Rich Women Rock is a blog and online resource designed expressly for women. Here, we will talk about how to put the past behind you and begin making healthy, smart, and maintainable choices to secure your financial future.
Cash flow is king when thinking about your financial future
Cash flow is like the water in the moat surrounding a successful retirement. It ís an essential element of financial planning that can help you defend your castle against unexpected expenses, coffer-raiding or overspending. Cash flow planning combines five interdependent activities: setting goals, establishing an emergency fund, calculating your net worth, recording expenses and communicating your wishes to your loved ones — the five elements of cash flow planning.
Today’s “modern family” is decidedly nontraditional. According to the latest Census data, fewer than 25% of American households currently consist of married couples with dependent children, while more than 40% of unmarried couples have children under the age of 18. Even the term “married” can be defined differently depending on where you live. Some states allow and recognize same-sex marriage, but the majority of states and federal government do not. Therefore, it’s important for domestic partners to ensure they have legal protections in place to protect their families and themselves.
Unmarried partners lack many of the legal protections granted to spouses in the event of divorce or death. Although most states will consider a claim by an unmarried partner, there is no specific legal precedent in the absence of a written contract. Domestic partners may wish to consider creating a domestic-partnership agreement that details the sharing of expenses as well as the ownership and distribution of assets should the relationship end. Unmarried couples with children should consider signing a written agreement acknowledging parental rights and responsibilities and having each partner name the other as primary guardian in wills.
Unmarried couples are not eligible for their partner’s Social Security benefits and, in some cases, employer-sponsored retirement plan distributions. The IRS allows a nonspousal beneficiary of an IRA to take required distributions over his or her lifetime rather than in a lump sum, allowing for potential tax-deferred growth over a longer period of time. Domestic partners who can afford to do so may want to contribute the annual maximum to an IRA to capitalize on this benefit.
Estate Planning Issues
If an unmarried individual dies without a will, the state may distribute assets to his or her closest blood relatives, leaving the surviving domestic partner out in the cold. To help rebut a challenge to a will, domestic partners may want to videotape their wishes in the presence of an attorney.
Federal tax law allows all assets to pass to a spouse tax free and no applicable estate taxes are due until the second spouse dies. Unmarried couples, however, do not enjoy this tax advantage. For those with significant taxable assets, it will be necessary to pursue other avenues to avoid estate tax. One strategy is to purchase life insurance to pay any potential federal and state estate taxes. The surviving partner must own the insurance to avoid it becoming part of the estate of the deceased. Therefore, each partner should own enough insurance to pay anticipated taxes on the assets of his or her partner.
This communication is not intended to be legal and/or tax advice and should not be treated as such. Each individual’s situation is different. You should contact your legal and/or tax professional to discuss your personal situation.
What makes a company a good investment? Investment professionals consider several factors when they’re selecting companies to include in a stock portfolio. Here are some of the criteria they’re likely to use.
A Company’s Finances
A strong financial position on the part of the issuing company can make a stock attractive to investors. Analysts typically look at the company’s cash flow to evaluate how much money the company spends, how much it brings in, and how much “free” cash is left after the bills are paid. Reviewing revenues, net income, and earnings per share helps analysts assess the company’s history of sales and earnings growth. Another gauge of financial health is the amount of debt the company has compared to equity.
A Look at the Business
Stocks of companies that are leaders in their industries generally are desirable choices for a portfolio. Analysts look for profitable companies with limited competition whose products or services are valuable to customers. Keeping an eye on earnings estimates helps analysts determine whether the company is likely to experience rising profits or unexpected slowdowns in the future.
Analysts use different calculations to assess a stock’s relative value. Some of the most common include:
Price-to-earnings ratio (P/E) shows the relationship between the current stock price and the company’s projected earnings. The P/E is one of the most widely used ratios, and it is used to compare the financial performance of different companies, industries, and markets. The company’s forecast P/E (its P/E for the upcoming year) is generally considered more important than its historical P/E.
Price-to-book ratio (P/B) is a stock’s current price divided by its book value (i.e., total assets minus total liabilities) per share. Both can help identify potentially undervalued stocks and also may be reliable indicators of investor sentiment. Like most ratios, it’s best to compare P/B ratios within industries. For example, tech stocks often trade above book value, while financial stocks often trade below book value.
Return on equity (ROE) is calculated by dividing a company’s earnings per share by its book value per share. The ROE is a measure of how well the company is utilizing its assets to make money. Understanding the trend of ROE is important because it indicates whether the company is improving its financial position or not.
Dividend payout ratio is calculated by dividing the dividends paid by a company by its earnings. The dividend payout ratio can also be calculated as dividends per share divided by earnings per share. A high dividend payout ratio indicates that the company is returning a large percentage of company profits back to the shareholders. A low dividend payout ratio indicates that the company is retaining most of its profits for internal growth.
The Personal Factor
While metrics are critical to analyzing a company’s stock and whether it may be a good addition to an investor’s portfolio, personal circumstances — e.g., an investor’s other portfolio holdings, goals, time frame, and risk tolerance — should always be considered when determining whether a stock is right for a particular portfolio.
Avoid These Financial Traps — They May Be Hazardous to Your Wealth
Money. It’s hard to get and easy to lose. It doesn’t take long for the wealth you’ve accumulated to disappear if you don’t manage your money well or have a plan to protect your assets from sudden calamity.
Snares like the ones mentioned below could easily threaten your financial security. Planning ahead can protect you and your loved ones from getting caught.
The more you have, the more you spend — or so the saying goes. But not paying close attention to your cash flow may prevent you from saving enough money for your future. Manage your income by creating a spending plan that includes saving and investing a portion of your pay. Your financial professional can help identify planning strategies that will maximize your savings and minimize your taxes.
With the easy availability of credit, it isn’t hard to understand how many people rack up high credit card balances and other debt. Short-term debt will become long-term debt if you’re paying only the minimum amount toward your balances. If you can’t pay off your credit card debt all at once, consider transferring the balances to a card with a lower interest rate.
Your life, your property, and your ability to work should all be protected. Life insurance can provide income for your family if you die. Homeowners and automobile insurance can help protect you if your home or car is damaged or destroyed and provide liability coverage if someone is injured. Disability insurance can protect your income if you’re unable to work.
A financial windfall is great, but it also can be dangerous. Without solid advice on managing and investing the money, you could find that your inheritance is gone in a much shorter time than you would have thought possible. Your financial professional can help you come up with a plan for managing your wealth. Setting aside a portion of the money to spend on a trip or other luxury while investing the rest may be one way to reward yourself and still preserve the bulk of your assets.
Reviewing your investments to make sure they’re performing as you expected — and making changes in your portfolio if they’re not — is essential. But it’s also essential to periodically review your investment strategy. You may find that your tolerance for risk has changed over time. You’ll also want to assess the tax implications of any changes you plan to make to help minimize their impact.
If you’re not contributing the maximum amount to your employer’s retirement savings plan, you’re giving up the benefits of pretax contributions and potential tax-deferred growth. Maximizing your plan contributions can start you on your way to a comfortable retirement — hopefully with no traps along the route.
Just about anyone who’s ever watched a child or grandchild go from the crib to kindergarten and beyond has uttered the phrase, “They grow up so fast.” Although you can’t really freeze a youngster’s precious moments in time, you can take steps to make sure that his or her journey to adulthood starts with a sound understanding of money, investments, and personal financial responsibility. The following activities will help.
Grab your sunglasses — summer’s here, and it’s time to kick back and relax.
If only it were that easy. It would be great if all your worries disappeared when summer arrived, but that doesn’t happen. Actually, if money is stressing you out and you’re planning to take a vacation, summertime may be extra stressful.
Financial stress can strike at any time. If you’re worried about money and your solution is to wait for things to get better, you’re making a mistake. The best way to tackle money troubles is to take control and make some changes.
As the earliest baby boomers begin to enter retirement, the various income guarantees and other living benefits offered through variable annuities (VAs) are gaining in importance.
Yet before you rush to add a VA to your retirement funding scheme, take some time to understand what VAs have to offer in a general sense and to sort through the host of optional features and their associated fees and investment risks.
Variable Annuities — A Brief Primer
The Securities and Exchange Commission defines a VA as “a contract between you and an insurance company, under which the insurer agrees to make periodic payments to you, beginning either immediately or at some future date.”1 You can purchase a VA by making a single purchase payment or a series of payments spread out over a period of time.
The “variable” modifier denotes that the value of your VA will vary depending on the performance of the underlying investments you choose when contributing to and managing your account. Most VAs offer a menu of subaccounts that, similar to defined contribution plan options, invest in different styles of stocks, bonds, and money market instruments.2 Therefore, VAs could lose value.
VAs are used mainly to supplement more traditional sources of retirement income such as Social Security and pension plans. Common features include:
Tax-deferred growth. You will pay no taxes on the earnings from your annuity investments until you begin making withdrawals or receiving periodic payments.3
Unlimited contributions. Generally speaking, there is no limit to the amount of money you can put into a VA.
No mandatory withdrawals. If your VA is not part of an IRA or a qualified retirement plan, you are not required to begin taking minimum distributions after age 70½.4,5
Death benefit. If you die prior to annuitizing your contract — that is, converting your VA into regular income payments — your beneficiary will receive, in general, an amount at least as much as you contributed in payments, less any withdrawals.
Lifetime income benefits. Annuity holders typically have several options for receiving annuity payments for the rest of your life, including the choice of continuing payments to beneficiaries for a set period of time.
Living Benefit Options — Driving Today’s Annuity Market
Although the distinguishing characteristic of an annuity is a stream of income that cannot be outlived, most VAs offer — for an additional fee — optional principal protection benefits. Referred to collectively as living benefits, they offer exposure to the market’s upside while protecting against the effects of market declines on your account value or future income. In some cases, a combination of these optional benefits may make some variable annuities a potential rollover vehicle.6
There are three basic types of living benefits.
Guaranteed lifetime withdrawal benefit (GLWB). This benefit guarantees a return of your purchase payments (less prior withdrawals) through annual withdrawals for a specified period or for life.
Guaranteed minimum income benefit (GMIB). This benefit guarantees a minimum future income level regardless of how the market performs.
Guaranteed minimum accumulation benefit (GMAB). This benefit ensures that you retain the value of your purchase payments regardless of investment performance.
Living Benefit Basics
Guaranteed Lifetime Withdrawal Benefit (GLWB)
Guaranteed Minimum Income Benefit (GMIB)
Guaranteed Minimum Accumulation Benefit (GMAB)
Payout is either a pre-set percentage of your net purchase payments (and any applicable step-ups), typically around 4% per year, or is based on life expectancy
Payout is based on the greater of your account value or your net purchase payments (and any applicable step-ups) at the time you annuitize
If your contract value is worth less than your net purchase payments (and any applicable step-ups) on a pre-set date, the insurer will make up the difference
Long term, typically 10 years
Long term, typically 10 years
Duration of benefit
Lifetime payments, if withdrawals stay within prescribed parameters
Lifetime income guarantee
One-time, yet can be renewed
Investors who seek equity exposure for growth potential, but also have a need for liquidity in the short term
Investors who seek long-term growth potential, have no immediate need for liquidity, but want to guarantee a future stream of income
Investors who seek long-term exposure to the market’s upside potential as well as principal protection and/or minimum future income
In practice, living benefits have evolved increasingly into new hybrid benefit options, offering a mix of guarantees and participation in the market’s potential upside, as insurance companies seek ways to differentiate their offerings in the marketplace. This environment of expanding flexibility and functionality is helping to redefine VAs for a new generation of retirement investors. But with added choice comes the possibility for confusion and the need for expert advice.
1Source: Securities and Exchange Commission. Variable Annuities: What You Should Know, last modified April 18, 2011.
2An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.
3Withdrawals will be taxed at then-current income tax rates. Variable annuities are not suitable for meeting short-term goals because substantial penalties and early surrender changes may apply if you withdraw money early. In addition, withdrawals prior to age 59½ may be subject to a 10% additional tax. Keep in mind that the insurer may also impose additional early surrender charges. Please refer to your contract’s prospectus for detailed information about how withdrawals can affect your annuity’s death benefit and/or your living benefit.
4This applies to nonqualified annuities only. Qualified annuities (i.e., rollovers) must adhere to required minimum distribution rules.
5Investors do not receive any additional tax benefit by placing qualified retirement plan assets into an annuity, since tax deferral is already provided by the qualified plan. However, an annuity may still be an attractive option if other features such as guaranteed riders and death benefits are important to the investor.
6All living benefits are available for an additional cost. The guarantees associated with living benefits are backed by the claims-paying ability of the issuing insurance company. It is important to weigh the costs against the benefits when adding such options to an annuity contract.
Variable annuities are long-term, tax-deferred investment vehicles designed for retirement purposes and contain both an investment and insurance component. They are sold only by prospectus. Guarantees are based on the claims-paying ability of the issuer and do not apply to a variable annuity’s separate account or its underlying investments. The investment returns and principal value of the available subaccount portfolios will fluctuate so that the value of an investor’s unit, when redeemed, may be worth more or less than their original value. Withdrawals made prior to age 59½ may be subject to a 10% additional tax. Surrender charges may apply. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal.
Besides the ubiquitous Napa Valley, Bordeaux region, and the Loire Valley, several other spots here and abroad are worth touring this year.
How about upstate New York, Oregon, or Washington?
Wineries in the Hudson Valley have earned national acclaim, as have some in the Finger Lakes region. More and more oenophiles are discovering Oregon’s Yamhill County, known for its outstanding pinot noir. The Walla Walla Valley contains dozens of wineries, including two of The Daily Meal’s top 10 in America.
Outside of the U.S., how about these destinations?
A spring trip to New Zealand’s Central Otago region could acquaint you with a plethora of enchanting, aromatic riesling, gewürztraminer, and pinot gris, all during harvest time in the Southern Hemisphere. In Spain’s laidback La Rioja province, more than 500 wineries offer a vast array of robust reds. Or, you could tour the Stellenbosch Wine Route in South Africa’s Western Cape, home of great pinotage and chenin blanc.
Whenever and wherever you go, make sure to follow some basics.
Take a designated driver, go early in the day if you can, and bring a foam shipping container or sturdy box to store wines you want to send home.
When considering adoption, it is important to understand the legal process, the evaluation by a social worker, programs that may help you finance an adoption, and your ability to care for a child.
Anyone who is considered a “fit parent” may adopt a child, but many states and adoption agencies impose special requirements.1 State laws may impose a residency requirement for a period of time prior to the adoption or may insist that a parent be a certain number of years older than the child. Adoption agencies may impose stricter guidelines. Be aware that many private organizations may have strong preferences for placing children with heterosexual couples. Although it is possible for single parents and same-sex couples to adopt, they may have to go through more steps to prove that the placement would be in the best interest of the child.
For an adoption to be legal, birth parents must consent unless their rights have been terminated. Most states will not permit consent until after a child is born, and there is likely to be a waiting period after birth. You may want to consult an experienced adoption lawyer to make sure you understand circumstances when birth parents can revoke consent.
All adoptions must be approved by a judge at an adoption hearing. Prior to the hearing, biological parents, the adoption agency (if applicable), the child’s legal representative (if applicable), and other parties must provide consent in order for the judge to issue a final decree of adoption.
Prior to the adoption hearing, the judge typically reviews the recommendation of a homestudy in which a social worker examines the home life of the adoptive parents. Social workers are likely to examine the adoptive parents’ financial situation, marital stability (there may be exceptions for single parents or nonmarried couples), lifestyle, other children, career obligations, physical and mental health, and criminal history.
Private agencies typically charge fees ranging from several hundred to several thousand dollars.2 One-time, non-recurring expenses may include fees associated with the homestudy, parent preparation classes, criminal checks, court costs, attorney fees, health and psychological exams, and travel. In many instances, public agencies may help adoptive parents pay expenses when a waiting child or a foster child is adopted. Many waiting children are entitled to state or federal adoption assistance each month until the child reaches age 18 or 21. Federal tax law provides an adoption tax credit of up to $13,460 in 2016. In addition, financial support may be available from religious organizations and from the National Adoption Foundation.
Your Readiness for Adoption
In addition to the legal and financial issues, consider whether you are able to care for a child personally and emotionally. The adoption process does not always proceed smoothly, and you may encounter frustration and delays before bringing a child into your home. If the child is young, you are likely to spend the better part of two decades putting the child’s needs ahead of your own. That said, being an adoptive parent also presents many rewards. Going into the experience with your eyes open may increase your chances of creating a positive outcome for all parties involved.
Market timing is an investing strategy in which the investor tries to identify the best times to be in the market and when to get out. A big risk of market timing is missing out on the best-performing market cycles; missing even a few months can substantially affect portfolio earnings. Moreover, guessing the market’s timing is not easy, and even many professional money managers have misjudged significantly.
For individual investors, a better alternative over the long run may be a buy-and-hold strategy. But a buy-and-hold strategy should still include regular portfolio checkups and balancing as necessary.
Sports commentators often predict the big winners at the start of a season, only to see their forecasts fade away as their chosen teams lose. Similarly, market timers often try to predict big wins in the investment markets, only to be disappointed by the reality of unexpected turns in performance. It’s true that market timing sometimes can appear to be beneficial. But for those who do not wish to subject their money to such a potentially risky strategy, time — not timing — could be the best alternative.
What Is Market Timing?
Market timing is an investing strategy in which the investor tries to identify the best times to be in the market and when to get out. Proponents maintain that successfully forecasting the ebbs and flows of the market can result in higher returns than other strategies. Critics, however, note that changes in a market trend can appear suddenly and almost randomly, making the risk of misjudgment significant.
Market Timing Has Its Cost
One of the biggest costs of market timing is being out when the market unexpectedly surges upward, potentially missing some of the best-performing moments. For example, an investor, believing the market would go down, sells off equities and places the money in more conservative investments. While the money is out of stocks, the market instead enjoys a high-performing period. The investor has, therefore, incorrectly timed the market and missed those top months.
The opposite of market timing is buying and holding as the market goes through its cycles. This table illustrates the potential results from poor market timing compared with buying and holding.
The Risk of Missing Out
Miss 10 Top-Performing Months
Miss 20 Top-Performing Months
Perhaps the most significant risk of market timing is missing out on the market’s best-performing cycles. The three columns represent the growth of a $1,000 investment beginning in 1987, 1997, and 2007, and ending December 31, 2016.
Row 1 shows the investment if left untouched for the entire period shown above; Row 2 shows the investment if it was pulled out during the 10 top-performing months; and Row 3 shows the investment if it was pulled out during the 20 top-performing months.
Buy and hold, however, doesn’t mean ignoring your investments. Remember to give your portfolio regular checkups, as your investment needs will change over time. An annual review can help ensure that the investments you select are in keeping with your goals and time horizon.
Time Is Your Ally
Clearly, time can be a better ally than timing. The best approach to your portfolio is to arm yourself with all the necessary information, and then take your questions to a financial advisor to help you with the final decision making. Above all, remember that both your long- and short-term investment decisions should be based on your financial needs and your ability to accept the risks that go along with each investment. Your financial advisor can help you determine which investments are right for you.