Take Care of Your Family with a Good Estate Plan

Jane Young, CFP, EA

Jane Young, CFP, EA

Most of you put tremendous effort into saving and investing for the future.  It’s common to routinely monitor our budgets, portfolios and progress toward retirement but neglect our estate plans.  It can be uncomfortable and awkward to work on your estate plan but the failure to plan for the thoughtful distribution of your assets can be disastrous for your loved ones.  Your estate plan is a significant part of your financial plan and needs to be accurate and thorough to cover most contingencies.

I encourage most individuals to work with an estate planning attorney to develop or maintain a plan.  To select an attorney ask friends, colleagues and professionals you know or work with for a referral.  Have a brief phone call with at least three attorneys to find one you feel comfortable with, who provides the services you need and whose fee structure seems reasonable.   If you have a complicated situation select an attorney who is proficient with complex estate planning.   If your situation is straight forward, you’ll want to guard against an unnecessarily complicated and expensive estate plan.

Prior to seeing an attorney think about how you want your assets distributed and who should serve as your personal representative to manage the distribution of your assets.  Also consider how your plan will change if one or more of your heirs predeceases you.

Your estate plan should address and coordinate assets that are distributed using a will and those to be distributed using a beneficiary designation, transfer upon death or other automatic transfer.  Give beneficiary designations serious consideration as they may impact a large portion of your estate. Beneficiary designations, accounts transferable upon death, accounts held in Joint Tenancy, beneficiary deeds on real estate and assets held in a trust all supersede a will.  A will provides instructions on the distribution of your residual estate or those assets that are not distributed via other legal transfers.

Assets in retirement accounts, annuities and life insurance policies are generally distributed using beneficiary designations.  Be especially careful to name an individual rather than an estate or trust as beneficiary on a retirement account. This will make it easier for your beneficiaries to spread out distributions from the account over time and avoid a substantial tax bill if the entire balance is distributed all at once. Additionally, don’t leave the beneficiary designation blank on the assumption it will be distributed in accordance with the will.  Many financial institutions distribute retirement accounts, without beneficiary designations, in accordance with “intestacy guidelines”.  These are rules your state uses to distribute assets when no will or beneficiary designation is in place.

In addition to the distribution of assets your estate plan should include a durable power of attorney, health power of attorney, advance health care directive or living will and a HIPPA authorization.  Most attorneys provide these as part of a complete estate planning package.

Selecting the Right Asset Allocation – Part 2

Jane Young, CFP, EA

Jane Young, CFP, EA

Your asset allocation is the basic structure of your investment portfolio defining the target percentage you want to hold in different categories of assets.   Start creating your asset allocation by deciding how much you want to invest in the two major categories, stock mutual funds and interest earning assets.  Next break your allocation down into more specific categories including cash, CDs, bonds, large cap stock, mid-cap stock, small cap stock, international stock, emerging markets stock and real estate.  Setting an appropriate, well diversified asset allocation helps you balance risk and return within your portfolio.  Your asset allocation may change over time as your financial circumstances change.  However, avoid changing your allocation too frequently based on short term fluctuations in the market.

The appropriate allocation depends on several factors including your age and investment time horizon, your financial goals, other risk factors in your life, your experience with investing and your emotional risk tolerance.  Regardless of your investment goals, you need to maintain an emergency fund of readily available funds equal to at least four months of expenses.

Your financial goals are a major determinant in setting your allocation.  Identify your major financial goals and when money is needed to support these goals.  Design an asset allocation to meet these goals.  Money needed in the short term should be held in safer, interest earning investments. The stock market should only be used for long term needs – generally at least five to seven years out.

You may be able to assume more risk in your portfolio if the timetable for your goals is flexible.  The timeframe for money to cover things like college education or your emergency fund may be firm but there may be some flexibility on when you take a major vacation, remodel your home or plan to retire.   Money needed for retirement is generally spent over twenty or thirty years.  You won’t need your entire nest egg on the first day.

Your allocation is also dependent on risks taken in other areas of your life.  For example, if you work in a volatile career with unpredictable earnings, own a small business or own rental property, you may want to reduce the risk in your investment portfolio. On the other hand, if you have a secure job and anticipate a generous pension, you may be comfortable taking more risk.

Regardless of your situation you need to feel emotionally comfortable with your allocation. If you are constantly worried about market fluctuations you may need a more conservative allocation.   Historically the stock market has trended upward, but there will be years with negative returns.  Create an allocation that gives you adequate emotional security to ride out swings in the stock market and helps you avoid selling when the market is down. If you are new to investing, start out slowly and test the water to see how you will react in a volatile market.

Risk and Your Investment Portfolio – Part 1


Jane Young, CFP, EA

Jane Young, CFP, EA

Deciding upon an asset allocation is one of the first and most significant decisions to be made when you start investing.  Your asset allocation is the percentage of different types of investments such as cash, bonds, stock or real estate that make up your investment portfolio.  Probably one of the most important allocations is that between investments in the stock market and investments in interest earning vehicles such as bank accounts, CDs and bonds.  An ideal asset allocation provides a balance between risk and return that helps you meet your goals but doesn’t keep you awake at night.

There is a trade-off between risk and return.  Generally, if you want a higher return you need to assume a higher level of risk.  Investment risk comes in many different forms with the most common being stock market risk.  Historically, over long periods of time, the stock market has out-performed most other investments.  However, in the short term it can be extremely volatile, including years with negative returns.  In the extreme case you could lose your entire investment in an individual stock.  To reduce risk in the stock portion of your portfolio, consider buying diversified stock mutual funds. You will still experience swings in the market but fluctuations in any one stock will have less impact.

On the other hand, interest earning investments such as bank accounts, CDs, bonds and bond funds are generally less risky and are not subject to stock market fluctuations.  Unfortunately, in exchange for this lower level of risk you may earn a much lower rate of return.

Additionally, bonds and bond funds are subject to interest rate risk and default risk.  If you purchase a bond or bond fund and interest rates increase, the value of your investment will decrease.  To make matters worse, when interest rates rise bond funds commonly experience a flood of redemptions forcing them to sell bonds within the fund at a loss.  Even if you hold on to your shares you can experience a drop in value. However, if you purchase an individual bond and hold it till maturity you will receive the full value upon redemption.   Use caution when buying low quality bonds or bond funds; you may get a higher return but you are subject to a much greater risk of default.

Many investors don’t consider inflation risk.  This results from taking too little risk with a conservative portfolio containing little or no stock.  Over time inflation has averaged about 3% annually, if you are only earning 2% on your portfolio your real return after inflation will be negative.  This is compounded if inflation rates rise significantly.  Consider increasing your allocation in the stock market to hedge against inflation risk.

In the current environment of low interest rates and high volatility it’s crucial to build a portfolio that balances risk and return to support your financial goals and provide you with peace of mind.