Estate Planning

Financial Planning for Newlyweds

The joining of two people in marriage is quite a significant event, not only for the families of the newlyweds, but for their finances as well. While bringing together two incomes is a pretty straight forward endeavor, bringing together various expenses, assets, liabilities and the possible emotion connection to them can be tricky.

In my previous post “You’re Engage, Create a Financial Plan”, I discussed some of the advantages of having a financial plan before you’re actually married. In short, creating a financial plan can help you and your future spouse explore your life’s goals and objectives before tying the knot. This will help significantly reduce the possibility of disagreements when managing your finances in the future.

If you are a newlywed or recently became engaged, start the financial planning process by defining your combined goals and objectives. Once complete, the following steps will help you merge your finances and create a joint financial plan.

Data Collection and Analysis

During this memorable time in your lives, it’s important to locate all of the data that will impact your financial well being. This information will be used to construct your financial planning statements and determine the strengths and weaknesses that exist in your current financial situation.

The first step is to gather your qualitative financial planning data. This information will help you explore and document your risk tolerance, past experiences with money, feeling towards different investment products and your retirement expectations. This data is mostly used in the consideration of shared values and the emotional connection to various financial decisions.

In contrast, quantitative financial planning data is more numerical in nature. Gathering this data can be accomplished by listing the title and value of your cash accounts, insurance policies, estate planning documentation, and historical tax returns. This data will be used to develop forecasts and determine the affordability of your goals and objectives.

Once you have gathered and listed all of your financial planning data, it’s time to determine which accounts and policies should be merged, eliminated or simply left alone.

Merging Accounts and Financials

The decision to merge accounts and other financial planning tools, can be difficult. This is not only due to the volume of forms that will have to be filled out, but also the fear of losing control over a very important aspect of your personal life.

To begin merging accounts, it’s important to understand the advantages and disadvantages of each one. This will help determine if there could be any savings or added complexity from merging accounts (such as consolidating insurance policies or changing beneficiaries).

Once all of your options have been laid on the table, it’s time to merge the accounts that have the most advantages. When merging accounts, remember you don’t have to do it all at once. As long as there is open and honest communicate accompanied by a clear action plan, you can merge your financial accounts when it’s best for you and your schedule.

In today’s fast moving and advanced world, marriage is more than a romantic commitment to the person you love, it’s a business arrangement as well. Newlyweds should take the time to create a financial plan. This will ensure that the business side of you relationship is healthy and moving in the right direction.

A Few Benefits of Financial Planning

Personal finance affects most of Earth’s population. However many of us do not understand the benefits of financial planning. Creating a financial plan will help you with a wide variety of financial and non-financial aspects of your life.

A common misconception of financial planning is that only the wealthy need a financial plan. This couldn’t be further from the truth, in all actually I personally believe that we, non-wealthy people, need a financial plan more than those with huge portfolios. This is primarily due to the fact that having a well designed and properly implemented financial plan can enable us to improve our life through increases in our financial resources.

Understanding What’s Important to You

One of the first steps in the financial planning process is to clearly list your goals and objectives. When going through the mental process of determining your life’s goals and objectives, you will quickly discover what’s important to you and your family. This understanding can have a huge impact on your self confidence and attitude.

In addition to defining your goals and objectives, creating a financial plan will provide you with the direction and clarity required to make sound financial decisions. When you have a clear understanding of what you want and where you want to go, you will gain more control of a seemingly chaotic world.

Improving Your Standard of Living

An obvious benefit of creating a financial plan is the eventual increase of one’s material wealth. However, keep in mind that it is the effect of increased wealth that is most important. To many, an increase in wealth is accompanied by an increase of freedom and independence from the restriction of finite resources. Increases in financial resources enables you to live the life that you want without having to take on the burden of debt.

Improving your standard of living begins with the prioritization of expenses. To accomplish this the financial expenses that provide you the most value should have a high priority and expenses with a low priority should be reduced or eliminated.

When cutting expenses, you will subsequently increase your free cash flow. This additional cash should then be placed into your savings and investment accounts. Overtime, this increase in material wealth will provide the resources that you need to live the life that you want.

Protecting Your Property and Financial Assets

An often overlooked benefit of financial planning is the protection of property and financial assets. Many see financial plans as a way to increase material wealth, versus protecting what they already have. A comprehensive financial plan includes risk management and insurance to ensure life’s unexpected events have little impact on your family’s finances.

A comprehensive financial plan will also include an estate plan, which will help protect your assets from entering probate. This ensures that your estate's beneficiaries receive the property that is intended for them with minimal Government involvement, or in other words headache.

There are many financial and non-financial benefits of financial planning. Creating and implementing a financial plan will help you increase your standard of living, protect your property and provide focus and direction in your life.

An Introduction to Cost Basis

If you have ever changed investment brokers in the middle of the tax year, inherited stock or have been gifted property, you understand the amount of work that can go into determining the right cost basis. It takes a lot of effort to figure out the right cost basis due to the complexity of the U.S. tax code.

What Is Cost Basis

Cost basis is generally the original cost of an asset used to calculate capital gains or losses for tax purposes. More often than not, this is the amount in which the asset was purchased for. With that said, an asset is usually a financial instrument such as a share of stock. However in certain circumstances the IRS will ensure that you pay taxes on other types of property, usually received through an estate or as a gift.

In addition to the original cost of an asset, an asset’s cost basis should be adjusted to include transaction costs and reinvested dividends, if relevant to the transaction. So in-order to calculate the capital gains or losses from a simple stock investment just take the cost basis (value of the original investment), add any broker fees and subtract it from the proceeds from the sale of stock. The result will be the capital gains or losses from the sale of the asset.

Cost Basis for Inherited Property

As stated above, there are a variety of cost basis calculations depending on the type of property transfer. When determining the cost basis for inherited property, use the primary valuation amount. This is generally the property’s fair market value at the time of death.

When determining the cost basis for inherited property you can also choose to use an alternative valuation date. This option allows for the valuation of the cost basis of inherited property at its fair market value for up to 6 months after death. Unfortunately, there are a few rules that restrict the election of this valuation method. These are used to prevent the avoidance of tax through increasing the cost basis of the property.

Cost Basis for Gifted Property

Determining the cost basis of gifted property is, in my opinion, the most complicated. This is due to the calculation of the cost basis being contingent on the original cost basis, gift taxes if paid and the fair market value of the property on the date of the gift.

If gifting has occurred and no taxes have been paid, the gift has a dual basis (one basis for a capital gain and another in the case of a capital loss). In the event of a capital gain the donee’s cost basis will be the value of the donor’s original basis. However, if the donee’s transaction results in a capital loss the cost basis will be the lower of the fair market value at the time of gifting or the donor’s original cost basis.

While it would seem that determining the cost basis of property for tax purposes would be an intuitive endeavor, there are a few complicated scenarios you might have to deal with. I feel it necessary to caveat that this article is only an introduction and that tax law changes from time to time. So with that said it’s always a good idea to consult the IRS or a CPA when dealing with complex tax issues.

The 3 Life Phases of Financial Planning

When developing and implementing a financial plan, it is important to consider where you are in life. The three main life phases that can be used as a guide in the financial planning process include asset accumulation, capital appreciation and capital distribution.

It’s important to note that every financial plan is a unique as the individual creating it. We all have different goals, expectations and experiences, thus it’s important to take that into consideration when determining what life phase you are currently in and when you can expect to move to the next. As we progress through these phases your financial plan’s focus and objectives should too.

Asset Accumulation

The asset accumulation phase can be described as the time in your life when you are most likely focused on purchasing a variety of different assets. Usually, people in their 20’s through their 40’s are buying houses, investing in their education and increasing their earnings through promotions and other career moves.

Towards the end of this phase, the accumulation of savings and investments should be a major priority. Ensure that your monthly fixed expenses, such as mortgage and vehicle loan payments, are not so high that it undermines your ability to save a little cash every paycheck.

Capital Appreciation

In many cases the rapid growth in the accumulation of assets begins to significantly slow as we enter the capital appreciation stage. The transition to this new phase can be expected to occur as early as the mid 30‘s through the late 40‘s. At this point in our lives, our careers have matured and supporting a growing family becomes the main focus of our efforts.

Financially we should begin to focus on paying off the debt we accumulated and growing our investments through capital appreciation (increases in the value or market price of the asset). During this time the returns gained through investing will determine when and how you will be able to retire.

Capital Distribution

After the accumulation and appreciation phase, we then move into the capital distribution phase of our lives, other wise known as retirement, around our early to mid 60’s. A few years leading up to this point it’s wise to begin to reallocate higher risk assets, such as stocks, into low risk assets such as bonds. This will help ensure you do not run out of money during retirement.

During the capital distribution phase many begin to rely on their personal assets, such as savings and social security benefits, to support them financially. In addition to distributing your assets for income purposes, you may also begin to gift additional assets to family members as part of an estate plan.

Understanding the three life phases, asset accumulation, capital appreciation and capital distribution will help you develop your financial plan.

How Much Do I Need to Retire

One of the most common questions concerning retirement, is “how much money will I need to retire”. This question is extremely important and forms the foundation of retirement planning. Despite the fact that the answer to this question can become complex, it’s not as difficult to figure out as you might think.

Define Your Retirement Lifestyle and Goals

Just like developing your comprehensive financial plan, retirement planning starts with defining your goals and lifestyle. Once you have a clear sense of how you want to live your life, you will be able to determine how much it will probably cost.

Some topics to plan for include when to retire (age and year), what activities to enjoy (housing, vacations and gifts) and how long you will be retired (I assume to live to 100 for financial planning purposes). Retirement planning is all about determining how much money you will need to cover your expenses. Thus it’s imperative that you calculate how much your lifestyle will cost.

In addition to retirement expenses, its a good idea to take the time to decide if you would like to pass any left over assets to your heirs. If you would like to leave some assets to your loved ones, you will need to ensure that you have enough money to live your desired lifestyle during retirement and have enough left over to pass through your estate.

Determine How To Finance Your Retirement

Once you have determined your desired lifestyle during retirement, its time to figure out how to finance it. Hopefully you have acquired enough assets in your lifetime to fully fund your retirement. A few retirement income source examples include your savings, investment, Social Security and IRAs. These sources of income will need to be enough to maintain your desired standard of living, so take the time and estimate your income during retirement.

Estimating your retirement income can be a little tricky, however after a little research you should be close enough to the right answer. Once have estimated your future income and expenses, its time to determine if you will have enough to live the life you want. If you have performed the necessary calculations and have found that you will have enough to meet all of your goals, congratulations! If not, you might need to revise your retirement plan and expectations.

Fix Any Retirement Planning Shortfalls

If you have done the math and figured out that you might not have enough money to live the life you want during retirement, you are not alone and still have a few choices. First you could decide to go on fewer vacations or move into a smaller residence. You could also make the decision to keep your car longer than you expected. These ideas will help you reduce some of your expenses during retirement. Second, you could change your income situation.

Many potential retirees are postponing retirement for a few years in-order to save a few extra dollars before they leave the workforce. Lastly, you could decide to take up some easy part-time job to supplement your existing retirement income.

As illustrated in this article, answering the question “how much do I need to retire” is rather straight forward. First, determine your goals and desired lifestyle. Next, figure out how much that lifestyle will cost during your retirement. Then calculate your income sources and their amount during retirement. Finally, determine if you have enough money to live the life you want and if not make adjustment so you can.