Archive for June, 2011

Getting rid of paper clutter can really add to your peace of mind and boost your morale. Chances are that this has been on your to-do list for a while. Lots of people think about it but don’t know what they should keep and what they can throw out.

Here’s some tips to help.

Step One: Toss what you can.

Nearly all of your financial papers can be divided into three categories: records that you need to keep only for the calendar year or less, papers that you need to save for seven years (the typical window during which your tax return may be audited), and papers that you should hang onto indefinitely. You don’t need to keep sales receipts for minor purchases after the warranty has expired. Keep receipts for major purchases. Shortly after the end of the calendar year, you get a final end of the year statement for your financial accounts and can get the same thing from your credit card company; then you can toss the monthly statements.

Step Two: How long should you hang onto the records you need to keep?

You may need access to those final credit-card statements, your W-2s and 1099s for at least three years and, preferably, for seven. Among the additional documents you should keep are canceled checks and receipts for all deductible business, retirement-account contributions, charitable donations, child-care bills, out-of-pocket medical expenses, alimony, and mortgage-interest and property-tax payments.

Keep the tax returns and year-end summaries of your investment accounts, indefinitely. They don’t take up much space and can come in very handy for future financial planning.

Step Three: Set Up A System and Give your papers a good home.

The number-one reason that people get overwhelmed by the paper in their lives, experts say, is that they have no system or place to put it. As a result, piles grow and documents end up in a dozen different places, none of which you can ever remember when you need to lay your hands on them. If you have a spare room or corner, great; if not, a file cabinet where you can store bills and current records, situated near a table on which you can write checks, will do. Having filing supplies on hand, and creating a easy-to-read labeling system is crucial.

Keep your will and other estate planning documents, birth and marriage certificates, and insurance policies in a secure place and keep copies of these documents accessible and near your other financial documents so you and your family will always be able to get to them quickly, if they need to.

One of the most important things you can do to protect your wealth and care for your family is creating a life and estate plan. An estate plan is your key to ensuring that your hard-earned assets are distributed (or saved or invested) as you designate. An estate plan is your family’s safety net.

Unfortunately, too many people attempt to take shortcuts with their plan, and find themselves with a safety net that is falling apart just when they need it most. Below are 5 of the most common missteps that can sabotage your estate plan, and how you can avoid them.

1. Not getting the help of an estate planning attorney. There are do-it- yourself will kits and estate planning programs out there that promise you a full estate plan for a cheaper price. But estate plans are complicated things, requirements change depending on your state of residence, the size of your estate, the age and situation of your beneficiaries, and many other factors that a good estate planning attorney will discuss with you.

An estate planning attorney would get all necessary information from you and has the experience to point out other areas of concern that you wouldn’t have thought of. Your personal lawyer should explain how things would look be for you and your family if you died or were incapacitated with your current plan in place. Good lawyers offer alternative planning solutions to avoid the unpleasant scenarios.

2. Making notes in the margins of documents that have already been signed. Any changes you want to make must be officially executed in order to have any effect.

It is often a good idea to revoke any previous documents so there is no confusion about which document is current and valid. Neglecting to do this can end with your assets tied up in probate court for months or years—or even worse, invalidating both documents completely.

3. Putting your plan somewhere so that it can’t be found. I can’t tell you how often I speak with people who tell me “Yes, I have a will and other estate planning documents” and when I ask them to bring them to our meeting, they tell me “Oh, I don’t know where they are”.

Estate planning documents are important and need to be accessed quickly at times of crisis. Wherever you choose to store your documents, be sure one or two trusted individuals have not only the knowledge of where the documents are, but also the ability to access them. An estate plan does no good if it cannot be accessed when it’s needed.

4. Not putting your assets in your trust. A trust can be a wonderful tool for protecting your assets; flexible and customizable, a useful trust can be created for just about every situation. But a trust is like a strongbox—if you don’t fill it up it has nothing to protect. Accounts and assets must be put in the name of your trust for it to work as you’ve designed it to.

5. And finally, one of the most common missteps that can sabotage your estate plan is not updating your plan regularly. Not only do federal and state laws change but you will undoubtedly experience changes in your own life and family. Failing to update your plan to keep up with the law or with your own life can result in an estate plan that is as useful as a car you neglected to maintain—it may look fine on the outside, but it simply won’t run anymore.

If you’ve worked with me on your estate planning then you know how important it is to review and update your plan in order to keep it on track. The same thing is true for your financial retirement plan. Most people are used to thinking about reviewing your financial plan during the earlier growth years – when new children are born, when college funding plans are put in place and when you start saving for the day you will not longer be working.

It’s just as important to review your retirement plan even after the retirement phase has begun. It turns out actually that it may be more important then so you can make sure you are still on track to have the quality of life you planned. Will the financial plans you have in place for the first 15 years of retirement be the right one for the next 15 years?

Just about everyone should give his or her finances an annual checkup, especially during retirement when it’s harder to correct course. But taking a big step back around the likely midpoint of retirement can be a good time to review your longer-term history of saving and spending — and think about whether any big changes might be required.

After a mid-retirement review many people found that they were overspending. The biggest surprise revealed by a review can be realizing you’re probably going to live a lot longer than you had planned. The sooner adjustments can be made, the better, especially if it’s going to require making any big moves, such as selling a house or getting a reverse mortgage. Essentially, the longer you live, the longer you’re likely to live. Back in 1990, the average American male turning 65 could expect to live to age 80, and the average female to 85, according to the Social Security Administration. Now, having turned 80, that average male is likely to live to be 88 and the average female to age 90.

From there, it’s a matter of reviewing your savings, spending habits and investment returns. The focus: seeing if you’re keeping up with inflation and your — hopefully — longer life expectancy.

Even if you’re a do-it-yourselfer, this may be a good time to sit down with a financial planner. But plenty of online resources can help. Vanguard Group, for example, offers an easy-to-use calculator to see how long your savings might last. Visit retirementplans.vanguard.com and search for “nest egg calculator.”

Of course, the challenge is adjusting should numbers come up short; especially since going back to work at age 80 isn’t an option for most people. One question is whether your investments are too conservative for a retirement that could stretch an additional 15 or 20 years.

This doesn’t mean loading up on risky investments. It could mean simply adding Treasury inflation-protected securities to your investment mix, which will help counter rising inflation. But even at age 80, you likely need some stocks in your nest egg such as high quality, dividend-paying stocks.

For some retirees is that their savings simply won’t last. That could mean downsizing to a smaller home. For some it may be appropriate to get a reverse mortgage, which allows homeowners to convert some of the equity in their home into cash.

A portion of the money raised from a home sale or a reverse mortgage could then be put into an immediate fixed annuity, which would provide a guaranteed payout for life. This step can help ensure there will be enough money to cover basic expenses and allow greater flexibility with the rest of an investment strategy.

Read more at Get a Mid-Retirement Checkup.

A hidden risk that occurred when only one spouse took out a reverse mortgage has been fixed – at least for now. The problem had left some widows facing the risk of foreclosure after their husband died.

After three surviving spouses recently sued HUD over changes in reverse mortgage policies adopted without any public notice or input, HUD announced it had rescinded its December 2008 policy. Here’s the background to the story.

A reverse mortgage allows homeowners over 62 to borrow against the equity in their home. The loan is repaid with interest once the homeowner no longer lives in the home. One of the advantages of a reverse mortgage had always been understood to be that the outstanding loan amount would be capped at the value of the property, so that no one would ever have to pay more than the value of the property.

In 2008, the Department of Housing and Urban Development, which regulates and insures reverse mortgages, issued what it called a ‘clarification.’ This clarification is being read by lenders to mean that if a surviving spouse is not listed on the reverse mortgage when the other dies, they would have to pay the full outstanding balance of the loan to avoid foreclosure, even if it more than the value of the home.

If the surviving spouse sells the home they are not required to pay more than the market value so long as they follow the HUD guidelines, but to stay in the home they may be quickly required to pay the full outstanding balance.

Having both spouses on the reverse mortgage will avoid this particular problem. But certain age requirements may lead some couples to decide to have only one name on the reverse mortgage. In some cases an older spouse applying alone may be eligible for a larger loan.

Read more at A Red Flag on Reverse Mortgages