federal laws. In some states, your spouse may be taxed on a portion of his or her inheritance that, in another state, would pass to him or her free of state estate tax. Some states exempt smaller estates and certain property from the probate process. Other considerations may also apply.

In addition, your choice of domicile can affect your overall financial plan, especially regarding property ownership. Not all states define property ownership in the same way. Some allow married couples to own prop­erty and income separately. In other states, known as community property states, married couples share ownership of all assets acquired during the marriage, but each spouse may own previously acquired property separately.

Further, your choice of domicile can affect your state income tax. Your income may be taxed in your state of domicile, the state where you earn income, or both. If you change your domicile during the tax year and both your present and former domiciles tax income, you may have to file partial-year tax returns in both states.

Establishing or Changing Domicile

You can take certain steps to establish your state of domicile. In general, your domicile is not determined by the length of time you spend in a state. You may establish a domicile when you first occupy a property, or you may spend decades in a place and never call it your domicile. If you marry a person domiciled in another state, you may be able to claim your spouse's domicile as your own, even if you never visited that state.

If you have moved, your “true” domicile may hinge on the number and significance of the contacts you have in your former and present state. Here are other significant fac­tors for you to consider:

Retention of “historical” home. If you have moved, have you sold your long-time resi­dence in a former state?

Business relationships. In which state are your significant business contacts located?

Location of property. Where is most of your significant real and tangible personal prop­erty located?

Social connections. Where do you maintain civic, religious, or family connections?

Time spent. Where do you spend the major­ity of your time?

While you may feel your intent is clear, it is most likely that your actions will determine the evidence of your intentions. Consequent­ly, simple acts such as registering to vote in a new locale, changing your automobile registrations and driver's license, resigning from organizations in your former state, and joining organizations in a new state may also be viewed as evidence of intent to change your domicile. Because your choice of domicile can af­fect your overall estate planning, be sure to consult your professional legal and tax ad­visors for specific guidance on your unique circumstances.

Your Business: Family History or Continuing Legacy?

If you're a business owner, you've most likely worked hard to build and manage a company that provides for you and your fam­ily. As a result, the income and wealth derived from your business success has become a sig­nificant portion of your estate. However, the business that provides for your family during your lifetime may not do so after your death. In many cases, only a small number of family businesses are actually passed on to the next generation.

What will be the legacy of your business when you are no longer here? The business may be so dependent upon your involvement that it may have little remaining value. In ad­dition, attempts to pass the business on to the next generation could be thwarted by estate taxes, which have increased to a top rate of 40% in 2019; these could force the liquidation of the business.

Even if your business survives, finding a buyer may not be easy. Unlike a publicly-trad­ed firm, a small closely-held business may not command its real value on the market. If a family member does not actively manage the business after your death, the dividends from the business—on which your family will depend—may be insufficient to support their current or future lifestyle.

Succession Planning

Most owners begin succession planning by deciding whether they want to pass the business on to a family member, an associate, an employee, or an outsider. The business will command its greatest value when it is running at full speed. In other words, you should be looking for a buyer now.

The cornerstone of a good business suc­cession plan is the buy/sell agreement—a contract between owners, or the business itself and owners. This legally binding agreement obligates the estate of the deceased owner to sell the interest of the business defined, at a predetermined price, to the business itself (in a redemption agreement), to co-partners or shareholders (in a cross-purchase agreement), or to both (a hybrid agreement, or “wait and see”). The buy/sell agreement creates a mar­ket for the business interest of the deceased, sets the price, and governs the orderly transi­tion of the business.

A buy/sell agreement is only as good as the funding available to execute it. For this reason, most agreements stipulate how the purchase is to be funded. Since the agreement is triggered at your death, life insurance may be the logical and most cost-effective choice.

Selecting the best method of buy/sell can be an involved process. Certain tax, estate planning, and control advantages exist with each method. The decision is almost always case-specific and should be discussed with qualified professionals. In conjunction with your attorney and accountant, your insurance professional will play a critical role in develop­ing and executing your business continuation plans.

Long-range planning is always subject to change; therefore, your buy/sell agreement should be reviewed periodically to help en­sure that it continues to meet your overall objectives.

 

The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different. The information provided is not written or intended as tax, legal, or financial advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax coun­sel. Neither the information presented nor any opinion expressed constitutes a representation by us or a solicitation of the purchase or sale of any securities. This newsletter is written and published by LIBERTY PUBLISHING, INC., BEVERLY, MA COPYRIGHT 2019.

 
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