4 Things to Help You Plan for The Worst

4 Things to Help You Plan For the Worst

Today we are going to talk about 4 things everybody should do to help you plan for the worst. These steps will make it easier for the people you care about the most.

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4 Things to Help Plan for the Worst

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4 Things to Help Plan for The WOrst

Today, we are talking about 4 things that everybody needs to do to help plan for the worst. “The worst” means your death or becoming incapacitated. These steps will help your loved ones move forward more efficiently.

Some of this involves legal documents, and we are not attorneys. We cannot offer you legal advice. We are sharing some of our experiences to make it easier for people to handle these situations.

1. Name Beneficiaries

The first item is naming beneficiaries. Certain types of accounts do not have to go through the probate process. IRAs, retirement plans, life insurance policies, and annuities all have beneficiary designations. When you die, those assets go directly to your beneficiaries.

It is important to name those beneficiaries and keep those designations up to date. This helps avoid future problems. If you do not name beneficiaries, these assets then go to your estate. This involves the probate process. This mistake can result in extra costs, and potentially some extra income tax costs.

2. Durable Power of Attorney

The second thing everyone needs to have is a durable power of attorney. This is a legal document prepared by a lawyer.

A durable power of attorney allows you to name someone to make decisions on your behalf. This goes into effect when you become incapacitated.

A durable power of attorney allows the person you name to make “business decisions” on your behalf. For example, it will allow them to

  • pay your bills
  • buy or sell investments
  • sign checks
  • sign your tax return

Not having a durable power of attorney can create difficulties. Your loved ones will have to go to court and have a guardian appointed for you. This takes time and money at a stressful and inconvenient time.

3. Will

The third item everyone needs to have is a will. A will is a legal document prepared by an attorney.

Having a will allows for an orderly distribution of what you own to go according to your wishes. If you die without a will, your state’s intestate rules apply to your assets. This can add confusion, hassles, and red tape to the process.

4. Health Care Directives

The fourth item everyone needs is healthcare directives. This is a healthcare power of attorney and a living will. The healthcare power of attorney appoints someone to make healthcare decisions for you. If you need surgery and cannot sign the form, your appointee can sign the medical orders for you.

The living will deals with end-of-life decisions. It allows you to specify what means you want used to keep you alive. It allows someone to make that decision for you.

What About a Trust?

A trust can be a useful tool, but it may not be beneficial for everybody. Even if you have a trust, you still need to take care of these four items.

A trust is something you should discuss with an attorney to see if it makes sense for you. There are extra costs involved, and sometimes the cost does not add value.

If you are not sure who to talk to about these legal documents, please contact us. We can provide referrals to local attorneys who specialize in estate planning.

Talk to a Certified Financial Planner™ Professional

 


4 Things to Help Plan for the Worst

About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

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10 Percent Doesn’t Mean 10 Percent

10 Percent Doesn't Necessarily Mean 10 Percent

When it comes to stocks, 10 percent doesn’t necessarily mean 10 percent. We will explain this and how setting reasonable expectations can make you a better investor.

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3 Things to Know About Bear Markets

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When young financial advisors go to financial advisor school, one of the first things they are taught is the stock market has an average annual return of 10% per year. This leads people to believe the stock part of their investments are going to improve by 10% each year. But, 10% doesn’t mean 10%.

Only two times in the last 96 years have we seen stocks return close to 10% in a calendar year (10.06% in 1993, and 10.88% in 2004). It is more likely the positive years are going to be much better. And, there will also be some negative years, too.

When you’re thinking about what could happen in any given year, you should expect anything. In the short term, almost anything is possible. But over a long period of time—20 or 30 years—expecting stocks to return 10% per year is reasonable.

Setting Reasonable Expectations

It helps to set reasonable expectations when you’re an investor. It helps you to understand volatility is part of the process. And, we also know there will be difficult periods you have to navigate.

For example, you should expect the stock market to be positive three out of every four years. And, you should anticipate one year in four will be negative. Those plus years are likely to be much better than the 10% average annual mark. The average up year is about 21%. The negative years average -13%.

Corrections

You should also expect corrections to happen at least once a year. (We may be in the middle of one right now.) The average correction is about -14%. But even with those interruptions, the market has continued to improve over time.

Bear Markets

You should also expect bear markets. We had one last year, and it was an awful experience. But, the stock market recovered, and the recovery happened a lot faster than any of us anticipated.

When we set reasonable expectations, we can make better decisions about our investments. It keeps us from selling at bad times. It may keep us from buying at bad times as well. Avoiding those key mistakes can help us improve our real-life returns.

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About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

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How Can You Invest in Electric Vehicles?

How Can You Invest in Electric Vehicles?

How can you invest in electric vehicles? Today we discuss:

  • the two ways you can do this
  • the difference between the two
  • and a valuable lesson we can learn from one of the best-performing stocks over the last quarter-century, Amazon.

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How Can You Invest in Electric Vehicles

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How Can You Invest in Electric Vehicles?

This is a hot topic right now. More people are wanting to know how they can take part in this new and emerging technology.

Individual Stocks

The first way to invest in electric vehicles is to buy individual stocks. The most popular is Tesla. They have been making electric vehicles for a few years. The other major auto manufacturers are also getting involved in this. Both GM and Ford are committing billions of dollars to this technology. GM is also challenging Tesla on the battery front.

There are other companies in this industry. Nikola is developing battery-powered semi-trucks. And there are companies working on charging and battery components. Examples of those include Blink Charging and Plug Power.

There are also companies that manufacture the technology for the cars. Intel and Nvidia will also have a role in this emerging industry.

You can also look for investments in companies who focus on lithium. Batteries are a major component.

Mutual Funds or Exchange Traded Funds

The other way to invest in this industry is to use an exchange-traded fund or a mutual fund. The financial industry has been very innovative over the years. When industries like this emerge, they create a fund to focus on these companies. You can buy the fund instead of trying to pick individual stocks.

The Difference Between Using Stocks and Funds

The big difference between the two is the potential risk and reward.  Both ways of investing offer the opportunity to benefit from the growth of the industry. Both also experience a lot of volatility.

An individual company offers the potential for more reward, if you choose a good one. But when you pick the wrong one, you could lose more.

Using a fund reduces the potential gains. When you buy funds, you make smaller bets on a larger list of companies. Not all of them will be the big winner. You own shares of Tesla, GM, and Ford. You also may own shares of Nvidia and Intel.

The Lesson From Amazon

Amazon went public in May of 1997 in the middle of the dot-com boom. Since its offering, it has been one of the best-performing stocks over the last quarter-century. But early on, there was a lot of volatility.

In its first five years of existence, Amazon suffered significant price drops.

  • It fell more than 20% twice.
  • There were two 40% price drops.
  • One price drop exceeded 60%
  • And one time the price declined 90%!

Withstanding that much volatility takes a strong stomach and nerves of steel. Emerging technologies are not for the faint of heart.

Talk to a Certified Financial Planner™ Professional

If you would like to consider an investment in electric vehicles, talk to a financial planner. They can help you understand how it fits within your plans and your goals.

 


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About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

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Required Minimum Distributions

Required Minimum Distributions

Today we discuss required minimum distributions and cover:

  • when you have to start taking them
  • why it’s important to take them
  • the basics of how they’re computed
  • when during the year is the best time to take your distribution
  • and, what you can do with the money if you don’t need the income

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required minimum distributions

Required minimum distributions may not be an interesting topic, but our clients ask a lot of questions about them. If you’re heading towards your retirement, it’s something that should be on your radar.

When do you have to start taking your required minimum distributions?

In 2019, the government passed the SECURE Act. This legislation increased the age at which you have to start your required minimum distributions. It used to be the year you reached age 70½.  Now, you must start the year you reach age 72.

Why do you want to take your required minimum distributions?

If you don’t take your RMD, the penalty is severe. The penalty is 50% of the shortfall. If your required amount is $10,000 and you fail to take that, the IRS penalty is $5,000.

required minimum distributions

How much do you take the first year?

Your first RMD is roughly 4%. The IRS uses the Uniform Lifetime Table. It is a life expectancy table which uses a 10-year difference in age between spouses. If your spouse is more than 10 years younger than you, you can do things differently.

You look up your age on the table find the divisor. The first year the divisor is 25.6. (25 equates to 4%.) The next year, the divisor goes down a little bit, which means the percentage increases.

Required minimum Distributions

Here is an example. The balance of your IRA at year’s end is $256,000. Divide that by 25.6. The amount you have to withdraw is $10,000. Next year, you divide the year-end balance by 24.7. The following year, you divide the year-end balance by 23.8. You always take the balance at the end of each year and divide it by the number for your age.

Eventually, you will take more from the account than you can earn. At age 88, the amount is about 8%. At age 92, the required amount is roughly 10%.

Required minimum Distributions

When is the right time to take your distribution?

Some clients take their RMD early in the year. Others wait until later in the year. Many people worry about what is happening in the investment markets. If the stock market is near all-time highs, a lot of people will want to take it at that point.

We do not know what will happen later in the year. Values could be higher or lower than they are right now. The correct answer to this question is, “take the distribution when you need the money.”

Income Taxes

Most custodians will withhold taxes from your IRA distribution. Most will withhold both state and federal income taxes. If you pay quarterly estimates, you should adjust your estimated tax payment.

What if you don't need the money?

One of the better planning tools you can use is a qualified charitable distribution. You direct a distribution from your IRA directly to a charity of your choice. You do not report the distribution as income. You will save both the state and federal income taxes on the amount that you donate.

The other thing you can do is reinvest your distribution in a taxable account. Many custodians allow you to transfer shares of an investment to another account. This is an “in kind” transfer. You can also transfer cash.

You cannot convert your required minimum distribution to a Roth IRA.

Benefits of Using a Roth IRA

There are no required minimum distributions from Roth IRAs. It’s another great reason to use the Roth IRA to help you save for your retirement.

These specific rules only apply to the original account owner or their spouse. If you have an inherited IRA, different rules apply to you.

Talk to a Certified Financial Planner™ Professional

If you have specific questions about your situation, a financial planner can help. Talk to one today.  Click below to schedule a call

 


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About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

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Why Not Use Dividend Stocks For Retirement Income?

Why Not Use Dividend Stocks for Retirement Income?

Today we answer a viewer question about using dividend stocks to create retirement income.

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Our question from Ronald. He writes:

I am looking to retire soon and trying to determine the best way to generate retirement income with interest rates so low. Traditionally, you could have done this with treasuries or CDs. Why wouldn’t buying dividend stocks paying 4% to 5% makes sense? In addition to the dividends, you have the opportunity for appreciation.

The Challenge of Low Interest Rates

Ron makes a couple of good points. Interest rates are ridiculously low right now. Traditional methods of using bonds or CD’s to generate income are a challenge. Ten-year Treasuries are yielding about 1%. Thirty-year Treasuries yield about 1.8%. CDs, unless you lock those up for a few years, are going to be well below 1%. Using these interest-bearing investments to create retirement income is very difficult.

Using Dividend Stocks For Retirement Income

Why can’t you use a portfolio of dividend-paying stocks to create that income? You can, and there are some benefits. The dividend income is more than you would earn on a lot of fixed-income investments. You also have the opportunity for capital appreciation. Many of these companies will increase their dividends over time. And there are some tax advantages.

The Challenges

1. Volatility

But there are significant challenges to doing this. The first one is volatility. Companies who pay good dividends will decrease in value. You are going to see periods where your account drops 20%-30%. You must be able to withstand those periods, and not sell something at an inopportune time.

2. Portfolio Construction

The next challenge you have is how you build your portfolio. You want to make sure you have diversification across different industries. You want to make sure you are picking good companies.

Oil companies provide a great example of why you should diversify. When oil prices went down last year, many oil companies saw their share prices decrease. Many of them also decreased their dividend. Investing too much in one industry could impact your ability to maintain your income.

Stock selection is also important. Look for companies that have good earnings as well as a decent payout ratio. (The payout ratio is how much of the earnings are being paid out as dividends.) If a company is paying more in dividends than they earn, it could be a problem down the road.

You also want to look at their dividend history. Has the company been able to maintain their dividend over time? Have they been able to increase their dividend over time? Or have they had periods where they cut the dividend? When you depend on that income, the last thing you want to see is your income cut.

You want to be cautious of owning too few companies. When you own too many shares of one company, bad news could hurt your account.

3. What if You Need Extra Income?

You may find you need extra income. This can also be a challenge. You can sell positions that have appreciated in value. But when you sell those shares, your future dividend income is going to decrease. It can create a problem if you do need extra income. One of the ways to address that challenge is to have a bigger emergency fund on hand. When you need extra income, use your emergency fund and not disrupt your regular income flow.

Tax Advantages for Using Dividend Stocks to Create Retirement Income

This can be a tax-advantaged way to generate income in a non-IRA account. Qualified dividends receive preferential tax treatment. For most people, qualified dividends get taxed at 15%. It could be lower, depending on your total income. Other types of income are taxed at higher rates.

Qualified dividends come from common stocks of US companies and some international companies. When you build a portfolio of common stocks, you are going to be in a more tax-advantaged position.

Some higher-yielding investments pay dividends that are not qualified. Real Estate Investment Trusts (REIT’s), Master Limited Partnerships, and Business Development Companies pay good dividends. But those payments are not qualified. You can hold those, but you will not see the same tax benefits.

If you can handle all the challenges, using dividend stocks to create retirement income can be a good strategy. But it may not be easy.

Talk to a Certified Financial Planner™ Professional

 


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About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

Our Most Recent Videos And Posts