All Things Financial Planning Blog


6 Tips for a Better Financial Future

Summer is upon us and in full swing. While you (hopefully) have some well-deserved time off, take the necessary steps to get your financial life back on track. No matter what stage of your life you are currently in, these simple but valuable financial planning tips may help you do so.

  1. Take 5 minutes to check your beneficiary designations– Young or old, chances are you have some type of life insurance policy or retirement plan. And chances are, you have not taken a look at who will inherit these funds/accounts since you opened the account several years ago. Countless times I have seen clients shocked when I uncover their beneficiary designations to be an ex-spouse, a deceased family member, or even worse – a big blank line. Take the time now to check to ensure that you have the appropriate beneficiary designations in place on all retirement accounts and insurance policies. Your financial professional can help you with the tax and estate planning advantages to certain beneficiary designations for each type of account.Tip: The most common (and basic) type of life insurance most employees have is an employer-paid policy with a $50,000 death benefit (this is the most common type because the IRS requires you to be taxed on the value of employer-provided group term life insurance over this amount). More often than not, when employees go through their first-day-of-work orientation and elect their new benefits, they leave the beneficiary designation for this standard policy (and probably their 401(k) account) blank. Check it out now and make sure you have elected a primary AND contingent beneficiary.
  2. If you don’t know how to do taxes; it may not be a great idea to do your own taxes– It’s really as simple as that. Oftentimes, we attempt to do our own income taxes in order to save some money, but have no real knowledge of our complicated tax system. This may be a costly mistake if you are not aware of many important and ever-changing tax laws. Are you aware of all of the various deductions and credits you are entitled to? Are you aware of the rules for claiming dependents? Do you know how to properly calculate your charitable contribution deductions? Do-it-yourself tax software has made it very convenient to complete your own taxes, but tax planning is not simple and the decision to do your own taxes should not be taken lightly.Tip: One of the most common mistakes people make when they attempt to do their own taxes is failing to utilize carry-forwards from prior tax years. For example, you can carry unused capital losses (say, from a bad investment loss) forward for your lifetime. Your capital losses will offset other capital gains, and if there’s still a loss remaining, you can deduct $3,000 p/year from other taxable income. If you do not keep track of your carry-forward balances or look at your previous returns for guidance (assuming these prior returns are correct), you may miss this valuable deduction, costing you hundreds or thousands of dollars in tax savings. If you are not confident in your ability to prepare your return, consider having a professional complete them this time around.
  3. Can you name three investments in your 401(k) account?– If someone asked you if your car had leather seats and air conditioning, would you be able to tell them? Absolutely. Then why shouldn’t you know what your biggest retirement asset is made up of? Take the time to understand your 401(k) account as it will be an important savings vehicle for your retirement years. Explore your available investment options, know the deferral percentage rate you need to elect in order to take advantage of your employer match (if any), and ensure that your investment allocation is appropriate for your risk tolerance, time horizon and retirement goals.Tip: Some 401(k) plans allow you to automatically increase your deferral percentage each year by a desired increment. This will allow you to gradually increase your contributions effortlessly and systematically without dramatically impacting your cash flow. Consider the following example which shows the difference in ending account values between keeping a constant deferral rate compared to increasing it incrementally over the years. Both examples assume a starting account balance of $20,000 and a beginning gross salary of $65,000 p/year:

    Constant 3% p/year deferral rate: $1,576,264*

    Starting at 3% deferral and increasing by 2% p/year until 10%: $2,693,714*

    *Assumes 3% raises p/year, 7% annual return, and a 3% employer match, for 40 years.


  4. Do you know what will happen to you, your children and your assets when you pass away or become incapacitated?Estate laws are complicated, ever-changing and mostly misunderstood by the average American. Not having a basic estate plan in place is like showing up to a job fair without a resume. Did you know that in 2011, over 70% of Americans did not have a basic will in place? This is one area of your life that you do not want to risk being unprepared. At the very minimum, you will want to have a will, guardianship provisions (if you have children or legal dependents), and power of attorney documents. A revocable living trust is also an important estate planning tool you will want to consider, depending on your situation, estate planning goals and objectives.Tip: Many people believe that only the very wealthy need estate planning. This is simply not true. Basic estate planning documents are important to ensure you have control of your assets and well-being during your lifetime and after your death. Do not let the state decide how your assets will be distributed or who will care for your loved ones.
  5. Planning for educational expenses begins at birth– Far too many parents begin to plan for their children’s college expenses when it’s far too late – when the college-bound child is sitting in their driver’s education course. At this point, the tax advantages and compounding advantages of a 529 college savings plan are greatly diminished, and the impending expenses are likely to be paid out of any cash flow and lots and lots of debt.According to the College Board, the increase in college tuition at a public four-year school was 8.3 percent between the 2010-11 and 2011-12 school years. That’s over twice the inflation rate over the same period! Take actions as soon as possible to begin planning for your child’s education. All things being equal, the earlier you start saving, the longer you have for your savings to grow and compound.

    Tip: Once a college savings vehicle is established, try to increase the amount you contribute each year. Aim to increase the total amount you save each year by at least 6%. For example, if you save $100 a month this year, you should save at least $106 a month next year. This will help your savings keep up with the high college inflation rate.

  6. Do you know what your risk tolerance is?– The old adage that says you should hold your age in bonds (as a percentage of your overall portfolio allocation) may no longer be appropriate for today’s investor, especially in today’s economy. Don’t know what your risk tolerance is? Think about the following scenario. You are given a choice between two cars to take on a cross country vacation. Option 1 is a fast, attractive, high risk sports car with very bad crash ratings. Option 2 is a slower, unattractive, safe sedan with excellent crash ratings. Which do you choose and why?Consider another scenario in which you have the option to stay in one of two resort hotel rooms. Option 1 is a suite on the 25th floor with great panoramic ocean views. Option 2 is the same sized suite, but on the first floor with convenient emergency exits. Which do you choose and why?

    The amount of risk you are willing to assume for a chance at receiving a desired return can help you begin to design your overall investment portfolio. Among the various factors to consider when deciding on an appropriate allocation are: your proximity to retirement, how comfortable you are with investing, your other available income streams, liquidity needs, and your general comfort level with the financial markets.

    Tip: Your risk tolerance (once you determine it) should help you and your financial professional design an appropriate and diversified investment portfolio that will help you achieve your goals and objectives. It is important that you are comfortable, knowledgeable and confident in your investment plan, or else it may be very difficult to stay on course.

By FPA member Grant Webster, MSBA, CFP®
AKT Wealth Advisors
Special to FPA


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Unintended Consequences: Are You Absolutely Sure – No Question About It?

In the past, my colleagues and I have blogged about property titling and beneficiary designations and the need to review them periodically. But have you done it? Let’s look at some of the unintended consequences of ‘naming or titling’ an account beneficiary by looking at some situations that can arise by reviewing real life examples.

Case Study One

A sophisticated investor, age 65, was very conscientious about his estate planning. He set up a living trust and titled ‘all’ assets in the living trust name. He had a pour over will that brought into the living trust all assets that may have not been specifically titled in the living trust name. This is typical planning to avoid probate and to make for smooth transitions of assets to the heirs and benefactors. The investor had one son and no other family members that his estate had, or was required, to provide for. The investor had an IRA that he had named the beneficiary as his estate thinking that the funds would go into the living trust as the ‘holder’ of his estate’s assets and his son could take out the assets slowly over his lifetime if he wished. 

Ok, what happens? When the estate is named as the beneficiary of a decedent who dies before 70½, there is no ‘named’ beneficiary (no individual or a ‘trust’ that qualifies) and there is, therefore, no lifetime payout option available to the beneficiary. The trust IRA assets, in this case, must be distributed at least by 12/31 at the end of the five year period, which begins January 1 the year after death. Another issue that can complicate the ‘taking over’ of the account is the fact that with the living trust and minimal assets involved in the ‘pouring over’ into the estate, there was no probate. So now we have what was intended to be a ‘legal-hassle-free’ transfer of assets being complicated because we have to prove to the custodian that there is a legal determination that the assets in fact have passed to and are controlled by the ‘executor’ or ‘trustee’. If the son was directly named as the beneficiary on the IRA, there would have been lifetime distribution available and there would have been no legal hoops to clarify ownership.

Case Study Two

A sophisticated investor, age 69, has a ‘qualifying trust’ established and is named as the beneficiary of his IRA. His three sons, age 35, 25 and 15, are the beneficiaries of the ‘qualifying trust’. At his passing, he would like each of his sons to have unlimited access to the money if they want to, but if they didn’t, he would like them to have the ability to stretch the payouts over their life expectancies.

In this case, what gets complicated is that with the trust involved there are not any opportunities to take individual life expectancy withdrawals for each of the trust beneficiaries – the three sons. The only option would be for each of them to take distributions at the oldest son’s required withdrawal rate rather than their own, lower, ‘attained age’ divisor. That means that the younger sons would have payout requirements higher than they would have otherwise had. 

It might have been better to have each son named as 1/3 beneficiaries of the single IRA account because with this option, with the correct timing, the beneficiaries could break the IRA up into three accounts and then take distributions from their respective IRA beneficiary accounts over their respective life expectancies.

Case Study Three

The husband, age 40, of a young couple passes away and the wife, age 40, is named as the beneficiary of the husband’s retirement accounts. The wife can keep the retirement accounts in her deceased husband’s name or she can roll the over into her own retirement account. If she keeps the retirement account in her husband’s name, she would have to take distributions once her husband would have reached the age of 70 1/2. In this case it doesn’t make any difference because they are both the same age. So she decides to roll over her deceased husband’s retirement accounts into her own retirement account.

The problem with this is that should she now need some extra money out of the IRA (for other than a qualifying distribution), she would be subject to a 10% tax on any pre-59 ½ distributions. If she had left the money in her deceased husband’s name it would have been a distribution on account of death which is exempt from the 10% penalty.    


Issues of property titling and beneficiary designations are so easy to clarify and rectify while we are living, but they can be a nightmare and emotionally exhausting to those that need to climb mountains and jump hurdles to merely get what you intended for them to have. Give them a break during those most stressful moments of life and optimize what you intend to leave as your legacy by keeping up to date with beneficiary designations, property titling and otherwise general estate planning howeverlarge’ your estate is!   

To quote 50 Cents, ‘you are never promised a tomorrow’.

David Bergmann, CFP®, EA, CLU, ChFC
Managing Principal
The David Bergmann Group
Marina Del Ray, CA