Are you financially streetwise? Are you familiar enough with the details of your financial situation and basic financial concepts to be able to make good financial decisions?
Anecdotally, I remember reading a magazine story during the Bush–Gore presidential campaign and election season making a point about people’s beliefs in their own financial acumen. One of the campaign issues in that very close election that George Bush ultimately won was whether estate taxes might be repealed. Essentially, George Bush was in favor of repeal and Al Gore was not.
I recall the article postulating that one of the reasons Gore might have lost some votes is that even though estate taxes at the time might have impacted only about the top 1% of all individual taxpayers, some 15%-20% of the people they surveyed thought they were or would be in the top 1%. Clearly, at least some (if not most) of that 15%-20% may have seriously misinterpreted the realities of their financial future.
Good financial decision-making is grounded in some personal financial savvy-ness:
· Your knowledge of the facts of your financial condition.
· An understanding of basic financial concepts.
· An understanding of how those concepts may be applied to your financial condition.
· Identifying what the realistic results of that application might be.
Following are some basic questions illustrating situations and concepts which we, at the Family Wealth Decisions Group, have felt to be often misunderstood. Some of these questions may appear to be very simple, some not so much. None are “trick” questions, but some may allude to traps for the unwary. Finally, some may generate the need for additional discussion.
General Retirement Planning Questions
1. True/False – Everyone can contribute to an IRA, regardless of whether they can deduct their contribution.
2. True/False – Working for two additional years past your planned retirement date is likely less helpful in reaching your retirement goal than saving an additional 5% of your salary for each of the five years prior to your retirement.
3. True/False – If you are single and believe you will live to age 90 or longer, you will most likely be better off claiming Social Security benefits at age 62 rather than at age 70 to collect benefits for more years.
4. True/False – There are never any required minimum distributions from a ROTH IRA.
5. True/False – You want to lower your monthly mortgage payments so you can save more for retirement. If you secure a 30-year loan instead of a 15-year loan, assuming the same interest rate, you should expect your monthly mortgage payment to be reduced by about 50%.
General Estate Planning Questions
1. True/False – If you become incapacitated, appointing an appropriate Executor in a well-drafted will can become an important tool in assisting with your financial decision-making.
2. True/False – It is generally important that your will be crystal clear about who will receive your retirement accounts and any life insurance benefits paid on account of your death.
3. True/False – If you are wealthy and you want to make gifts to your children during your lifetime without the need to file a gift tax return, your gifts need to be less than the gift tax exemption amount in the year of the gift ($13.61MM in 2024).
4. True/False – The agent you appoint in your power of attorney can make changes in your will if your are unable to do so yourself.
5. True/False – If your 18-year old child gets sick or encounters a financial issue while away at college, you as the parent, will be able to secure information to assist in their decision-making.
General Investment Planning Questions
1. True/False – A diversified portfolio of bonds and CDs is generally a better way to protect against inflation than a diversified portfolio of stocks.
2. True/False – A $100,000 50% bond 50% stock portfolio should permit an inflation adjusted $8,000 annual withdrawal for about 30 years.
3. True/False – A 25% drop in portfolio value in a single year may be really bad for retirement security but its negative impact will be roughly the same regardless of whether it occurs 10 years before retirement or at the time of retirement.
4. True/False – An annuity purchased for lifetime income by a male and female of the same age and health status, should pay out more annually to the female.
5. True/False – When interest rates increase, it is reasonable to expect the value of bonds to increase as well.
General Insurance Planning Questions
1. True/False - Original Medicare covers routine wellness and dental exams but not dental procedures
2. True/False - It is estimated that between 25%-50% of the population will need assistance with the activities of daily living at some point.
3. True/False – When the insured dies, typically the beneficiary receives the sum of the death benefit, the cash value and the pro-rata amount of the premium paid for the portion of the policy year remaining after death.
4. True/False – If you transfer your home to a revocable living trust as opposed to an irrevocable trust, you generally don’t need to update your homeowner insurance company and policy with this news.
5. True/False – More long-term care expenses are paid for by Medicare and Medicaid than by the individual receiving services and their families.
How is your financial savvy-ness? Are you an expert in your financial condition? The above represents only a fraction of the issues we regularly encounter and help our clients deal with. Each question above represents a group of concerns and concepts we have seen struggles with. We hope that you found some value in reviewing them. Please call us for a complimentary consultation if you would like to compare your answers with ours.
CRN-7084676-100224