Questons to Ask in Financial Matters

Do you know what questions to ask when it comes to your personal finances? Chances are you are like most people and keep your personal finances, well personal.  It is not a natural feeling for us to discuss our personal finances with people who are not in our inner most circle.  It is important to have a person with whom you can discuss your financial situation with and if that is a financial planner then you need to have one that you trust completely.  If you do not have a planner find a family member or good friend who is financial savvy who can be your sounding board.  Here are several questions that everyone needs to be aware of and answer when looking at their personal finance situation.

What is the cost of this investment at the end of the day? Fees can come in all shapes and sizes and if they go unchecked can erode your financial position in ways you never considered.  If you are investing on your own you have fees associated with the buying and selling of the securities or commissions on each transaction.  Also mutual funds and exchange traded funds have fees associated with their daily management.  Here passively managed funds such as an indexed fund will have much lower fees than an actively managed fund.  Also, some companies are known for lower fees over other such as Vanguard who is the leader in low cost indexed funds of both varieties.  What you pay in fees can add up over the long haul in some serious money loss or gains for you so pay particular attention to what you are paying in various fees.

How much do I need to retire and is there a chance I can save that much? Just about any financial website has a calculator that will assists you in figuring out how much you will need to save in order to reach a specific goal but that is about the end of their usefulness.  These calculators only tell you what you will have at retirement assuming an initial sum saved, an inflation rate, and savings rates to give you what you would technically have at the end of a pre-defined period of time.  That will answer the second part of the question and that is if you can save enough of what you think you will need for retirement.  As for how much you will need that will take some additional work on your part or better yet the consultation of a qualified planner.  Here you need to figure out your post retirement budget and spending levels.  You will also need to estimate how many years you will be in retirement to spend your money.  A good planner can help you budget your post retirement years and help make adjustments in the event there is a major event that could affect your retirement such as a stock market decline.  If you are detailed oriented and can do decent projections you may be able to accomplish this on your own but it really is better to consult a financial planner.

Am I taking too much or too little risk with my investments? Here the answer is one that is best accomplished when you are able to work with a financial planner.  Many people will buy a security when it is hot and normally at a higher price and when the market turns they panic and sell at the worst possible time.  This is not a unique situation but rather one of human nature. By hiring a financial planner to advise you on these matters it takes the emotional side out of the equation because they are helping you make these decisions and they are able to look at the situation as a whole and not as individuals do in the heat of the moment.  Also, financial planners can assist you in selecting appropriate securities that will match your risk tolerance levels and build a portfolio that will handle the changes in the markets with minimal effects on your returns.

Is my insurance coverage adequate on my residence? This is a very important question that needs to be addressed on a regular basis.  The best thing to do in this situation is to review your policy on an annual basis to ensure that it is adequate for your needs.  If you have a life event or a major change in circumstances it is always good to revisit your policy coverage after these events.  At a minimum you need enough coverage to replace your residence in full.  Additionally you need to make sure you have adequate insurance to cover your contents as well.  Be aware that some high dollar items and collections need special riders to provide adequate coverage in the event of a loss in these items.

What surprises might come back and bite me in my coverage? Here is it good to sit down with your insurance agent and go over the possibilities that could affect your property.  An example of this is a home owner’s policy will protect your house against rain and wind damage but you need a special flood policy to protect you against flooding.  A second area that is often over looked is liability coverage.  Normally for a nominal cost anyone with a home owner’s can get an umbrella policy that will provide a million dollars in coverage and you may even get more depending on what your needs are.  I know my policy costs about $135 a year for the basic million in coverage.  A wise insurance for the minimal costs that provides a world of comfort in today’s world of lawsuits.

Are my investments tax efficient? Not all investments gains are treated the same way or in the same manner.  Any security that you sell that was not owned for at least 12 months will be treated as a short-term capital gain and be taxed at your ordinary income tax rate.  For those investments held longer than 12 months the gains will be treated as long-term capital gains and for most people will be taxed at 15%.  If your tax rate is less than 15% long-term capital gains are not taxed at all allowing many retirees the ability to sell these long held assets with no tax consequences.

How can I minimize my taxes when I have to take a withdrawal from my IRA? Before you elect to take social security calculate what your RMD will be for your IRA at age 70 ½.  Then you can calculate what your social security would be at age 70.  Here is where the tax savings comes into play.  For someone who is in the situation such as myself their full retirement age is 67.  By delaying social security until age 70 you will increase your benefit 8% a year for an additional 24% in benefits.  For the time period you are not taking social security make withdrawals from your IRA to replace the missing social security.  Then at age 70 ½ your RMD will be lower and you will now also be collecting social security at an increased amount.  And the tax brackets are much broader than most realize with the 15% rate being anything between $18,150 and $73,800.  Then it bumps up to 25% up to $148,850.  But taxes are bracketed and if your income was $100,000 the first $18,149 is tax free, then from $18,150 to $73,800 will be taxed at 15%, and the final amount will be taxed at the highest 25%.

While these are not the only questions that you need to be aware of they are some of the more important ones that should be addressed. If you have any comments or questions please feel free to contact me and I will do my very best to address them in a timely and relevant manner.

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