First Person: Financial Planning at Year End

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First Person: More Fun, Less Expense
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First Person: More Fun, Less Expense

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I have a modest financial planning and investment advisory practice in Connecticut and one of my goals is to make sure that people understand that financial planning is not the same thing as investment management. I can understand why they get confused since the press speaks about the two interchangeably.

Today I am going to offer a few suggestions for things to do before the year-end that will put your life in order and maybe even reduce your level of stress.

Wills

One of the first things that I discuss with clients is their will and other estate documents. They are shocked to learn that by default every person has a will and that is called the Law of Intestacy. The state where you live has a chart all set up that shows how your assets will be distributed when you die. "Is this really what you want to happen?" I ask and am usually told "no." People want to make their own choices and the way to do that is create your own will. Lawyers' fees vary greatly by location but I think that it is safe to say that the cost will start around $300 for a simple will, one not involving trusts or complex issues. In addition there are online sites such as Legal Zoom that will prepare a will and other estate documents at lower cost.

In addition to a will you should consider preparing a Power of Attorney which gives the person that you designate the ability to act in your place. The caveats here are twofold. The appointed person could wipe you out, so make sure that you trust them. Secondly, remember that no one has to honor the Power of Attorney.

There is also a Health Care Proxy/Directive/Living Will that should be prepared. This allows the designated person to receive medical information for you, make medical decisions for you and follow your end of life directives. The Living Will usually just states your own wishes, such as a Do Not Resuscitate order but does not allow for the sharing of information. Again, since these are legal documents I would recommend that the discussion be held with a lawyer.

Insurance

Another important non-investment step that you should do is review your beneficiary designations on any life insurance policy, annuity contracts, IRAs or retirement plans. Your will does not cover the disposition of these types of assets and it is important that they be up to date. I had one person who was divorced and remarried and still had their ex-spouse listed as a beneficiary on their IRA. Needless to say, the current spouse was not amused.

If you are over the age of 70-1/2 you may be required to take money out of your retirement accounts. This is the Required Minimum Distribution and the minimum amounts are specified by the IRS based on your age and account values as of 12/31 of the prior year. While you can aggregate your non-ROTH IRAs to determine the applicable amount and take the distribution from any of your IRA accounts, you are not afforded the same luxury if the money is still in a 401(k) or 403(b) plan. Those have to be calculated separately and taken individually. The penalty for not taking the proper amount is 50 percent, which means that if you had to take out $20,000 and did not then the government will tax you $10,000 and you will still need to take out the $20,000 and pay income tax on that. Clearly you do not want to mess this up!

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