The Financial Aid Officer Could be Your Best Friend

By Katherine Vessenes, JD, CFP®, RFC
July 19th, 2010

Funding College without Bankrupting Retirement

 

As a Certified Financial Planner® who helps families create a college funding plan, we have found many college bound students and parents have no idea how powerful the Financial Aid Officer (FAO) can be. They can literally make or break you and your child’s financial future and completely derail your college financial aid plan. If you want to reduce college costs and increase your financial aid award there are many steps you can take to save thousands of dollars every year your child is in college. One important step is your relationship with the Financial Aid Officer.

 

 

The goals of the Financial Aid Officer are numerous:

 

· They need to manage the disbursement of their college’s endowment funds, in the form of merit and need-based awards, in a way that meets the college’s goals and best leverages their pool of funds. They are a lot like a CFO for any business—they need to manage their funds in a way that is best for the school. This means some are more “closed-fisted” than others. A few feel it is their responsibility to give as little merit or need-based awards as possible, because it comes out of the college’s own funds.

 

· To use their financial aid, and ability to create award packages, to attract the best students—this increases the prestige of the school, and over time increases their rankings, making it easier to attract high-quality students in the future. They think of this as “buying the right students”.

 

· To work within government and school guidelines to create a financial aid plan for each student that might include various loan programs, grants, and awards that help the student afford a college education.

 

 

Here are 15 suggestions for working with the Financial Aid Officer in a way that could mean higher awards and spending less for college:

 

1. This is a lot like dealing with the IRS: it is a business for the Financial Aid Officer. They want you to pay as much as possible and for them to pay as little as possible. Just like it is both legal and ethical to pay less taxes by taking advantages of the legal tax code, the same is true for the financial aid process.

 

2. Remember what your Mama told you: Be polite! This is not the time to throw your weight around and be rude and demanding with the Financial Aid Officer. FAO’s have a great deal of power. In the right situation, they may grant you more aid than you would normally be entitled to. They are not likely go this far for a bully.

 

3. Take the time to learn how your target school’s financial aid office operates and how the entire financial aid system works across the country. Get informed about the process and deadlines. The uneducated consumer is the Financial Aid Officer’s best customer.

 

4. Work with a qualified college financial aid planner to get an estimate of what your expected family contribution is likely to be. This helps you have a more realistic expectation of what you can expect from your Financial Aid Officer. Note: this is a very complicated area—make sure you find someone who is a Certified Financial Planner® and properly trained to help you with your college funding plan. In our experience, most financial planners and CPAs do not have the training you need in this area.

 

5. If your target school is anxious to have your child in class, the Financial Aid Officer is likely to give you a higher award, or they might sweeten the deal with grants/scholarships not based on need.

 

6. Submit your supporting documents, like letters of special circumstance, and your required forms like the FAFSA as early as possible. Some college financial aid consultants report those who file early are more likely to get favorable awards and larger grants. If you are late in the process, there are likely to be fewer funds available for your student and you will be paying more for college.

 

7. Your file and supporting documents should be neat and organized. Make it easy for the Financial Aid Officer to make a decision. A messy and disorganized file that is missing information is likely to go to the bottom of the pile as it will be more work for the Financial Aid Officer to make a decision.

 

8. Never, ever lie or falsify any information on your forms. Financial Aid Officers have numerous ways of verifying your information including comparing it to your tax return. The consequences can be devastating: they can revoke awards, and in certain cases they can even refer a case to attorneys for fraud or to a DA for criminal prosecution.

 

9. If your Financial Aid Officer asks for more information, give them whatever they are asking for. However, this is a lot like being a witness in a trial—don’t volunteer anything they don’t ask for! If they don’t ask, don’t tell.

 

10. Financial Aid Officers tend to be very sympathetic to the poor family who is struggling, scrimping and saving to put their student through school. They have little sympathy for the family who has lived beyond their means and now expect the Financial Aid Officer to bail them out.

 

11. If you have unusual expenses, that might not be obvious, like higher than usual medical expenses, you should speak to the Financial Aid Officer and submit your budget directly to the school of your choice.

 

12. Financial Aid Officers have a lot of power and could decide your Expected Family Contribution (EFC) is higher or lower than the “standard” calculation. They could even come up with a package that meets your entire requirement.

 

13. There is a trend towards FAOs making lower awards than in the past. This allows parents and students to “negotiate” with the FAO. Many people don’t realize the FAO can make awards in their discretion, outside the normal guidelines. If you didn’t get the award you were hoping for, place a call to the FAO, and in a kind, laid-back manner, ask if they could review it and possibly increase their award. Be sure to supply new information if it is appropriate. This kind of “negotiation” is becoming more common. One of our college financial aid consultants suggested three of his clients do this last year, and all three of them got an increased award.

 

14. Carefully review any award, before you sign it and return it. If you don’t understand it, call up the office and ask if they would review it with you and answer your questions. Make sure you understand the terms of any loans, and when they are due. Also, ask what the monthly payments are likely to be. In some cases you can accept or reject any portion of the award that you desire—however you will be responsible for any unfunded amounts.

 

15. Finally, even if you don’t get the award you were hoping for, send the Financial Aid Officer a hand-written thank you note. Hopefully, they will remember you next year, when you go through the same process all over again!

 

Applying for college financial aid is a complicated process with many potholes. Making a wrong turn can cost you thousands every year. If you are considering engaging a college financial aid professional to help you with the process, be sure they are properly trained. Look for a Certified Financial Planner® who is a college financial planner and has had special training in the college financial aid process.

 

If you would like us to help you with this process, please call our offices at 952-401-1045 or email me at Katherine@vestmentfinancial.com. There is no charge for the first meeting. Also, we frequently hold workshops for parents and students who want to understand the financial aid process. If you are interested, let me know and we will invite you to the next workshop.

 

Katherine Vessenes, JD, CFP®, RFC is a Twin Cities based Financial Planner and Advisor who loves to help clients find a way to pay for their child’s college education. She is a nationally recognized Financial Advisor, former member of the CFP® Board of Ethics, and is known as America’s best-known authority on the legal and ethical issues of financial advisors, according to Bloomberg Press. She can be reached at: 952-401-1045 or Katherine@vestmentfinancial.com. Her website: www.vestmentfinancial.com.

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5 Things You Can Do to Reduce College Costs and Increase Financial Aid

By Katherine Vessenes, JD, CFP®, RFC
July 9th, 2010

Paying for college without bankrupting your retirement plan, is getting harder and harder to do, particularly in the current economic climate.

 

Between 70 and 80% of students are accepted by their first choice school. The problem is not getting into the school of choice, but paying for the school. This problem is exacerbated during bad markets, as some schools are forced to reduce the amount of “free money” they can award students for merit or need. If the economy weakens many schools may be faced with not being able to put together packages that will cover the entire cost, meaning parents will have to pay more than their Expected Financial Contribution.

 

As a Certified Financial Planner®, here are five things we tell our clients to do that can do to increase your chances of getting more financial aid and reducing college costs:

 

1. Educate yourself on the financial aid process. It is not the poorest who get financial aid, but those who best understand the financial aid process. Knowledge is not just power, but dollars saved that you can use for your retirement. The process is complicated and the road to paying for college has many potholes. A great source for explaining this process in detail is a book by Princeton Review: Paying For College Without Going Broke.

 

2. Line up your child with the right school, financially. It is possible to get a higher award from a private college than a state school. If your student is in the top 20 to 25% of all the applicants to the private school, they will be more attractive to that school, making it more likely they will get a good offer that includes more grant (free) money.

 

Don’t ignore the private schools, thinking they are too expensive. The key is finding the right school where your student will be one of the top in the incoming class. Look for a school who wants the talents of your son or daughter. If your daughter is a soccer star, then look for schools who want to improve their soccer team—it is more likely you will get a merit award. Be creative when it comes to talent—if you have an entrepreneurial son, look for a school with a strong business department. If your daughter is a violin virtuoso, there is likely a school who wants that talent.

 

3. Get those grades, ACT, and SAT scores up. Every increased point on your SAT/ACT or tenth of an increase in grade point average can mean thousands more dollars of financial aid. Encourage your child to get the highest possible grades/scores. If your child hasn’t taken the SATs/ACTs yet, enroll them in a cram course. One source says the study courses can increase their scores by over 100 points. This could mean thousands more dollars in your pocket.

 

4. Avoid transferring money to your child’s name. One of the worst things you can do is move money into your child’s name. Sometimes this is a good tax strategy, but it can cost you in financial aid dollars. There are a number of reasons for this: the financial aid process assesses a certain percentage of both the child’s and the parent’s assets and income. Money they require you to pay for college. The child’s assets are assessed at higher rate than the parents— transferring money may have saved some tax dollars, but it is costing you more money financial aid.

 

Another downside is you now have no control over this money. If Sonny Boy wants to take the money and buy a Jaguar the day he turns 18, you will not be able to stop him. You gave away this money and now you don’t have the right to it, or the ability to use it for college costs. This is true, even if the Financial Aid Officer wants to assess you, the parent, and the child the same amount of money as before.

 

5. Maximize the money that goes into qualified plans in the years before your child goes to college. Qualified plans, annuities, pension plans, IRAs, cash value life insurance, and some other categories, are not used to calculate how much money parents need to contribute to financial aid. In fact you can have hundreds of thousands saved in these qualified plans, and not be expected to use these funds to pay for college. You don’t even have to report them! And it is perfectly legal.

 

This means you can save a lot of money paying for college, by carefully transferring assets into a “protected” category. This can be a tricky area, so make sure you get the advice of a college financial aid counselor who is trained on the intricacies of financial aid planning. In our experience, many talented financial planners and CPAs are not properly trained in this area. Make sure you are dealing with a properly trained professional.

 

Finally, many ask if these strategies are legal and ethical. My answer: yes and yes! Just we have a duty to avoid over paying our taxes. You also have a duty to avoid over paying for college costs. Remember, you have already paid for financial aid with your taxes. If it isn’t going to your kids, it will be going to someone else’s. Do what you can to reduce your college costs—it will also be a good way to save for retirement, too.

 

Probably the most important step you can take in funding college, is working with a Certified Financial Planner® who understands college financial planning and the financial aid process. We are here to help. Our mission is to help you build wealth, while funding college at the same time.

 

“I am on a mission,” says Katherine. “I unwittingly blew through $300,000 sending my three children to college. I later found out I could have saved that much money with some simple college planning techniques. I don’t want any other parents to bankrupt their retirement,” she explains. “My goal is to help every family fund the college of their dreams while building their net worth at the same time,” Katherine states.

 

Katherine Vessenes is a nationally known attorney, and financial planner, who was on the Certified Planner Board of Ethics, and has written two books on the legal and ethical issues of financial advisors. According to Bloomberg Press, she is America’s best-known authority on the legal and ethical issues facing financial advisors. She works in the western suburbs of the Twin Cities helping clients create a college funding plan and a plan for retirement at the same time. She can be reached at: 952-401-1045 or Katherine@vestmentfinancial.com.

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Should You Buy Term and Invest the Difference?

By Katherine Vessenes, JD, CFP®, RFC
July 2nd, 2010

This mantra has been common since the 1980’s. Dave Ramsey and Suze Orman are also singing from this hymnal. Here is the question: Is this the right song for you?

 

Answer? Maybe. Then again, maybe not.

 

When we do a financial or retirement plan for our Minnesota clients, we always look at survivor needs. Almost all of our financial plans show that clients are underinsured. They need more life insurance than they thought.

 

We have had two clients, with high debts, stay-at-home moms, with young kids, who have no life insurance at all! That’s right–zero. Hubby dies, wife didn’t even have enough to pay for the funeral. It was my unhappy duty to show them, the surviving spouse would be filing for bankruptcy within days of her husband’s unexpected demise.

 

Here are some of the positives, and some negatives, about buying term and investing the difference. As typical with all investments, there are pros and cons to every product.

 

When we compare term insurance to permanent, it is similar to renting or buying a house. It is usually cheaper to rent, but if you were in the same house over 20 years, it would probably be cheaper to buy it out right. Renting doesn’t give you the rights of owning a home.

 

Look at this comparison:

 

Term Permanent
Lower cost initially Higher cost initially
Higher costs as the client ages Lower overall cost as the client ages
Lasts for a period of time Lasts until the end of client’s life
Death benefit only Death benefit plus savings account
Can by-pass estate tax if structured properly Can by-pass estate tax if structured properly
No special income tax benefits Special income tax treatment

 

Here is where we use term for our clients in the Twin Cities of the Minnesota:

 

1. Client is young; in fact the younger the better.
2. Client is healthy; the healthier the better.
3. Client has a high need for a large death benefit. They have a heavy debt load or a spouse who could not earn as much as the insured, in the event of a pre-mature death. It might also be used to pay for estate taxes.
4. The premature death of the insured would cause extreme financial hardship on their family.
5. The client will actually have the discipline to save the difference into the side fund. Now this may surprise you—it is very rare for this to happen! They usually buy term and spend the difference.
6. The client is strapped for cash and can’t afford to buy a permanent policy at this time.
7. The client will need access to the side fund in the next couple of years.

 

Here is where we use a permanent policy:
1. There is a likelihood the client will need a death benefit for their entire life.
2. Client may need the death benefit to cover estate taxes.
3. Client will probably not be able to afford term premiums later in life, when they still have a high need for insurance, or they want to avoid the high premiums by starting early.
4. Clients have the funds for this type of strategy and it won’t cramp their current life style.
5. Clients like the special tax advantages of permanent insurance and want to use the cash value as a tax-free emergency fund, a tax-free college fund, or for tax-free income in retirement.

 

I have run the numbers on whether it makes sense to buy term and invest the difference or buy permanent insurance. Here is when buying term and investing the difference works:
1. The client needs all or most of the cash value in the next few years. (Some permanent policies have surrender charges, which reduce the savings account. So we see permanent policies as a long-term strategy.)
2. If the stock market only goes up! A hidden assumption of most advocates of buying term and investing the difference is that it assumes a stock market that is only going in one direction, up! If the market goes down, particularly over a prolonged down turn, like has happened in Japanπ, then the guarantees of some permanent life insurance policies would, over time, out perform a side fund that is tied to the market.

 

When does buying permanent insurance make sense as a strategy?
1. You are forecasting long-term market down turns or a dicey market.
2. The client can afford to stick with the program.
3. You want the unique tax benefits of the cash value, like tax-free withdrawals, if structured properly.

 

We use both strategies in our practice. In fact for a lot of our Minnesota financial planning clients, we will recommend both term insurance and permanent policies, thinking they have a higher need for insurance now. Once that need goes down, and the price of the term policy goes up, they can drop the term policy.

 

So what is right for you? No size or product fits all. We would run your numbers for you and see what makes sense in your case. If you would like a second opinion on your current insurance strategy, or maybe you are looking for a way to save money now or in the future, then give us a call.

 

Katherine Vessenes is a nationally known attorney, and Certified Financial Planner®, who was on the Certified Planner Board of Ethics, and has written two books on the legal and ethical issues of financial advisors. According to Bloomberg Press, she is America’s best-known authority on the legal and ethical issues facing financial advisors. She works in the western suburbs of the Twin Cities helping clients plan for retirement and stay retired. She can be reached at: 952-401-1045 or Katherine@vestmentfinancial.com.

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Common Money Mistakes and How to Avoid Them Mistake number one: Not Considering All four Cornerstones

By Katherine Vessenes, JD, CFP®, RFC
June 25th, 2010

We spent last summer providing free financial plans to our friends and family. I have been in the business since the mid 80’s, and yet this was a huge eye-opener for me. I had no idea how poorly prepared they were for their financial future. These were my closest friends and many of them were headed for financial disaster!

 

A number of them were going to run out of money in retirement; none had properly saved for college and every case had big gaps between reality and what they wanted for their financial future. Thank goodness they came in when they did—we still had time to make changes that would have a much better impact on their future and the future of their children.

 

These articles will each cover some of the common mistakes we see families, professionals, business owners, and boomers make with their money and how to avoid them.

 

Mistake number one: not considering all four financial cornerstones.

 

We believe when you are building a solid financial house—one that can withstand the storms of time, you need to place it on a firm foundation, one that includes all four cornerstones: Building Wealth, Protecting Wealth, Distributing Wealth and Transferring Wealth®. Unfortunately, most people just focus on building wealth—and this can be very detrimental to their financial future.

 

Building or accumulating wealth is just one piece of the puzzle. In fact, some investors and many financial advisors, unfortunately, only look at this one piece. You can do a great job of building wealth, but if you don’t take the other three cornerstones into consideration, you may not be able to KEEP your wealth.

 

We see many people who are so focused on building wealth they have never even considered some other important parts of the financial equation:

• How much money will my spouse and children need if I die prematurely?
• How much money will I need in a nest egg, to provide a steady retirement income?
• Will I run out of money in retirement?
• What effect does taxes have on my income now and into the future?
• How much will it cost me to pull money out of my retirement plans? (The answer: a lot more than you think!)

 

Those who focus just on accumulating or building wealth, tend to be preoccupied with the stock market—some actually get depressed when the market is down, even though there is always money to be made, even in a down market. In fact, there is a good chance they should be investing MORE when the market is down—this is like a sale at Nordstroms.

 

My advice—pay more attention to your plan, than to the market. We tell clients, standard indexes, like the S&P 500 are really meaningless to them. The reason? We create a financial plan for every client. When using this roadmap to their desired future, we know a range of returns that are important for reaching their goals. As long as they are averaging within that range, most years, they will get to their desired future. Sure some years we will be below that range, and other years we will be above it—that is why it is important to update your plan regularly.

 

This also means for most clients we don’t need to take the risk of the S&P; they can still get to their future by taking less risk than the market.

 

Takeaways:

• Your personalized, customized financial plan is more important than the market.
• You need to look at all four cornerstones to build, and KEEP your wealth.
• Standard indexes may have nothing to do with you and your portfolio.
• Update your plan regularly.

 

Katherine Vessenes is a nationally known attorney, and Certified Financial Planner®, who was on the Certified Planner Board of Ethics, and has written two books on the legal and ethical issues of financial advisors. According to Bloomberg Press, she is America’s best-known authority on the legal and ethical issues facing financial advisors. She works in the western suburbs of the Twin Cities helping clients plan for retirement and stay retired. She can be reached at: 952-401-1045 or Katherine@vestmentfinancial.com.

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Paying for College Without Bankrupting Your Retirement Plan

By Katherine Vessenes, JD, CFP®, RFC
June 23rd, 2010

Start Saving Now

If your retirement account is down 30 to 50%, you have a number of options:

 

• Work longer
• Invest more
• Get a higher rate of return
• Reduce your life style in retirement

 

Unfortunately, if you have a 529 plan that is down 40%, your high school student doesn’t have the same options. You can’t force your darling daughter to stay in high school until the market rebounds—at the current rate, she might not be out of your house until she turns 30!

 

To make matters worse, your child’s college costs are increasing far faster than current inflation rates. All of this adds up to less money for you to have for your retirement.

 

As a parent, if you haven’t started to panic yet, it is not too late to pay for darling daughter’ or son’s college without sabotaging your retirement future.

 

So what can you do, now that your child is a junior or senior in high school and has her/his heart set on Harvard, one of the most expensive schools in the country?

 

1. Plan ahead. The sooner you can start planning for your child’s college the better. In fact, starting at birth is not too soon. Unfortunately, most of us were not in financial shape to pay for diapers, much less start saving for college. Think about this way: 1) you will either be saving money and getting interest on your money for college or 2) you will be borrowing money and paying interest. Most of us would rather be in the first category.

 

Once your child is a junior or senior, it is a good time to look at what colleges cost and estimate what you will need to contribute in order to finance your child’s education. At that stage, you and your child should take the schools that are too expensive off your list…

 

2. Manage your child’s expectations. Talk to your sophomores, juniors, and seniors about what they can expect you to cover financially and what you are expecting your son or daughter to contribute. Most students need to come to reality—you might not be able to afford their top school, or they need to be willing to work and spend their savings to help finance their education.

 

One of worst things that can happen is to not discuss your finances with your son, who is operating under the impression you are more than willing to finance any school that he wants. You do the college tour, and Sonny Boy falls in love Stanford, and glory, be—actually gets admitted! It is at this point you have one of the most difficult conversations you can have with your son. “Congratulations on getting into Stanford, but we can’t afford to send you based on their financial aid package. You need to think about a less expensive school—how does Paduka U sound?” Needless to say, Sonny is devastated, your relationship is strained and the entire family is unhappy. Not a good way to send them off to college.

 

Start talking to them–NOW!

 

3. Choose your colleges/universities carefully. Even families who are not technically considered “needy” by Financial Aid Officers, may qualify for financial aid if, and this is an important if, they apply to the right school, one where the student could easily qualify for merit aid, instead of need-based aid. Here is how it works: A great tactic for reducing your college expenses is to make sure Darling Daughter only applies to schools where she is within the top 20% to 25% of all the applicants. Another option is where Sonny Boy is a soccer star or violin virtuoso or has some other talent that appeals to your target school. In that case, you want to look for a school that is actively seeking students with talents like your son’s. You may be offered a much better financial aid package, even in a bad economy. Using this strategy may make a private college cheaper for you than even a state school.

 

 

4. Get a plan. This is the time to work with a qualified financial aid advisor who can help you compute what you can expect to pay for your child’s college. Advisors who have an expertise in this area have software that computes how much financial aid you are likely to get and what your Expected Financial Contribution (EFC) is estimated to be.

 

These advisors can also help many people qualify for more financial aid, even for parents who are in higher-income brackets. This can be a huge advantage for you.

 

Take this case that one of my colleagues handled recently. By creating a financial aid plan, repositioning some assets, and following a few of his suggestions, the clients reduced the amount of money the family had to spend on college by a whopping $10,000 per year! Needless to say, this college aid financial planner more than paid for himself.

 

We think of this like employing an accountant—their job is to help you legally, and ethically reduce your taxes as much as possible. In fact their entire mission is to make sure you DON”T give Uncle Sam too much money. The same is true of your college aid financial planner—you want them reducing your out-of-pocket college costs as much as possible—it is legal, ethical, and any money you save on college can be used to finance your retirement—reducing what you need to save. Everyone benefits.

 

Word of warning: most financial planners and accountants are not up to speed with the intricacies of planning for college financial aid. Frequently good tax planning could actually mean you are paying more for college. There are a lot of pitfalls, so be sure to work with someone who is properly trained to guide you on paying for college, experienced and has good referrals and reputation.

 

Katherine Vessenes, JD, CFP®, RFC, is a nationally known attorney, and financial planner. She was on the Certified Planner Board of Ethics, and has written two books on the legal and ethical issues of financial advisors. According to Bloomberg Press, she is America’s best-known authority on the legal and ethical issues facing financial advisors. She works in the western suburbs of the Twin Cities helping clients create a college funding plan and a plan for retirement at the same time. You can reach Katherine at: 952-401-1045 or Katherine@vestmentfinancial.com.

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More Scary Financial Developments for Middle and High-Income Families

By Katherine Vessenes, JD, CFP®, RFC
June 11th, 2010

By Katherine Vessenes, JD, CFP®, RFC

 

Beware of tougher tax laws

A rough week in the stock market, and bad news out of Europe, are not the only news items affecting your family’s finances. Here is more disturbing news for Minnesota investors, and how you can overcome the devastating effect of new taxes.

 

1. The newly enacted Health Care Reform Act imposes an additional 3.8% “unearned income Medicare contribution” on investment income beginning in 2013. Investment income is broadly defined as interest, dividends, capital gains, rents, royalties and annuity distributions. This new tax will be applied to taxpayers who have income over $200,000 for individuals or $250,000 for married couples filing jointly.

 

2. The Bush tax cuts will expire shortly. This means your top marginal rates will raise from 35% to 39.6% Of course, living in Minnesota, our rates add an additional 7.85% to this figure. When we prepare financial plans for our Twin Cities clients, we usually use a top federal and state bracket of 47.45%.

 

3. Capital gains and dividend taxes, which have been at historic lows of 15%, will increase to 20%. Unfortunately, the administration has also proposed total elimination of the capital gains taxes from dividends. If this proposal is made into law, then dividends would be taxed at ordinary income rates, as high as 39.6% at the Federal level, plus additional Minnesota taxes.*

One of the things I have seen as we prepare financial and retirement plans for our Twin Cities clients: it is almost impossible today to retire without have a huge chunk of savings in the tax-free pocket. This makes sense.

 

If your total effective tax rate goes to 50% (which doesn’t look that unlikely given the current news), then you will need $200,000 a year just to provide $100,000 in income! If your income was all coming from tax-free sources, then you would only need $100,000—a huge difference.

 

Yes, I know the top tax rates, don’t reflect your effective tax rate, the average amount of taxes you pay on all of your income. Nor does my simple example consider alternative minimum taxes. However, given that income rates are going higher, and Minnesota is one of the highest taxed states, these simple illustrations may not be that far off.

 

My point: the more money you have coming from tax-free sources, the more options you have in retirement and the more money you have to live on.

 

Right now, there are only three main sources of tax-free income:

1. Municipal Bonds
2. Roth IRAs and for a few people, Roth 401k
3. Investment Grade Life insurance

 

Here is your takeaway: when computing your retirement income, be sure to consider the advantages of tax-free income. It can dramatically improve the amount of income you have to live on in retirement.

 

Katherine Vessenes is a nationally known attorney, and Certified Financial Planner®. She was on the Certified Planner Board of Ethics, and has written two books on the legal and ethical issues of financial advisors and another one on building a practice. According to Bloomberg Press, she is America’s best-known authority on the legal and ethical issues facing financial advisors. She works in the western suburbs of the Twin Cities helping clients create a college funding plan and a plan for retirement at the same time. She can be reached at: 952-401-1045 or Katherine@vestmentfinancial.com.

 

* Source: 5/21/10 Newsletter from: Chuck Moore, CCFC, CAMC, CAFC:

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Money Myths and How they can Derail Your Retirement Plan

By Katherine Vessenes, JD, CFP®, RFC
June 8th, 2010

 

When I started in the financial planning business almost (gulp) 25 years ago, we all used some basic assumptions when creating our financial and retirement plans. Little did we know at the time, some of those assumptions weren’t just wrong, they were dead wrong.

 

This is the first in a series of articles about the Money Myths, or the Deadly Financial Assumptions and how they can completely derail your retirement plan.

 

Money Myth number One: Defer Taxes, Defer Taxes, Defer taxes as far into the future as possible.

 

The thinking at the time was pretty simple, and in fact, many financial advisors today still believe it today: Instead of paying taxes now, defer them into the future when you will be in a lower income tax bracket. In the meantime, your earnings can grow tax-deferred and you won’t have to pay tax on them until you retire. This second thought is true, but must be considered in context of your overall financial picture.

 

A few years ago, some of my fellow Certified Financial Planners® and other financial advisors started asking ourselves some terrifying questions: What has to happen in order for our clients to be in a lower bracket in retirement? What is the likelihood they will be paying less taxes when they retire?

 

The answers to these questions were quite sobering.

 

In order for you to be in a lower tax bracket in retirement one of two things has to happen:

 

• You have to live on less money—in fact a lot less money. Who wants that? Virtually none of our financial planning or retirement planning clients come to us and say they want to drastically reduce their life style in retirement. In fact, most want to increase it a little so they can travel, visit with their grandchildren or participate in their favorite charities. So clearly reducing taxes by living on less money is out for most people.

 

What about condition number two?

 

• Congress reduces your tax rates. What do you think the chances are that is going to happen in our lifetime? One hundred percent of our clients believe tax rates are going up not down, and we agree with them. This is particularly true as Congress is considering more and more social legislation—someone has to pay for it in higher taxes. That means higher taxes for you, me, our children and grandchildren.

 

How do these money myths affect you?

 

In a number of things:

 

• First, all the money you have stashed away in pension plans, IRAs, 401ks, SEPs and other vehicles are not as much money as you think. In fact, you have to consider none of this money has ever been taxed!

 

It is not unusual for us to see someone who has diligently saved and they have $300,000 or even more in their 401k or IRA. Unfortunately, that money is not worth what they think it is. Now no one would do this, but if you pulled all that money out at one time, after the age of 59 ½, it would be completely subject to income tax in that year. What looks like $300,000 might only be worth $180,000 to $210,000 after taxes if you pulled it all out in one year.

 

Another way to look at this: if you have a life style now, pre-tax of about $100,000 per year, and you want to maintain that in retirement, your $300,000 will probably only last you three to four years, depending on your social security income. If you retire with no pension at age 65, and are just relying on your 401k and social security, you are highly likely to be out of money at age 70, even though you have 20 or more years left of retirement!

 

• Next, you might want to reconsider how much money you are putting in tax-deferred investments and consider the importance of properly diversifying your portfolio from a tax-efficient basis. This might mean having some money that is taxable now, and some that is tax-efficient and (hopefully) never taxed.

 

• It is not too late to rethink your retirement or financial plan. Running out of money in retirement is our client’s biggest fear. It is the reason they come to us to create a financial and retirement plan that reduces their risk of going broke in retirement.

 

Now is a good time to create a financial plan that forecasts where you will be in retirement. A good financial plan will look at how much money you will need to support your lifestyle and if there are any gaps. It will let you know if there is a chance you will be running out of money or not. A good certified financial planner® can also tell you what your options are if your future is not as bright as you would hope.

 

We are here to help. If you are concerned about running out of money in retirement and want to know where you really stand, give us a call. Our first meeting is completely free and no obligation. We promise you will learn something in that meeting that will help your financial future.

 

Katherine Vessenes is a nationally known attorney, and financial planner, who was on the Certified Planner Board of Ethics, and has written two books on the legal and ethical issues of financial advisors. According to Bloomberg Press, she is America’s best-known authority on the legal and ethical issues facing financial advisors. She works in the western suburbs of the Twin Cities in Minnesota helping clients plan for retirement and stay retired. She can be reached at: 952-401-1045 or Katherine@vestmentfinancial.com.

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Is Your 401k Going to Be Enough to Fund Your Retirement?

By Katherine Vessenes, JD, CFP®, RFC
May 28th, 2010

It is not unusual for us to meet with new clients in the Twin Cities, whose entire savings for retirement is their 401k. Typically these clients don’t know what I know just taking a quick look at their statements: they are highly likely to run out of money in retirement, and they have no idea of the danger they are facing!

For some reason there is a prevalent misconception today that goes like this: I am “maxing” out my 401k, and this is all I will need for retirement. Unfortunately, nothing could be further from the truth.

If you had a problem with your retirement planning strategy, how soon would you want to know about it? Hopefully you are thinking: Right away, of course!

In fact, I have yet to see a case where a client’s 401k alone, will be enough to finance their retirement. In fact, I am not sure I have ever seen a case where their 401k, plus a pension, plus social security was enough. If your 401k is your only source of retirement money, then it is time for you to face a reality check and rethink your financial and retirement plan.

Here is the reason your 401k will probably only finance a part of your retirement, possibly leaving you with the unappetizing option of working at Wal-Mart to make ends meet:

  1. First, your 401k has never, ever, been subject to income taxes. Not one penny has ever been taxed! That means when you finally do take the money out of your account and start to spend it to fund retirement, Uncle Sam will definitely want his fair share, and it comes out first.
  2. Taxes on your 401k are taxed at ordinary income rates, not the more favorable capital gains rates that are currently at a historical low of 15%. If you are in the top income tax bracket, Minnesota taxes and federal income taxes could easily take your tax bite to 40% to 45%! If your 401k is worth $100,000 today, then after taxes, you really only have $55,000 to $60,000. If it is worth $500,000, after you pay 45% in taxes, you would only net: $275,000, a whole lot less money than what most people think they have.
  3. Unfortunately, anticipated changes in the income tax rates are likely to make these tax figures even more painful. We frequently use a 50% tax rate to forecast what your 401k will be worth in the future. In fact, though, even a higher percentage of your 401k going for income taxes is not out of the question. Bottom line: your 401k might only be worth about ½ of what is on your statement, maybe less.
  4. Just in case you want to postpone accessing your 401k until later in your life, realize that Uncle Sam is aware of this ploy. To make sure Uncle gets his share, the IRS requires that you start to distribute this income by age 70 ½ so they can start taxing you! Failure to do so results in an excise penalty of 50% annually!
  5. If you believe, as we do, that income tax rates will only go up from here, it may not make sense to keep investing in or as much into your 401k. The reason is: if this account keeps growing, when you pull the money out, it is possible you will be in a much higher tax bracket than you are now. This means not only has your investment grown, but so has your tax bill, leaving you with a lot less to live on in retirement. (Note, we do think you should continue saving and investing for your retirement plan. It is just there might be better places than your 401k. This depends on each person’s individual situation.)
  6. Unfortunately, many people don’t “manage” the money in their 401ks. So it is common for us to see clients in their late 50s or early 60s, who have all of their 401k invested in higher risk equities. They invested in these categories years ago and never changed them. This means their portfolio is much more volatile, subject to more risk, and more likely NOT to be there when they need it.
  7. In the past few years, financial planners have gotten a lot smarter about calculating how much clients can take from a portfolio without “blowing it up” or running out of money. The generally accept rate now is an annual withdrawal amount of 4 to 5%, however we don’t believe this account for taxes and inflation. At Vestment Advisors Financial Group, we generally use a 3 to 4% rate to be on the safe side.
  8. Take this example: Suzy is a single woman, with no dependents. She works for a local hospital and makes $50,000 per year. So here is how the math might look for her $300,000 401k:
    1. Annual withdrawals at 4%:$12,000
    2. Less taxes (here we are using an optimistic and conservative rate of 35% to include both Minnesota and Federal income tax. This also assumes she had other income from Social Security and maybe a pension. ) $ 4,200

Balance of her 401k after taxes: $ 7,800

In this example, a conservative withdrawal of 4%, would only allow an annual 401k withdrawal of $7,800 after taxes for Suzy. Even if she is lucky enough to have social security and a modest pension, this is a very far cry from her current income of $50,000.

Note, if her 401k withdrawals are her only source of income, then she may not meet the minimum test and may avoid income taxes all together. However, that would still mean she is only living on $12,000 per year, not the $50,00 that she is used to.

9.  Let’s say, Suzy felt she had to withdraw more than 4% and she wasn’t concerned about running out of money. Even if she increased her withdrawal to 10%, taking out $30,000 a year, she would likely be liable for some taxes, and only net out $19,500 per year, or 39% of her previous salary. She just took a huge pay cut in retirement. Further more, at 10% annual withdrawal rates, she better plan on only living for only 10 years in retirement, because her 401k will be completely gone in 10 years or even less.
So what are the takeaways for you?

  1. Don’t count on your 401k being enough to finance the retirement of your dreams.
  2. Consider other sources of dependable income in retirement—sources that you can control, like investments, savings and annuities and other vehicles that could diversify not only your investment risk, but your tax risk.
  3. Please have an experienced Certified Financial Planner® practitioner run your numbers before your retire, so you know how long your money will last and what you have to live on.

Katherine Vessenes is a nationally known attorney, and Certified Financial Planner®, who was on the Certified Planner Board of Ethics, and has written two books on the legal and ethical issues of financial advisors. According to Bloomberg Press, she is America’s best-known authority on the legal and ethical issues facing financial advisors. She works in the western suburbs of the Twin Cities helping clients create a college funding plan and a plan for retirement at the same time. She can be reached at: 952-401-1045 or Katherine@vestmentfinancial.com.

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What is a Financial Plan?

By Katherine Vessenes, JD, CFP®, RFC
May 28th, 2010

A financial plan is a written road map that takes you from today, to where you want to be in the future. It identifies your financial gaps, and makes recommendations on how to overcome the gaps.

 

A financial plan may consist of all or some of the following:

 

1. Your Financial Goals and Concerns
Every one of our financial plans starts with you. It is all about your goals, your concerns and where you would like to be financially in the future.
We take into consideration your current financial situation, including your income, debts and expenses. We also look at your investments in each of the three taxable pockets: taxed-now, taxed-deferred and tax-efficient. Because as my daddy used to say: it is not how much you make, it is how much you keep that makes a difference.

 

2. Examine your present financial situation
In order to map out your financial future, you’ll need a clear picture of your current financial situation. This will include your income, debts, taxes, expenses and company benefits.

 

3. Each plan will then address all four financial cornerstones:

  • Building wealth
  • Protecting wealth
  • Distributing wealth
  • Transferring wealth

 

4. Building wealth in a tax efficient manner
In today’s environment, it is not enough to build wealth, we have to do it in a way that doesn’t make Uncle Sam your senior partner in retirement or a co-beneficiary at your death. Taxes are part of every financial decision.

 

5. Protect what’s important to you
Every client who has come to our offices in Chanhassen, Minnesota, was concerned about protecting somebody. Some people are concerned about protecting their spouse or family in the case of an unexpected death or illness. The plan will look at your exposures and see if there is a way to mitigate this risk so you can sleep a little better at night.

 

6. Taking money out of your retirement plans in a tax-efficient manner/Distributing your Wealth.
Unfortunately, many of our clients come to us with a plan to build wealth, but not a plan to pull money out in retirement. If they are relying on pension plans or their 401-k for retirement income, they are in for a big shock. This money has never been taxed. They don’t have as much money in their retirement accounts as they think they do.

 

Every solid financial and retirement plan, should cover how to pull money out of tax-deferred plans in a way that could minimize taxes because you will have more money to live on in retirement.

 

7. Transferring your estate and Leaving a legacy
Many of our Minnesota clients are concerned about leaving a legacy. They want to provide for their heirs or favorite charity. If this is important to you, we should cover it in your financial plan.

 

8. Recommendations
Every solid financial plan should also include specific recommendation on how to fill in the gaps and make your financial future better.

 

I have been in the financial services business for over 20 years. In that time, I have never seen a single person where a complete financial plan, at the CFP® level, that didn’t make their financial future a little bit brighter.

 

If you would like a second opinion on your finances, or you live in Minnesota and would like a financial plan to see where you are, please give us a call today: 952-401-1045.

 

Katherine Vessenes is a nationally known attorney, and financial planner, who was on the Certified Planner Board of Ethics, and has written two books on the legal and ethical issues of financial advisors. According to Bloomberg Press, she is America’s best-known authority on the legal and ethical issues facing financial advisors. She works in the western suburbs of the Twin Cities helping clients plan for retirement and stay retired. She can be reached at: 952-401-1045 or Katherine@vestmentfinancial.com.

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Five Benefits of Hiring a Certified Financial Planner® As Your Financial Planner in Minnesota

By Katherine Vessenes, JD, CFP®, RFC
May 22nd, 2010

If you are starting to worry, seriously worry, about your financial future, it may be time to retain a Certified Financial Planner®. Hiring a CFP® should be the first step to bringing you a sense of peace about your financial future.

 

One of the highlights of my career has been obtaining my CFP® designation shortly after moving to the Twin Cities. It is probably the most difficult to obtain and the most prestigious of the many financial designations. Many writers on the national scene, counsel consumers to only work with CFPs. Whether you live in California, or Minnesota, like I do, I believe this is good advice.

 

Here is what you get when you work with a CFP®:

 

1. Someone who has been rigorously trained and tested on the intricacies of investing, insurance, retirement, debt, taxes and other areas of financial planning. In order to use the CFP® marks, the financial planning practitioner must pass a strenuous exam. This exam is not quite as hard as the Bar exam administered to new lawyers, but it is close. In fact, the pass rate is frequently only around 50%. Not just anyone can pass this exam. It typically takes two full years to study for it.

 

It is much harder than you would think. When I was studying for it, the course instructors recommended a full 10 hours of homework a week, over two years, to successfully prepare for the exam. In my arrogance (and being busy with three children and a demanding law practice), I thought I could do it in four! My thought process was: I passed three different bar exams, in three states—how hard could this be? Well, it turns out, a lot harder than I thought. It did take me 10 hours a week, over 2 years. But I am happy to say, I passed it on the first time.

 

2. A person who is committed to the CFP® standard of ethics. This is critical because in recent years, the standards were amended to require CFP® practitioners to practice with the ethics of a fiduciary. They must put their clients’ interests above their own. This is the same yardstick that Trustees and Lawyers use to judge their own ethical behavior.

 

This is an important distinction, because most of the rest of the industry does not adhere to this high, strict, standard of care. Many consumers don’t realize if they walk into the office of any well known bank or financial services firm, they are likely to get a financial advisor who is not required to put the clients’ interests above his own. This means they can make decisions/recommendations that are ok, or even good for the client, but these decisions/recommendations might be better for the advisor. This is not acceptable behavior for a CFP®. Any time the recommendation is better for the advisor than the client, it is suspect and not trustworthy.

 

Once consumers really understand this proposition, they will only work with a financial advisor who has a fiduciary duty. All practicing CFPs are fiduciaries and bound by this standard of care.

 

Many of the problems on Wall Street would evaporate if the entire industry were required to act with a fiduciary standard. It is the self-interest that ultimately leads to an investor or consumer being injured. This self-interest is not allowed CFPs.

 

3. Someone who stays sharp and on-top of the ever changing world of financial planning by continuing education. In order for us to maintain our status as a CFP® and use the marks, I must complete a significant number of continuing education hours every year.

 

4. An entire industry that is committed to “policing the marks” and the industry. A few years ago, I had the privilege of being on the CFP® Board of Ethics and Professional Responsibility. Every quarter I donated three days of my time to serve on the board and review cases, typically filed by unhappy investors. After carefully reviewing the case, if we found cause, we would reprimand the CFP® designee or sometimes, in extreme cases, revoke their right to use the marks. These marks are so valuable to a CFP®, it was not unusual for the CFP/Respondent to hire an attorney and fly them to Denver, just to defend their case. This was true, even though this board did not have the authority to fine the designee or even put them in jail. It just shows how important it is to a CFP® to have a “clean record” and be able to prove to the public they are a CFP® in good standing.

 

The Ethics Review is an important part of being a CFP®. The public needs to have confidence in us, the industry, and how seriously we take our duty to help clients plan their financial future. One of the reasons the public can have confidence in a CFP® is our commitment to seriously police our own members.

 

5. A complete, comprehensive look at your financial future. The longer I serve the public in this industry, the more convinced I become it is necessary to look at your entire financial future in order to cover all your bases and prepare for some rainy days. Unfortunately, many financial advisors have been taught in recent years, to just review a person’s investment plan. Some might prepare a retirement plan. Very few people prepare a comprehensive, soup-to-nuts, financial plan. CFPs are taught how to do this work.

 

The reason the comprehensive approach is so important for clients is this: it takes a lot more than just accumulating wealth to prepare for a solid financial future. It is also important to look at how to withdraw your wealth from tax-deferred plans in a way that doesn’t make Uncle Sam your senior partner in retirement. It is equally important to protect your wealth and transfer your wealth in a thoughtful way. Every one of these decisions has tax consequences that also must be considered and factored in. Your average financial advisor does not consider all of these factors when making a recommendation.

 

However, your CFP has been extensively trained to look at all of these factors and many more, when helping you create a financial plan that will carry you through both the calm and rough waters of your financial life.

 

These principals are so important to us at Vestment Financial, that we use them with every advisor, and on every plan. Even if we have a Financial Guide who is not a CFP®, we encourage them to get that designation. To make sure they meet the rigorous CFP® guidelines, I carefully review all of our planning tools, our strategies and products. Part of my job in running the firm is to instill the CFP® principals into everything we do.

 

Katherine Vessenes is a nationally known attorney, and Certified Financial Planner®, who was on the Certified Planner Board of Ethics, and has written two books on the legal and ethical issues of financial advisors. According to Bloomberg Press, she is America’s best-known authority on the legal and ethical issues facing financial advisors. She works in the western suburbs of the Twin Cities helping clients plan for retirement and stay retired. She can be reached at: 952-401-1045 or Katherine@vestmentfinancial.com.

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