We were all reminded last year that life doesn’t always go as planned. While there likely won’t be another year like 2020, and hopefully never another global pandemic that puts the world on lock down, it’s important to be prepared for the other curveballs that life may throw your way and understand how they can affect your financial life.
As a Certified Financial Planner in Utah, I see 5 threats that often take people by surprise.
Taxes can take a big bite out of your finances, both during your working years and in retirement. Tax planning is especially important for high net worth individuals, because the more you make, the higher your taxes.
We all know taxes are coming, so how can taxes surprise so many people?
Well, not only is tax regulation complicated, but it changes frequently. When you have a high net worth or are running a business, taxes can be even more complex. According to reports, the average audit rate is 1 in 250 tax returns, but it’s 1 in every 100 if you make anywhere from $200,000 to $1 million. That elevated rate more than doubles again if you make more than $1 million. Audits, even when you and your tax professionals have done everything by the book, are time-consuming and can be expensive.
Taxes also surprise a lot of retirees. For one, it’s a common misconception that Social Security benefits aren’t taxed. Secondly, not all retirement income is taxed the same. For example, Roth IRA contributions are made after-tax, so they aren’t taxed when withdrawn; but Traditional IRA contributions are made pre-tax, giving you a break in the present time opposed to later. While a Traditional IRA can be a strategic financial move, because many retirees are in a lower tax bracket in retirement, and therefore, pay less taxes, taxes will still be due.
There are many ways to plan for taxes now and in retirement. For tax-planning strategies specifically for last year, read our recent blog post: Tax Planning Strategies in the Year of COVID, From a Financial Advisor in Utah.
Don’t let retirement surprise you. Schedule a no-obligation conversation with the team at Rock House Financial.
Divorce can have a major emotional and financial impact on your life, but what about the after-effects? How does it affect your retirement plans? And what about your estate plan?
A key component of an estate plan is a Last Will and Testament, which provides for disposition of one’s assets after death and also often specifies child guardianships and educational plans. Be sure to review these documents if you are undergoing a divorce. Your estate plan might not be the first thing on your mind when you’re navigating this major change in life, but you don’t want to pass away unexpectedly with a Will that doesn’t reflect your current wishes.
Social Security and other retirement benefits are also often overlooked by divorcees. Even though you may no longer be married, you may still be eligible to spousal benefits. If you’re not sure, ask!
A financial advisor can be a huge resource during and after a divorce. Not only can your financial advisor help make sure you update your future plans, but he or she can also help you create a new financial plan based on your changing lifestyle today.
The stock market was strong throughout most of last year – almost surprisingly strong given the impact of the COVID-19 pandemic on the economy.
But ebbing and surging, rising and falling, is the natural state of stock markets. Volatility can be mild or severe, and the markets can always move up or down. If they move down severely, your net worth and plans can both suffer.
Fortunately, many strategies to ease the effect of market volatility exist. Make sure to allocate the assets in your retirement and investment portfolios to both reap the good side of the stock market (higher returns than many other asset classes, such as cash or bonds) and protect against the bad side (the possibility of declines). Remember, lower prices can be a good thing.
Take your age into account; pre-retirees and retirees may want more stability.
If you’re unsure about your asset allocation, don’t be afraid to ask for help. A financial advisor should monitor your portfolio on a regular basis and alert you to any rebalancing you may need.
Caring for Adult Children
Last year especially, we saw more adult children needing financial infusions from their parents, either to tide them over in periods of unemployment or to help them out during college and advanced degrees or other training. In fact, times of emotional duress such as COVID-19 have caused many adult children to move back in with their parents.
If you find yourself caring for your adult children, assess how much financial help that will likely equate to and how much you are willing to give them. Remember, your financial stability is most important. You can’t help your children if you’re financially struggling yourself.
For some families, drawing up a mutually agreed-upon plan of how much each person will contribute either financially or around the house (or both!) can be a huge help to avoid any potential conflicts.
Caring for Aging Parents
At the other end of the spectrum, we also see clients having to care for their aging parents. Once again, while there may be no question of whether you’ll take your parents in, make sure you don’t put yourself in financial distress because of it.
Long-term care and its expense can be extremely complicated – and financially overwhelming. Work with your parents and candidly discuss their physical, emotional and financial needs. This can be a difficult conversation, so bring in your financial advisor to help. Discuss their financial situation and their estate plans. Know who their powers of attorney and executors are. (And then use this time to update your estate plans! If you’re not sure who you want in charge of your estate, read our recent blog post: How to Choose an Executor for Your Estate (5 Tips).
The Bottom Line
Our financial lives are complicated. Don’t be afraid to ask for help. Being forewarned, after all, is being forearmed.
If you’re looking for a Certified Financial Planner in Utah or feel it’s time to make a change, contact the team at Rock House Financial. Locally owned and independent, Rock House Financial is passionate about helping clients create a more confident financial future. We offer fee-only financial planning, investment management and tax strategies to help you minimize financial stress and achieve your goals, whatever those goals may be.
Schedule a no-obligation meeting, and take the first step to protecting yourself against the unexpected.