In the State of California there are currently three major ways your property will be inherited, with significant differences.

1. If you die before having a will or Living Trust created, the State of California will create a will for you after your death. If this happens, your assets will be frozen while your “estate” goes through the probate process (if your assets are over approximately $125,000 or you own any real estate). This is a public court action.  In San Bernardino county, this often takes in excess of two years and will cost 8 percent or more of the estates assets. Public announcements are made to ensure all creditors have an opportunity to collect any money owed by you at the time of your death. Also, if there are minor children, the court will determine who will act as their legal guardian. At the end of probate, the assets are then divided according to a State statute called the “Law of Intestate Succession”. This statute determines who gets your possessions after the cost of probate, and valid claims against the estate have been paid.
2. If you want to determine who inherits your property, then at minimum, you should execute a will. It follows the same probate process mentioned above, but you are able to determine who your beneficiaries are.
3. The third way of transferring your property at your death is to create a Living Trust. A trust is its own “legal entity”. After the trust is created, you transfer your assets into the trust so that the trust has ownership of your possessions. Therefore, you are no longer the legal owner of your property, the trust is, however, you still have complete control over the trust and everything that has been transferred into it. While you are the “trustee” during your lifetime, you also name a successor trustee who will take over your property at your death. However, the trust is now an irrevocable, meaning that the successor trustee can only accumulate and distribute your possessions according to your instructions. This process avoids the probate process and can be accomplished as quickly as possible. In addition, it insures your minor children are raised according to your wishes.

A living trust can only be created by an attorney, and the upfront costs are greater than the other two options, but costs to settle your estate may save your children or other beneficiaries tens of thousands of dollars and a significant amount of time during the process.
 
If you would like to learn more about creating a Living Trust and how it might benefit your specific situation, you are invited to a free Seminar featuring a highly respected estate planning attorney, Randy Spiro, on the evening of January 23, 2020.
Registration can be made at https://www.russmorrisfinancial.com/trustseminar.html or by calling 909/599-2800.

A Buy–Sell Agreement, also known as a buyout agreement, is a legal agreement between co-owners of a business, which dictates the state of affairs if a co-owner dies or leaves the business. It may be thought of as a “premarital agreement” between business partners or is sometimes called a "business will."
 
Issues and questions such as the ones listed below can be answered and solved with a Buy-Sell Agreement:

• What will happen if one of the owners of your company were to die?
• Would the deceased owner’s spouse or children want to take an active role in the running of the company? Or, might they expect an income without offering any financial value to the company?
• The deceased owner’s spouse or children might want to “cash out” their interest in the business.
• Do you have the liquid assets (cash) to buy them out?
• What’s the business worth? What’s a fair buyout price?
• Would a cash buyout weaken the financial condition of the company?
• Would creditors tighten up their requirements?

 
​A Buy-Sell Agreement details how the company will fund the buyout of a departed business partner. The four main ways to fund a buyout are:

• With cash reserves. This will reduce value of company, may hurt financial condition and cost dollar for dollar of value of deceased interest in company.
• With payment plan. This will reduce future earnings, affect financial condition and cost dollar for dollar of value of deceased interest in company, plus interest.
• Bank loan. The repayment of loan will be dollar for dollar, plus interest.
• Life Insurance policy. This will cost pennies on the dollar.

Contact Russ Morris to learn more about a Buy-Sell Agreement and how it can help your company.        

Andy Williams' 'It's the Most Wonderful Time of the Year' holds true for many. While the holidays can be hectic, this is also one of the few times of the year when families come together. Assuming that you like your family, this can be one of the “wonderful” aspects of the season. Along with food, games and laughter, these family get-togethers also present an opportune time to bring up important topics such as estate planning, life insurance and other financial matters that don’t normally get discussed. 
 
Sixty percent of Americans lack any type of estate plan. And, of those who have one, many have not discussed the details with their heirs. Truth be told, “end of life” plans are topics that many people do not want to deal with, which often leads to unfortunate circumstances such as having no plans at all and/or family misunderstandings. The pain from never addressing is usually much greater than the temporary discomfort of having “the talk” (and I’m talking about the birds and the bees…). 
 
As a Financial Advisor and Life Underwriter Training Council Fellow (LUTCF), I recommend that everyone consider having a plan for their finances, life insurance and estate. It doesn’t matter if you just turned 21 or 91. You’re never too young and it’s never too late; however, you’ll usually have more options when you’re younger than when you’re older.
 
Estate Planning
Two ways of settling an estate are a Will and a Living Trust. 
 
Everyone in California has an estate plan! Either, an individual has established his or her own Will or Living Trust (usually through the help of an attorney), or, the State of California has written a Will for you. In the latter case, you may or may not like the provisions stated in the California statues regarding persons who die “intestate”.  This simply means people who have not written their own wills.  Luckily, there is an alternative. An individual can create their own will or a living trust.
 
Many people mistakenly believe that a living trust is just for the wealthy. But this is not the case.  Other Living Trust misconceptions such as; “I’m too young to have a trust” and “I don’t own enough” prevent beneficiaries from receiving the full value of the assets they inherited. Click here to learn the differences of a Will and a Living Trust. 
 
 
Life Insurance
The cost of life insurance is determined by age and health. You will never be younger and may not be healthier than you are today. When it comes to finances, the cost of waiting can be detrimental. You’ll hear very few people say, “I wish I hadn’t started to save so early.” Whereas, one of the biggest and most frequent life regrets is that savings didn’t happen soon enough. This scenario holds true for any type of savings - whether it be for emergencies, retirement or life insurance. 
 
Sadly, I’ve had clients come to me either after waiting until their term life insurance has expired or they are in financial despair after their spouse has passed away. Situations such as these are consequences from having inadequate or no life insurance. 
 
Nearly everyone should have life insurance – whether you’re single, married or divorced. 
 
Finances & Retirement
Most Americans close to retirement have saved only 12% of what they need. Having too little retirement savings often impacts other family members. Regardless of your age, if you haven’t started saving for retirement, you need to start as soon as possible. And, if your parents are still living, you should discuss their retirement plans with them, as well. Don’t wait and don’t assume.

According to a 2015 Genworth study, 75% of all people over the age of 65 will end up spending time in a skilled nursing home. Many people think that Medicare will pay for long term care, and they will to a very limited extent under certain circumstances, but after Medicare is exhausted, most individuals will be required to “spend down” his or her estate (assets) to less than $2,000. Click here to learn more facts about Long-Term Living. 
 
These topics can be difficult things to talk about. They can be easy topics to want to ignore or put off for another day. However, I urge everyone to not wait. The cost of waiting can negatively impact you and your family later. If discussed in a thoughtful and sensitive manner, your family is likely to appreciate you taking the time to discuss this with them.  

For a complimentary financial or life insurance consultation, please contact me at 909-714-1830 or at russ@russmorrisfinancial.com.
   
 
 

Years ago, a Certificate of Deposit (CD) was the “go-to” for people who had extra cash that they did not immediately need and wanted to save long-term for themselves or to pass on to their heirs. While it’s still a relevant and safe option, it’s no longer the only option, nor is it always the best. There are now other, just as beneficial, and sometimes better, long-term savings options to consider such as Single Premium Life Insurance. Before going into their differences, it’s important to understand what each is:
​
A SinglePremium Life (SPL) is a type of insurance in which a lump sum of money is paid into the policy in return for a death benefit that is guaranteed until you die. The size of the death benefit depends on the amount invested and the age and health of the insured.
 
A Certificate of Deposit (CD) is a savings certificatewith a fixed maturity date (terms usually from 6 to 60 months) and a fixed interest rate. CDs are generally issued by banks and credit unions and are insured by the FDIC or NCUA. 
 
Both a Single Premium Life and Certificate of Deposit are often used by people who want to leave a legacy to their children or a charity or save it for themselves in case of an emergency.

The key benefits to a Single Premium Life vs. a CD:

• The growth of a Single Premium Life Insurance policy is tax deferred and the death benefit is tax free. In a CD, the earnings are taxable each year as income. 
• The immediate cash value of a SPL policy is the amount of the premium and there is no surrender value. The SPL leverages the death benefit to 2 to 3 times the amount of the premium. This means that the beginning cash value is the same as the premium and is based on an index such as the S&P 500, which means the account will be credited up to 10% per year with the 10+ year average being about 6% with a 3% guarantee over any ten year period. 
• A SPL policy can immediately increase the amount of your legacy compared to the slow growth of a CD. A CD pays in the range of 1 to 2%, depending on the financial institution and length of term. 
• A SPL provides better liquidity than a CD. 
• A SPL provides no cost to surrendering the policy.

In summary, a Single Premium Life offers the safety of a CD, with better liquidity, a better return, and a larger legacy to the beneficiaries. The only down side is that the insured must medically qualify and be in average health. A SPL must also be purchased with after-tax money.

For a complimentary financial or life insurance consultation, please contact me at 909-714-1830 or at russ@russmorrisfinancial.com.

​When it comes to finances, the cost of waiting can be detrimental. You’ll hear very few people say, “I wish I hadn’t started to save so early.” Whereas, one of the biggest and most frequent life regrets is that savings didn’t happen soon enough.  This scenario holds true for any type of savings - whether it be for emergencies, retirement or life insurance. 

Today, I’m going to explain the negative impacts of starting a life insurance policy too late.  The cost of nearly any type of life insurance is based on two factors; your age at issue and your health. You will never be younger than you are today and most of us will never be healthier. Rates for both temporary (term) life insurance and permanent (cash value) life insurance go up as you grow older and if your health declines. 
​
One type of cash value life insurance, Indexed Universal Life, makes waiting an even greater problem. This type of life insurance is becoming more popular because it benefits both the insurer and the beneficiaries. The cash value can be used for retirement, college tuition and other large life events. The death benefit, of course, benefits the beneficiary. 

Albert Einstein once stated that “Compound Interest” is the strongest force in the universe. He explained that the length of time your money is working for you, compounding, the greater the return. The following example illustrates a comparison of buying an Indexed Universal Life insurance policy now versus waiting five years to buy it.

Life insurance can be a difficult thing to talk about. Saving can be an easy topic to want to ignore or put off for another day. However, I urge everyone to not wait. The cost of waiting can negatively impact you and your family later.

For a complimentary financial or life insurance consultation, please contact me at 909-714-1830 or at russ@russmorrisfinancial.com.

When it comes to retirement, there are several different saving plan options. While the goal of each may be similar, how they work and may be taxed can vary greatly. 
 
Retirement plans fall into one of three tax categories: 1) taxable 2) tax-deferred and 3) tax free. 
 
Below, is a breakdown of different retirement plans, based on tax-type. 
 
 
Tax-Deferred (pay taxes after withdrawal)
 
A traditional401(k) is a retirement savings plan sponsored by an employer. It lets employees save and invest a percentage of their paychecks before taxes are taken out. 

• Employers decide how much their employees can contribute (usually based on a percentage of salary), up to $18,500 per year.
• When the money is withdrawn, taxes are paid as ordinary income on both the contributions and growth.
• A 10% early withdrawal penalty may apply for withdrawals taken prior to age 59½.
• Required withdrawals begin at age 70½. 
  

​

• Pros: Some employers match the contributed dollar amount, up to a maximum percentage. It’s also one of the most convenient retirement plans, as contributions are typically taken out from an individual’s paycheck and go into their account automatically. Money pulled from your take-home pay and put into a 401(k) lowers your taxable income so you pay less income tax during the year of contribution. 
• Cons: You’ll be taxed at the higher ordinary income level rather than the lower capital gains level for investments. You may have limited choices as to your investments as well as limited control. Account value affected by performance of investments. Account could lose significant value near or during retirement.

 
A Traditional IRA is a retirement savings plan that allows investment earnings such as interest or dividends to accumulate tax deferred until the time of withdrawal.

• Penalty-free withdrawals for first home purchase and certain college expenses.
• A 10% early withdrawal penalty may apply for other withdrawals taken prior to age 59½.
  

​

• Pros: You do not need to pay the taxes up front. 
• Cons: All taxes are paid during the time of withdrawal. Even with the lower rate (if minimum age is met after employment), the total amount of taxes could be significant. Contributions are limited to $5,500/year or $6,500/year if aged 50 or older. Account value affected by market performance of investments. Account could lose significant value near or during retirement.

 
Other retirement plans that fit in this tax deferred category include 403(b), 457, SEP IRA and Simple IRA plans.
 
Tax-Free 
 
With a Roth IRA andRoth 401 (k), you make contributions with money you’ve already paid taxes on, and your money will grow tax-free, with tax-free withdrawals in retirement, so long as certain conditions are met.

• Individuals can contribute up to $5,500 per year if under 50, or $6,500 per year if 50 or over (Roth IRA).
• You may only contribute to a Roth IRA if you make less than a certain amount of money: $135,000 for single filers and $199,000 for married couples filing jointly in 2018.

• For Roth 401 (k) plans, employers decide how much their employees can contribute (usually based on a percent of salary), up to $18,500 per year.
• A 10% early withdrawal penalty may apply for withdrawals taken prior to age 59½. For a Roth IRA, if over 59½, you must have begun contributing to the account at least 5 years prior to withdrawal to avoid a 10% penalty. 
• There are no required minimum distributions during the lifetime of the original owner.
• Penalty-free withdrawals may be made for first-time home purchases and for unreimbursed medical expenses or health insurance if you’re unemployed.
• Minimum age to avoid penalty withdrawals (if not meeting certain exceptions) is 59½.
  

​

• Pros: No taxes on investment earnings or at time of withdrawal.
• Cons: Being taxed upfront means less money being contributed to account (less to grow).

 
An Indexed Universal Life Plan, which can also serve as a retirement plan, is considered tax-free because you pay with “after tax dollars”, it grows tax deferred, and money may be taken out tax-free. 

• Limitations on contributions (premiums) are dependent on the amount of life insurance.

• You can have access to your cash value at any age, any time, for any reason, without paying taxes or penalties.
• Death benefit is tax-free for beneficiaries
  

​

• Pros: No penalty or taxes are paid, regardless of the individual’s age or the reason that money is withdrawn. Once dividends are credited to account they cannot be lost as a result of market volatility if Indexed Universal Life. At time of death heirs receive life insurance plus account value tax free.
• Cons: In the event of policy cancelation, gains become taxable as income. You must qualify medically for the life insurance. Roth products subject to stock market volatility. 

The following example compares the results of investing in a 401(k), a Traditional IRA, and an Indexed Universal Life Policy. The following sonario will be used: A 30 year old employee, earning $80,000/year who is in average health, works for a company who will match an employee’s contribution with a “match” of ½ of the contribution up to 5%. The employee wants to contribute 5% of his/her salary to retirement. So he/she wants to compare the overall effect of the different types of plans. We will estimate that the employee will pay a total of 30% in combined State and Federal income taxes.

​Regardless of your age, I can help you start, modify or add a retirement plan that best supports your current financial situation and will help meet your future financial goals. 

For a free retirement and financial consultation, please contact me at 909-714-1830 or at russ@russmorrisfinancial.com.

Many people mistakenly believe that a living trust is just for the wealthy. But, this is not the case.  Other misconceptions such as; “I’m too young to have a trust” and “I don’t own enough” prevent beneficiaries from receiving the full value of the assets they inherited.
 
Many middleclass couples and individuals, especially those that are homeowners in California, would benefit from a Living Trust.
 
There are many benefits to a Living Trust:
 

• The assets from a Living Trust does not go through probate, a court-supervised process of authenticating the instructions and assets in a will. The average length of time for probate in the county of San Bernardino is two years. The average cost of probrate with court fees, etc., is 10% of the total value of the assets.
• A Revocable Living Trust allows a substitute trustee (a person that you assign) to manage your affairs if you become incapacitated; such as from a coma or Alzheimer's.
• A Living Trust is private. On the other hand, once filed, wills become part of the public record and can be accessible to almost anyone.
• A Living Trust can include provisions to financially protect beneficiaries that have special needs.

 
A Revocable Living Trust can be revoked or amended during your lifetime. For example, you should consider amending your living trust if:
 

• You get married or divorced
• You have, or adopt, a child
• You move to another state 
• Your financial status changes significantly 
• One of your trust beneficiaries dies 
• One of your named trustees dies or is incapacitated
• You have an AB Living Trust that written prior to 2000. Contact Russ Morris Financial if you’d like to have an existing Living Trust assessed at no charge. 

 
 Learn more about a living trust and/or to find out the options that may be best for you.
 
Click here to request more information about a Living Trust or to schedule a complimentary consultation with Russ Morris. 

​In 1978, when the highest marginal tax rate in the United States was 70%, and companies were eliminating corporate pensions, putting greater responsibility on workers to be responsible for their own retirement, the IRS instituted 401(k) retirement plans. These plans allowed a worker to contribute a portion of his/her income from each paycheck to an account (usually in the stock market) before taxes were taken out. The money could grow tax deferred until retirement (after age 59 ½), and income tax would be paid on the amount withdrawn. Initially, most companies would match all or at least a portion of the employee’s contribution.
​
The reality has been far from the expectation. First, even with the modest inflation rate of 3% we have experienced over the past 30 years, prices will have quadrupled during your working years. A commodity costing $10 at age 25 will cost around $40 at age 65. This means it would cost four times the amount to retain the same life style at retirement as it did in your twenties. Second, the tax rate has come down and instead of paying less taxes at retirement, most people will be paying higher taxes. Instead of paying the taxes on the smaller amount of the money invested, they are paying taxes on the original contribution plus the growth. 

The following tables compares a tax deferred retirement account (401(k) (or IRA, 403(b), or 457 plan) to The RAFT Strategy (The Retirement Account Free of Taxes). This investment is made with after-tax dollars, grows tax deferred and at retirement may be taken out tax-free. It also does not have a penalty for withdrawing funds prior to age 59 ½ , and it does not require funds to be withdrawn beginning at 70 ½ . This investment is through the use of a type of life insurance product called Indexed Universal Life.

Regardless of your age or what stage you are in your working career, I can help you start a tax-free retirement plan. If you have not already started a tax-deferred plan, it is not too late. A tax -free retirement can be integrated with your current plan.

For a free consultation and to learn more about tax free retirement options, please contact me at 909-714-1830 or at russ@russmorrisfinancial.com.

We seem to be inundated with advertisements on television, the radio, and in print by financial advisors telling us how best to invest our money for retirement. Unfortunately their advice is not always completely accurate. And it is up to us to sort through the vast amount of information and to determine what is true and what is myth.  In the following paragraphs, I have listed several of the myths I have heard or seen, and will provide evidence to demonstrate the truth.

Myth #1:  As long as the stock market continues to have more “up” years than “down” years my investments are safe. In fact, since the stock market crash of 1927, the stock market has had 67 up years, and only 24 down years.

Fact #1:  The magnitude of the gain or loss is more important than the mere fact that it was up or down. It is important to note that the size of a loss is greater than the same magnitude gain. For example, if a $100,000 investment lost 50% of its value at the end of year one, it would be worth $50,000. Then the following year the same investment gained 50%, it would only be worth $75,000 not its original $100,000. Even though its loss and gain were the same magnitude. Therefore, when annual returns are “averaged” by adding the losses and gains, then dividing by the numbers of years you have had your investment, it is not a true indication of how well the investment has performed, because, using the example above, the net result of a 50% loss and a 50% gain would equal 0, and your investment should therefore be at $100,000 not $75,000.

Myth #2:  Market timing strategies may cause you to miss the best days in the market and therefore limit your potential gains. One often sees or hears that the negative effect of missing “just the best 10 days” will have on an investment.

Facts #2:  This myth actually has some validity, but for the wrong reason. In truth, as illustrated above, missing the 10 worst days, would have a far greater effect. The point is that most successful investors take a long time horizon approach to investing. Trying to “time” the market by buying or selling in anticipation some expected high or low usually results in chasing the market and missing both targets to the expense for your investment.

Myth #3:  The returns of the market are the key factor to building a safe retirement portfolio.

Facts #3:  While market returns enhance one’s portfolio, the systematic contributions to your investment over time are the key components to a successful investment strategy.

Myth #4:  There is no need to prepare for recession unless or until I see signs of one. Financial news is like any other news source today, if you try hard enough, you can hear anything you want to hear. Someone once quoted, “all the weathermen and all the economists in the United States could change jobs and no-one would notice”. Meaning, they both seem to be operating at chance.

Facts #4:  Recent events have shown us that it is impossible to predict the market. Many pundits shouted that the market would be devastated if Trump was elected. In fact, the Dow futures dropped about 800 points following the announcement that Trump won, followed by an unpresented gain starting the following day and continuing to the present. However, with the way the world is today, who can tell what will happen tomorrow. And again, the prudent investor will implement a strategy that will incorporate safeguards against possible reverses in the market.

Myth #5:  My investment portfolio is diversified, I have a variety of stocks, or mutual funds. We all agree that diversification is important.

Facts #5:  If all your investments are in similar investments, are you truly diversified? Similar investments usually follow similar market trends. To truly diversify an investor needs to look to different risk pools. In other words, don’t put all your investments in the same asset class.

In summary, smart retirement investing begins with sitting down with a financial advisor to discuss your specific situation, goals, and desires to map out a plan. And most important, to get started. The earlier you start, the easier it is.  Feel free to contact me at (909) 714-1830 or rmorris@russmorrisfinancial.com for a complimentary consultation on starting and/or reviewing your retirement investing, 

When 401(k) plans were enacted into law nearly forty years ago, we lived in a different world.  The top federal tax bracket was at 70% (today it is 39.5%), and it made sense to save money tax-deferred for retirement when your income would be lower and your tax rate less.

​With the absence of pension plans, adjusted tax brackets and inflation, many Americans are now discovering that the ordinary income tax due when they withdraw their retirement income from qualified or tax-deferred plans is much greater than anticipated. Inflation over the forty years has caused an increase in costs of goods and services with corresponding incomes to match. An income of $25,000 a year in 1978 would be equal to an income of about $100,000 today. This means to maintain the same standard of living you are accustomed to, you may need to withdraw a retirement income that is greater than originally planned.  If you have a tax-deferred plan such as a 401(k), you will end up paying more in taxes for the larger withdrawal.

Fortunately, there are retirement plan options that allow your investments to grow and for you to withdraw as much as you need during retirement, while you pay no taxes.

Regardless of your age or what stage you are in your working career, I can help you start a tax-free retirement plan. If you have already started a tax-deferred plan, it is not too late. A tax -free retirement can be integrated with your current plan.

For a free consultation and to learn more about tax free retirement options, please contact me at 909-714-1830 or at russ@russmorrisfinancial.com.

There are two questions that I often get asked when I talk to people about retirement. They are:

1) WHEN should I start saving for retirement?
and
2) HOW MUCH should I save for retirement?
 
The answer to both questions is, “it depends”. It depends on a number of factors that are individual to you and your unique situation.
However, the answer to the first question is usually more simple.  If you’re making an income, and haven’t already started saving, it is ususally in your best interest to start saving now.  Your total retirement savings and the regular amount you’ll need to contribute to meet your total retirement savings goal will be more in your favor, the earlier you start saving.    

​As you can see from the chart below, the earlier you get started, the easier it will be to reach your goal at retirement. One of the most important variables in the retirement formula is time because of the power of compound interest.

This chart shows the monthly contribution required to reach $1,000,000 at age 65 given an average rate of return of 7.5% in an investment.

​The answer to the second question, How much should I save for retirement?” is more difficult to answer without understanding your situation. That is why it is a good idea to talk to a professional financial advisor. I say “professional” because there is always an abundance of advice floating around by individuals that may have strong opinions, but lack necessary training and licenses to be able to give trustworthy counsel.  I have often heard, “Russ what you are telling me is interesting, but my wife’s brother-in-law told us that we should be doing (insert any number of things here)”. The brother-in-law or other “advisor” is almost always someone other than a licensed financial advisor.

​A professional financial advisor incorporates years of training and experience along with knowledge of the laws and current trends in the industry to interpret your specific current situation, your goals, and what’s important to you at retirement. There is no one size fits all plan or strategy.
For a free consultation and to allow me to provide you with answers to these questions, specifically for you, please call 909-714-1830 or email russ@russmorrisfinancial.com.

With the baby-boomers reaching or nearing retirement and the millennials entering the job market, retirement planning is a major topic of conversation. Decisions made in our twenties can have a tremendous impact on our retirement outcome, yet that time for many of us, has passed. There are many ways to save for retirement and the most important decision is simply to have a plan and then to execute it. Virtually any plan is better that none. Having said that, there are some obvious differences in how the various retirement plans work and how taxes are paid. Not all retirement plans are created equal. All plans can be divided into one of three categories; taxable, tax-deferred, or tax-free.

Taxable Retirement Plans
Taxable investments receive a 1099 at the end of the tax year and are paid with your income tax return either as ordinary income or capital gains. These investments are usually in banks in the form of savings accounts or Certificates of Deposit (CDs), or in the stock market in individual stocks, bonds, or mutual funds. Bank investments are very safe, but they do not offer much growth. Currently they pay less than the rate of inflation. The stock market provides good growth potential in the long term, but your entire account is at risk. The closer you get to retirement the greater effect market risk plays on your portfolio.

Tax-Deferred Retirement Plans
Tax-deferred accounts are funded with pre-tax dollars and are allowed to grow tax-deferred until withdrawn (or beginning at age 70 and a half). The amount withdrawn is added to any other income including social security and is subject to ordinary income tax. Pension plans, 401(k), 403(b), 457, and IRAs, are among the most common tax-deferred plans. Most of these plans invest in mutual funds and are subject to the same risks mentioned above.

Many of the baby-boomers were “sold” on “tax-deferred” retirement plans that allow you to invest a portion of your income without paying income taxes at the time the money is earned, it then allows it to grow tax deferred until you retire and then pay the taxes on the money that is withdrawn. The thinking was that after retirement your income will be lower therefore you will be in a lower tax bracket and therefore pay less taxes. The reality according to my retired clients, is that they require just as much income after retirement to retain their life style or the life style they would like to live. This is also a function of inflation. For some time we have been experiencing a modest 3 to 4% inflation rate. But, over a 40 year working life the cost of goods would on average doubled twice. In other words, the buying power of $50,000 forty years ago would require an income of about $200,000 today. Taxes must also be taken into account. With the United States $17 Trillion dollars in debt, many people predict that taxes will have to go up in the future.  Also, the main tax deductions relied on by most tax payers are interest on their home’s mortgage and the deduction and tax credit for children. But, by the time they retire many couples have paid off their mortgages and their children have long since reached an age where they are not eligible for the deduction or credit.
 
Tax-Free Retirement Plans
Tax free investments are funded with after-tax dollars, grow and may be withdrawn tax-free. The two most common tax-free retirement plans are the Roth IRA, and a properly funded Life Insurance Retirement Plan (LIRP). Roth IRAs suffer the same risks as Tax-deferred IRAs, while LIRPs either pay a dividend, or have an indirect participation in the stock market. In either case, once your account has been credited, it is not subject to risk.

Remember, the main reason for a retirement account is to ensure adequate money to fund your retirement, not to reduce your tax liability in your working years. Although many seek the immediate gratification of the tax-deduction. It might be wise to pay taxes on the smaller contribution you invested during your working “accumulation” phase, rather than the much larger amount taken out during retirement. We sometimes ask people would you rather pay taxes on the seed (investment going in), or on the much larger harvest (amount of funds coming out after retirement). 

Below, are two different data comparisons of the impacts of beginning retirement savings at a younger vs. older age.  Table 1 represents the impacts of different age at inceptions with the same annual contributions.  The later that one starts saving, the less that they'll have as a retirement income if the same annual contributions are made.  

Table 2 shows what the annual contributions will need to be based on age at inceptions, for an estimated annual post-tax income of $80,000 after retirement.  

​The cost of higher education increases each year, and is expected to continue increasing into the foreseeable future. In the academic year 2014-2015, the cost to attend a college in southern California ranged from about $7,500 per year for a community college to over $65,000 for the most expensive private college (Harvey Mudd/McKenna). This amount includes tuition, room and board (or commuting expenses), books and supplies.

I am often asked, “When should I begin planning financially for my child’s education?”  While the answer of “at conception would not be too early”, most parents wait to think about it until sometime between birth, and their child’s senior year of high school.  The most important factor in preparing for the expense of your children’s college education is time. The sooner you start saving the easier (better) it is. There are also several types of financial aid that may be available. The aid may be based on financial need, special skills (such as academic, athletic, or talent in the arts), contest winners, or simply because you are a left handed, red-head. It is important to not only apply for government grants, but also to research the thousands of scholarships provided by a large number of private organizations. This information can be obtained by searching on the internet and talking to your high school counselor. If you do not qualify for a grant and the parents cannot afford to pay for a child’s schooling, a college load, or part-time job may be required. Often, the final solution is a combination of several of the above sources.

Since you will not know if your child will qualify for any scholarships until their junior or senior year of high school, many parents start saving for their child’s college education as early as possible. But, what is the best way to save? There are several types of college savings plans available each with its own set of pros and cons. The following outline may help your understanding, and the need to consult with a financial advisor that can address your specific needs, as each person’s situation is unique.

UTMA/UGMA Custodial Accounts;  The Uniform Transfer to Minors Act and the Uniform Gift to Minors Act Custodial accounts are the oldest forms of accounts used for college planning. They are often opened at a bank or savings and loan, although they could also be in the form of a brokerage account or other investment.
PROS:  Easy to open, no minimum requirement. Gain taxed as part of the child’s income which is usually lower than the parents. Easy for relatives and friends to contribute. The funds are not limited to college expenses.
CONS:  Assets in the account are the property of the child and the parents have no control over the account at age 18. The value of the account is used in determining needs-based financial aid awards.

COVERDALE ESA:  A Coverdale Educational Savings Account is similar in some ways to an UTMA/UGMA in that it is opened in the name of the child, and quite often is in a bank or savings and loan, although it may be in a brokerage account also. However, the custodian is the financial institution rather than the parent.
PROS:  The investment grows tax free until withdrawn. It may be used for any educational expenses including private school prior to college.
CONS:  There is a limit of $2,000 per year per child. The 3rd party custodian has ultimate control over the account until the child is 18.

529 COLLEGE PLANS:  The most common plans used for college planning. Each State has at least one plan in association with a mutual fund family. In California, the 529 plan is sponsored by TIAA-CREF. However, there is no penalty for using another State’s plan. The rules for each State are set individually and may differ from State to State.
PROS:  The account is controlled by the parent rather than the child or third party. The effective contribution limit is governed by the gift tax limit (currently $14,000 per person per year), with a maximum account value of between $220,000 to $310,000 depending on the State. Grows tax deferred and may be withdrawn tax free (federal tax) if used for educational purposes.
CONS:  In California, withdrawals are subject to State income tax. If not used for educational expenses, subject to ordinary income tax and penalty. Investments limited to mutual funds offered by State’s plan. Subject to market risk, value of account may lose part of its value in any given year. Value of account counted toward financial needs award.

CASH VALUE LIFE INSURANCE:  The cash value in a permanent life insurance policy is sometimes used as a source of funds for college expenses.
PROS:  Proceeds may be taken out tax-free. Funds not limited to any specific use. No direct investment in the stock market, therefore not subject to market loss. Parent retains control of funds.
CONS:  Insurance policies are medically underwritten if the insured is the parent.

What type of plan is most suitable for your family is a complex issue and should be discussed with a professional financial advisor.  Contact Russ Morris at Russ Morris Financial to schedule a complimentary consultation to discover which financial planning option for your child(ren)'s education is best for your family's situation.  

According to a recent study (Genworth, 2015), seventy percent of all people over the age of 65 will end up spending time in a skilled nursing home.  Currently, the median cost of skilled nursing home care in the Inland Empire is $285 per day, with the average stay being between 2 and 3 years, unless the reason is cognitive dysfunction (e.g. Alzheimer’s disease). Many Alzheimer’s patients spend as many as 8 to 10 years in a skilled nursing facility.  An average stay today would eat up a patient’s estate in the neighborhood of $100,000 to $300,000. And this cost has been going up at the rate of about 4% per year.

Many people think that Medicare will pay for long term care, and they will to a very limited extent under certain circumstances, currently for up to 100 days (with a copay after 20 days in most plans). After Medicare is exhausted, Medical may pick up the cost, but in most cases requires the patient to “spend down’ his or her estate (assets) to less than $2,000.

There are several solutions to funding the long term care problem. First, a person can self-fund the cost, in many cases wiping out a patient’s (couple’s) nest egg that would go to a person’s children if it were not for the high cost of a nursing home.
Second, there is a traditional Long Term Care Insurance policy. These policies are medically underwritten, and many times cost in excess of $300/month for a healthy 50 year old. The premiums may also increase over time as the costs of claims against the company increase. Quite often, people wait until they have medical issues making them uninsurable for long term care. Also, if a person passes away without needing nursing home services, the premiums paid for the policy are lost.

Finally, in the State of California, with our primary Life Insurance provider, we are able to offer a Life Insurance policy that contains a “Chronic Health Care” rider at no additional cost of premium. This rider becomes effective with the same criteria as traditional Long Term Care Policies. If a policy holder requires a skilled nursing home care, a portion of the life insurance policy’s death benefit may be used for payment of Long Term Care costs. If a policy holder never needs to use the rider, it hasn’t cost him/her anything more than the premiums paid for the death benefit which are then paid to the insured’s beneficiaries at death.

If you would like to learn more about this topic, contact Russ Morris so that we can discuss your specific situation and the solution(s) most appropriate for you and your family.