By Joe Globensky, RFC®
If you’ve ever debated the value of a financial advisor, this blog post is for you. Of course, as a financial advisor, and owner of a wealth management company, naturally I’ll say we bring value to all our client relationships. But there are four key areas where I may be able to quantify it for you, using real-life experiences.
Value #1: Retirement Accounts
When it comes to retirement accounts, there is a surplus of regulations and tax laws you must navigate to make sure things are handled correctly. If you make a mistake, you may not be able to correct it, and it may end up costing you a large amount of money.
An annual review of beneficiaries can ensure your intentions are met after you’re gone. Knowing the distribution rules of current or former employer-sponsored retirement plans may help you to avoid potential early withdrawal penalties, and possibly avoid paying taxes too soon. And, as this article demonstrates, conversions to a Roth IRA and rollovers from qualified retirement plans can end up being an extremely expensive mistake if done incorrectly.
Value #2: Social Security Planning
Have any of your friends commented about signing up for Social Security as soon they can because it’s not going to be there in the future? Or, after having worked for 30 or more years and paying into Social Security, they now want to get something back?
When Social Security started in 1935, life expectancies were such that the average person may have only collected their benefit for 10 years or less. Based on today’s lifespans, this number is close to double that. And that’s for the average person. We all probably know multiple people who have lived well into their 90s.
Having a strong Social Security plan, designed to maximize benefits based on your goals and objectives, could add up to well over $200,000 in cumulative lifetime benefits. For example, a couple turning 62 in 2020, each with a monthly benefit of $2,000, and a life expectancy of 85 years, can increase their cumulative benefits by over $280,000 by selecting the claiming strategy designed to maximize benefits. This strategy may not fit everyone’s situation, but by being aware of all your options, you can make a sound decision for your circumstances.
Value #3: Tax Reduction Strategies
I was speaking to a client a while back who had recently married. Both he and his new wife brought children to the marriage. Her kids were now adults, but one was going to college. This client has been a friend for almost 15 years, so I knew a lot about his financial situation, and we were talking about paying for her college costs.
Over the years, he had purchased stock in his various employers. His stepdaughter worked while going to school, but she was in a low tax bracket. I suggested, with his tax advisor’s blessing, that he gift some of his stock to his stepdaughter to help pay for college. In his case, by gifting stock, he doesn’t pay tax on built up gains, she inherits his cost-basis in the stock, and when she sells the stock to pay for college, she will owe no tax because her low income tax bracket comes with a 0% tax rate on capital gains.
He may very well have discovered this strategy on his own, but through his business relationship with our office, I was able to help him solve a problem, and save potentially thousands of dollars at the same time. This strategy may not fit everyone’s situation and we suggest that you work with a tax professional before making any decisions.
Value #4: Medicare Planning
Not all financial advisors offer Medicare Planning. We do. And let me tell you, it is a confusing topic for most people. First, you need to be aware that you may be penalized if your income is too high. And, it’s not your income at the time you enroll in Medicare, it’s a two-year look back. In other words, if you enroll at 65, your tax return from two years prior will be used to determine any penalty to which you may be subject. So, it can be helpful to do some income planning early to try to eliminate this risk.
Once you’ve decided to enroll, then the fun begins protecting yourself from what healthcare costs are NOT covered by Medicare. Original Medicare comes with deductibles, co-pays, and co-insurance that can be quite high. Through Medicare health plans, such as Medicare Advantage or Medicare Supplement plans, you can potentially reduce your out-of-pocket healthcare expenses. But these plans vary in costs and benefits, sometimes by quite a lot. You can educate yourself on these plans, or you can choose to work with someone that knows and understands the plans. And, the plans cost the same whether you use a specialist, or you do it yourself.
With this increased awareness of the value a financial advisor can bring to you and your family, it’s time to act. At Connections Financial Advisors, we can work with you if you only need help with one area of concern. We can also provide our expertise for more comprehensive engagements. Feel free to call us at (217) 605-8130, send me an e-mail, or use our online scheduler to set up your free, no obligation introductory meeting.
The information provided here is for general information only and should not be considered an individualized recommendation or personalized advice. The strategies mentioned here may not be suitable for everyone. Each investor needs to review a strategy for his or her own particular situation before making any decision. Connections Financial Advisors and LPL Financial do not provide tax or legal advice.