Clarify Your Family's Financial Planning Resources
As your family works through the financial planning process, it’s important to have a clear understanding of the family financial resources available to you. This encompasses your income, assets, and the experts who can assist you in reaching your financial objectives.
SOCIAL SECURITY
Employers, aside from government and nonprofit organizations, have collected Social Security taxes from your paycheck for years. Now, it’s time to crack open those Social Security statements and make some important decisions including when to begin to receive your Social Security benefits. For most recipients, waiting to receive benefits until age 70 makes sense when it comes to building family financial plans capable of supporting financial goals late in life. This decision should be made in the context of your other resources and goals.
Without assistance, earners end up making uninformed decisions with this critical financial resource. The Social Security Administration offers several calculators to better understand Social Security benefits. The Windfall Elimination Provision Calculator helps an earner understand how much their Social Security benefits will be reduced by non-covered pension benefits that were earned when the recipient was not required to pay Social Security taxes. A number of other calculators are available to refine your understanding of this important benefit. It’s crucial to take the time to understand and make informed decisions about your Social Security benefits to ensure a secure financial future.
PENSIONS
Though pensions are not as common as they once were, many employers, government to private, still offer pensions. The anticipated benefit amount for most pensions can be clarified through online calculators. For example, the State Teachers Retirement System pension benefit calculator is available on their website. Pensions generally require the recipient to make a payout election. This election allows for benefits to be paid to the surviving spouse should they outlive the primary pension benefit recipient. A well-designed financial plan requires a clear understanding of the inflation-adjusted impact of pension benefits. Many pensions provide an option to receive the pension benefit in a lump sum that can then be reinvested, used to fund goals, and inherited. Deciding how best to receive pension benefits is exceedingly impactful to the success of the financial plan for a family. Therefore, careful consideration and understanding of the options available are crucial in making the most out of pension benefits.
Why Do Jobs No Longer Offer Pensions?
Consider these pension plan trends as you plan for retirement.
Source: usnews.com
BANK CHECKING ACCOUNTS
Generally, the value held in bank checking accounts is rather minimal. However, checking accounts do play an important role in managing cashflow. They, of course, provide ready access to funds. The cashflow transactions checking accounts support are critical for a refined understanding of the family budget and the resources needed to fund family financial goals, like retirement spending.
Checking accounts act as a central hub for managing day-to-day expenses and income. With the use of checks, debit cards, and online banking, individuals can easily track and manage their cashflow. This allows for a clear understanding of where money is coming from and where it is going, which is essential for maintaining financial stability.
Furthermore, checking accounts offer the convenience of making bill payments, transferring funds, and even earning interest on the account balance. This all contributes to the overall management of financial resources and helps individuals make informed decisions about their future financial goals.
In summary, while checking accounts may not hold large sums of money, their role in managing cashflow and providing access to funds is crucial for maintaining financial stability and planning for the future.
BANK SAVINGS ACCOUNTS
Bank savings accounts serve as a reliable avenue for keeping funds readily accessible while also potentially earning more than a checking account. These accounts are essential for building emergency funds and covering short-term expenses. Additionally, for planned future expenses, a Certificate of Deposit (CD) can be a viable alternative to a traditional savings account. CDs offer a predetermined return for a set period of time and can typically be obtained from the same entities that offer savings accounts. This allows individuals to earn a guaranteed return while still maintaining the security and convenience of a bank savings account. Overall, bank savings accounts play a crucial role in ensuring family financial stability and meeting both immediate and future financial needs.
TAXABLE INVESTMENT ACCOUNTS
Once a comforting amount of cash is available in a bank savings account, families can invest their liquid assets in taxable investment accounts. These accounts offer access to investments that may produce returns beyond what can be secured through a bank savings account. Investment assets held in taxable investment accounts can generally be made available in a bank checking account within a week, providing flexibility in accessing funds for spending needs. This makes taxable investment accounts a viable option for generating greater funds over time, as compared to a bank savings account.
In fact, in many situations, it can make sense to not own a bank savings account at all and simply use a taxable investment account to hold emergency funds. While these accounts do not provide the same tax protections as retirement plans, they do offer liquidity and often come with favorable capital gains tax rates. By utilizing taxable investment accounts, families can optimize their financial resources to work for their future needs.
INDIVIDUAL RETIREMENT ACCOUNTS
Once liquid spending needs, which are often underestimated, are accumulated in bank and taxable investment accounts, retirement plans, including Individual Retirement Accounts (IRAs), are used to accumulate investment assets better protected from taxation. IRAs have maximum annual contribution limits that increase annually with inflation and eligibility requirements based on income and age. There are two types of IRAs. Roth IRAs allow after-tax contributions and tax-free growth. Traditional IRAs generally allow a tax deduction for contributions made while withdrawals are subject to ordinary income tax. This, of course, means that a choice must be made to invest in one or the other type of IRA. This choice is best informed within the context of a complete family financial plan with consideration of age, tax brackets, current investment assets, and financial goals. It’s important to consult with a financial planner to determine the best option for your individual circumstances and long-term financial objectives. Both types of IRAs offer tax-advantaged savings for retirement and can play a key role in a comprehensive retirement savings strategy.
EMPLOYER-SPONSORED RETIREMENT PLANS
Most employers offer a retirement plan for their employees, with higher contribution limits than IRAs and the potential for employer matching contributions. These plans can come in the form of a 401(k) or 403(b), allowing employees to save for retirement through pre-tax or Roth options. The Roth option, similar to IRAs, allows for after-tax contributions and tax-free withdrawals in retirement.
Employer-sponsored retirement plans often offer online access and a variety of mutual fund-based investment options, giving employees the opportunity to manage their retirement savings as they see fit. As employees near retirement age, these plans can be a valuable source of income, providing a nest egg after a lifetime of hard work.
With the opportunity for employer matching contributions and the potential for tax benefits, employer-sponsored retirement plans are a valuable resource for employees to save for their future. It’s important for individuals to take advantage of these plans and make the most of the resources available for their family financial well-being.
RESIDENCE
There are occasions when families wish to use the equity in their home to fund their financial goals. Whether it’s for making home improvements, financing education, or even supplementing retirement income, leveraging the equity in one’s residence can be a valuable resource. They may be downsizing or simply using a home equity line of credit to temporarily bridge funding gaps. This can be a strategic family financial move to access the value built up in the home over the years. Moving is always a big decision that requires consideration and careful execution. It’s important for individuals and families to weigh the potential benefits and drawbacks of using their home equity to meet their financial needs. Seeking advice from financial advisors and real estate professionals can help navigate the complexities of leveraging home equity to ensure that it aligns with long-term family financial plans. By tapping into their home’s equity, individuals can utilize their accumulated wealth to support their evolving financial objectives.
INSURANCE
Various forms of insurance impact financial plans. Ensuring coverage is adequate but not excessive is a tricky undertaking because insurance products are sold by agents who make more money when they sell as much as they can.
Auto and home insurance premiums are impacted by factors including deductibles, coverage limits and levels, and medical benefits. It is a good idea to obtain comparable quotes annually as the costs can fluctuate over time and it is possible for an insurer to become significantly overpriced.
Life insurance can be divided into two primary categories. Term insurance does not build cash value and provides a benefit for a set period of years. Permanent insurance does build cash value and is more expensive. Permanent policies must be reviewed with in-force illustrations to ensure they are progressing as intended. Term insurance generally offers the more cost-effective solution for replacing the lost income of a deceased spouse. It’s important to carefully consider the various options and work with a trusted financial advisor to ensure that insurance coverage aligns with your overall financial plan.
EMPLOYER STOCK PLANS
In addition to retirement plans, a much smaller number of publicly traded companies also offer employer stock plans. Employee Stock Options (ESOs), Restricted Stock Units (RSUs), and Employee Stock Purchase Plans (ESPPs) are three common employer stock offerings.
Employee Stock Options (ESOs) provide a grant of a certain number of shares that can be exercised for a set period of time (between vesting and expiration dates) when the stock price exceeds the strike price. The strike price is the share price above which the ESO has value.
Restricted Stock Units (RSUs) provide a grant of a certain number of shares that vest on a certain date. Once RSUs vest, the grant’s value is equal to the number of shares granted multiplied by the share price.
Employee Stock Purchase Plans (ESPPs) provide an opportunity for employees to purchase shares of employer stock at a discount. These plans can be a valuable tool for employees to invest in their company’s stock and potentially benefit from any future growth in value. Overall, employer stock plans can be a valuable addition to an employee’s overall financial investment strategy.
MORTGAGE
Repaying a mortgage should be a key part of your family’s financial plan. Consider budgeting a set amount each month to cover the mortgage payment. Look into the option of refinancing to a lower interest rate, which can result in lower monthly payments or a shortened loan term, ultimately accelerating the payoff. Prioritize mortgage repayment within the context of other debts by focusing on high-interest debt first, such as credit card or student loan debt. Creating a timeline for repayment can help you stay on track and ensure that your mortgage is paid off in a timely manner. It’s important to regularly review your financial plan and make adjustments as necessary to ensure that your mortgage is being repaid efficiently and effectively.
CREDIT CARDS
Another way to borrow from lenders is through credit cards. Everyone knows the basic concept with credit cards. There are a few practical considerations to keep in mind when using them:
- Oftentimes, it is possible to transfer balances to zero interest cards for a limited period of time. This may help limit interest expenses while the balance is paid down.
- Additionally, credit cards can offer rewards which can provide some meaningful value beyond what might be available through a checking account debit card.
- Arrangements can be made to automatically pay off the balance on credit cards on a regular schedule, ensuring that payments are made on time and avoiding penalties.
- Using credit cards responsibly can also help to establish and improve a credit score.
- It’s important to try to keep interest expenses to a minimum by paying off balances in full and on time.
Overall, credit cards can be a useful tool for borrowing and managing finances, as long as they are used wisely and responsibly.
LIABILITIES
Of course, there are many other ways to borrow from lenders. Student loans, auto loans, personal loans, loans from retirement plans, and loans against the cash value of permanent life insurance policies are among the additional ways loans can be established. Many families dislike making loan payments and prefer establishing a gameplan for paying down their debts expeditiously. Generally, debts with higher interest rates make nice targets to pay down first.
These financial obligations can add up and become burdensome if not managed properly. It’s important for individuals and families to prioritize paying off high-interest debts to minimize the amount of interest paid over time. By creating a strategic plan to tackle liabilities, one can free up financial resources for other purposes, such as investing, saving for retirement, or enjoying a higher quality of life. Managing liabilities effectively can also help improve credit scores and overall financial well-being. It’s crucial to consider all borrowing options and make informed decisions when taking on new debts, while also prioritizing paying down existing debts to achieve financial freedom and security.
FAMILY FINANCIAL RESOURCES MANAGEMENT
Developing a clear understanding and intention for each available financial resource can be quite helpful for building wealth. In order to best utilize these resources, each resource needs to be understood on its own before they can be mixed, matched, and prioritized in a way that collectively delivers the greatest benefit. These financial resources often compete with each other for use. A careful analysis informs optimal management.
For example, contributing to retirement plans is a wonderful idea, but it should only be done after sufficient liquid assets have been accumulated to cover needs and goals before retirement. Additionally, it sometimes makes more sense to borrow. Other times, it makes more sense to use available assets.
Effective resource management requires a thorough understanding of each financial resource and its potential impact on the overall wealth-building strategy. By carefully balancing and prioritizing these resources, families can ensure that their financial assets are working in the most efficient and effective way possible to meet their long-term goals.
RESOURCE IDENTIFICATION
Gathering the details for all of a family’s financial resources and making the most of the available opportunities is labor intensive. It involves cataloging savings accounts, investment portfolios, retirement accounts, properties, and other assets. It also requires understanding income sources, such as salaries, bonuses, rental income, and any other sources of revenue.
The effort is well worth it. By identifying all available resources, individuals can take advantage of investment opportunities, tax benefits, and long-term financial planning strategies. The impact is enormous. It can lead to increased wealth accumulation, improved financial security, and peace of mind for the future.
Keeping things in order from year to year leads to better results than eventually discovering opportunities were missed. Regularly reviewing and updating the details of financial resources allows for adjustments to be made based on changing circumstances and goals. It also enables individuals to stay informed about new opportunities and financial strategies that may become available. By doing the labor-intensive work of resource identification and management, families can ensure that their financial resources are working for their benefit.
