NAPFA planners took your questions about end of the year financial planning on Thursday, November 15. You can find a transcript of the chat below.
We will have five NAPFA advisors with us this afternoon: Debbie and Rich Frazier of Frazier Financial Consultants in Chapel Hill, NC; Bonnie Sewell of American Capital Planning; Randy Kratz of Willoughby Hill Wealth Management in Tomball, TX; and Wendy Weaver of FBB Capital Partners in Bethesda, MD.
I should probably note that I am a CFP, with Frazier Financial Consultants.
Hello. This is Randy Kratz, owner and principal of Wlloughby Hill Wealth Management in the Houston TX area.
Good afternoon! I’m Wendy Weaver and I look forward to answering your questions!
Wendy M. Weaver, CFP®
FBB Capital Partners
We received several questions in advance, so let's go ahead and get started. Questions will be answered in the order they came in.
This first one comes from Donna
Donna - Are you retired now?
I think if it's one area that gives financial advisors pause, it's SS. My best suggestion is to sit down with a CFP and CPA to incorporate her question into a comprehensive plan.
If a spouse is at full retirement age, he/she can file for SS income, and then delay payments. This allows that spouse's SS benefit monthly to increase until age 70. Then the other spouse can claim spousal benefits, or 1/2 of their spouses benefit.
Thanks, Randy. What works for some might not be the best option for others.
Hi Amanda - sorry to be tardy
Welcome, Bonnie. No problem!
I agree with Randy on devising strategies for SS inside a comprehensive plan - for better or worse, there are many different ways to think about how and when to receive SS benefits today and making the decision ad hoc (outside of an overall plan) could cause big hiccups down the road.
It is true today that the benefit increases nicely - I'm not confident that will continue in the next few years so once again, strategies for SS should be carefully weighed against having to revise them as the program changes.
@ Donna: This is a great question and can be a useful strategy for couples to ease cash flow while transitioning into retirement. The spouse who’s benefit is suspended will continue to increase, and this strategy can be especially beneficial if the spouse can wait to receive benefits until age 70. Each year of waiting after the full retirement age increases the benefit by 8%. A Certified Financial Planning™ professional can help you with such calculations, or possibly your tax professional. Your local Social Security office can help you with the process but be sure to make an appointment before you go down there.
Thanks, Wendy and Bonnie.
Here's another question from Mark.
Mark, many of us work virtually - I serve clients in CA, FL and GA while living in northern VA. We do this by Google Video Chat so I would think many NAPFA advisors can help you while you are overseas.
I echo Bonnie's response. We do most of our planning with clients via email or phone. So I imagine that you being in the same city as a NAPFA member or in a different country, that it would not make a huge difference.
Let's go ahead and take our next question from Matthew.
Matthew, I don't see any worry about return of capital in a ROTH IRA, others please weigh in.
Hi Matthew, I agree with Deborah. All income and distributions inside a Roth IRA are not taxed, so from a tax stand point there is no concern.
I think I may be missing something in Matthew's question - I am not seeing a need for concern on taxes. Matthew, have we missed what you meant to ask?
Ready for this next question from Bill?
Good question Bill. We always tell our retired clients that we prefer keeping at least 6 months of withdraws in cash for the very reason you specified, we do not want to be forced to sell securities to raise cash during down markets. Along with this, we recommend keeping another year or two worth of withdraws in liquid short term bond funds to add additional cushioning. Retiree's normally have a larger position in bonds than non-retirees, so it makes sense on 2 different levels to keep more bonds.
Emergency funds are the first "bucket" people should fill. the 6-9 months is a general rule. It depends what you're comfortable having in cash. One thing to consider is keeping your emergency fund in a short-term bond fund rather than cash so it at least earns something.
Hi Bill, good question! Hardly ever get this one. For clients in retirement, we like to see 3-5 years in cash or cash equivalents so we never have to sell into trouble (witness the last several ugly years) and so most clients don't call their previous emergency accounts that in retirement - we often call them play accounts for expenses they didn't plan for but would still like to spend while they can enjoy what they will purchase. Another way to think about a previous emergency fund is deciding whether to use credit or not - if you tend to carry balances, I'd review cash flow and pay off cc debt with this. Finally, it can serve as an old - fashioned holiday account, travel account, etc.
Staying on the question of cash for another minute, one way to think about holding it in reserve in any market is that it can serve as protection and/or opportunity. For example, when we hold it as protection, we don't expect to earn much on it, although it's always welcome if you do. When it's held for opportunity, we expect to deploy it under an unusual or unexpected market condition. When real estate tanked, those holding cash had a quite literally golden opportunity to use that cash to purchase real estate at very attractive prices.
Good point, Bonnie. Do you think this advice applies to all the uncertainty over the Fiscal Cliff, as well?
Yes, although it feels (no crystal ball here) that taxes must increase simply to help the math of paying our bills - if that's true, then we'd want to bring more income into 2012 than 2013 forward. The rest of it is up for grabs until more work is done.
Consider this however, for years, they've been chipping away at Schedule A where we deduct mortgage interest, real estate taxes, and charitable deductions and others - in the same time period the standard deduction has been increasing. It seems like the Schedule A may recede over the next several years - that has big impact on many families.
Interesting, Bonnie. Definitely something to look out for.
Lots of great advice on emergency funds, thanks all.
We actually have a question from a reader about the Fiscal Cliff. This should be a good one for all of the advisors to weigh in on.
There's a lot of press about how to "position" yourself for the "cliff". It's somewhat fruitless to try and structure your financial world based on the cliff right now. No matter what the result, we're all going to deal with different tax rates and policies in future years, so revamping now may be difficult.