Why Living in the Moment is Critical to Your Retirement Plan

photo-1441716844725-09cedc13a4e7On a recent Saturday morning I ran along a wooded trail near where I live that leads to a set of soccer fields. As I rounded the corner and came out of the woods I saw kids playing soccer in their little green and white jerseys. Parents and grandparents were lined up on the sidelines cheering them on, their morning lattes in hand.

I felt like had stepped into a time warp that took me back to the days when my girls used to play soccer on those same fields.

Those were good times and great memories.

As a financial planner I am always thinking ahead, living in the future. I plan retirements for other people as I daydream about my own. I often think things like “When the kids are older…” “After the kids are in college…” Or my personal favorite, “Someday when I retire, I would like to…” You can fill in the blanks.

I am sure you have had similar thoughts. Or yours may go like this: “When the market gets better…” “After I pay off these bills…” “As soon as my pension kicks in…”

While planning for the future is important, don’t let it get in the way of getting the most out of your life today. Unless you live a full and fulfilled life before you retire, it’s unlikely that you will do so after you retire. That’s why living in the moment is critical to your retirement plan.

Live a life of no regrets. In her book, The Top 5 Regrets of the Dying, Bronnie Ware writes about the most common regrets people have at the end of life. I won’t give away all 5 here, but #2 on the list: “I wish I didn’t work so hard”.

I try to be extra mindful of this one. Before I got married and started a family, I worked all the time. Nights, weekends, holidays, it didn’t matter. For that time of my life, it made sense to put in the hours. Today, things are different. (Thankfully!)

As focused as I am on my long-term goals, I try to remember to live in the moment and make the most of today. What is the point of a confident retirement, if it means sacrificing two or three decades of your life up to then?

That’s why you won’t see me in the office when my kids are out of school. It’s also why I limit my late appointments to just a couple per week, and I am very selective about the new clients I take on.

If you are not doing so already, start a new hobby or develop an existing one. Join a small group at your church. Find a way to serve your community that gives you a sense of purpose. Heck, just go for a bike ride with your kids or take your dog for a walk on a regular basis. It doesn’t have to be complicated.

Use it or lose it. According to an article on CNBC.com the average American worker uses only 77% of their paid time off. In fact, unused vacation time is at a 40-year high. While some people may be able to roll unused vacation time over to the next year, the average worker loses 1.6 vacation days per year.

That doesn’t sound like much, but it adds up. Think of it this way. If you spend just 3 extra minutes per day at the copy machine, that adds up to over 1.6 workdays per year spent staring at the walls making copies. Since paid vacation is part of your total compensation, losing paid vacation days is the equivalent of working for free.

If you want to spend 1.6 vacation days making copies, go ahead. Me? I’d rather be at the lake.

Live in the moment. Living in the future is a habit I have developed that isn’t always healthy. I need to remind myself to live in the moment and make the most of today.

To get the most out of your life in retirement, you need to do the same. When I create retirement plans for clients I recommend they save up to 20% of their income for their future goals. The other 80% is spent on day-to-day life.

I think that balance makes sense in other ways as well.

Set aside a percentage of your income to meet your long-term goals and spend the other 80% of your time, money and other resources living for today.

At the end of life it’s not the things you did, but the things you wish you had done that you are most likely to regret. Don’t spend life in retirement wishing you had done more living before retirement.

What’s Your Net Worth?

photo-1438027316524-6078d503224bDonald Trump recently reported a net worth of over $10 billion. Earlier estimates had pegged it at around $3 billion, but who’s counting?

While $10 billion may be a hard concept to get your mind around (it is for me anyway), the concept of net worth is fairly simple.

For example…

Net worth is the difference between your assets and your liabilities. Put another way, it’s the difference between what you own and what you owe.

Assets are things of value that you own. They include your home, cabin, and other real estate as well as financial assets like IRAs, 401(k)s, stocks, bonds, mutual funds, etc. The term “assets” can also include personal assets like your car, jewelry, artwork, and collectibles.

If you own a business, the value of the business would also be considered an asset and would count towards your net worth.

Life insurance cash value also contributes to your net worth. However, life insurance death benefits don’t count towards your total until after you die.

Liabilities are what you owe other people. Your mortgage, car loan, student loan and other debts are liabilities.

Subtract your liabilities from your assets and you have your net worth – voila!

A Hypothetical Case study …

Joe and Sue own a small home Washington County with a few acres of land that they bought in 1989. Today it’s worth about $350,000 and they still owe $50,000 on their mortgage. They also have a cabin in Wisconsin that they inherited from Joe’s mother. It’s paid for and valued at $275,000.

Joe teaches math and has a 403(b) plan at work with a balance of $300,000. Sue owns an antique store in White Bear Lake, Minnesota. The value of her business is roughly equivalent to the value of her inventory: $50,000.

Like most people, they have checking and savings accounts, IRAs, and a small amount of savings in a brokerage account. All told these assets add up to $185,000.

Their life insurance doesn’t have any cash value, but the two policies they own have a combined death benefit of $250,000.

Other than their mortgage, Joe and Sue’s only debt is a $25,000 line of credit they took out for some house projects.

Pop quiz: What is Joe and Sue’s net worth? If you guessed $1,085,000, you are correct. Ding! Ding! Ding! You have a pretty good understanding of net worth. The life insurance only counts towards their net worth after they die.

Net worth is a simple concept, but it’s one you should know. The exact number isn’t critical, but it helps you to know roughly where you stand financially — especially if you plan to run for president someday. Give or take a few billion.

5 Ways Minnesota Residents Can Avoid the Estate Tax

shutterstock_163602638 (2)Minnesota is one of only a few states that have an estate or death tax. MN residents who die this year will be assessed an estate tax by the state of Minnesota if the value of their estate exceeds $1.4 million (increasing to $2.0 million by 2018).

Depending on the size of their estate, the tax bill would be between 10% and 16% of the amount that exceeds $1.4 million. If you die with a $2 million estate, you will owe $60,000 or more in estate taxes to the state of Minnesota.

Below are 5 ways Minnesota residents can avoid the estate tax.

Don’t die. I say that only somewhat tongue-in-cheek. Obviously we are all going to die someday, but the exemption amount increases from $1.4 million in 2015 to $2 million in 2018. If you are a healthy person with an estate valued between $1.4 million and $2 million, you will likely avoid the estate tax just by living a little longer. In fact, according to the MN Department of Revenue, fewer than 2% of all Minnesotans will die this year with a taxable estate. That number drops by 37% in 2018.

Don’t die in MN. More accurately, don’t die as a Minnesota resident. Although there are some exceptions, it’s usually only MN residents who are subject to the MN estate tax laws. If you are a resident of Florida or any number of other states with no death tax at the time of your demise, you will avoid the MN estate tax. Click this link for a handy map of the 30 or so states with no death taxes.

Be generous to others. Assuming you don’t need a large net worth to fund your retirement income needs, one way to avoid the estate tax is to simply make sure that your estate stays under the exemption amounts (up to $2 million by 2018). If you can get by on $2 million, maybe you should consider making charitable gifts and/or gifts to others during your lifetime.

An individual can gift up to $14,000 per year to an unlimited number of other individuals without affecting their exemption amount. A married couple can gift up to twice that amount. If you are married and have two adult children who are married with two children of their own, you and your spouse could gift up to $224,000 ($28,000 x 8) every year.

If you are still feeling generous, there is no limit to what you can give to qualified charities (501c3 organizations), your kids’ or grandkids’ colleges to pay for education, or to a hospital to pay for medical expenses.

Be generous to yourself. Who says you have to give it all away? Maybe this is the year to take an Alaskan cruise or travel around the world. I spoke to a client recently who said, “It’s not like we are going to buy a sailboat and go around the world.” Why not? If you can afford it, why not trade in some cash for an experience of a lifetime? At the end of life most people regret things they didn’t do, not the things they did.

Credit Shelter Trust. $1.4 million is the exemption amount for the MN estate tax. This number increases to $2 million by 2018. However, a married couple can establish a credit shelter trust as part of their estate plan that will shelter up to $2 million from estate taxes for each of them.

In other words, if you are married and have properly drafted will and trust documents, you should be able to protect up to $4 million from the MN estate tax (by 2018). If you are not sure if your estate plan includes a credit shelter trust or a similar vehicle to minimize your estate tax liability, talk to your attorney and have them review your plan.

Planning is the key

That’s five ways you can avoid estate taxes as a Minnesota resident. For families with a higher net worth or more complicated estates there are even more things you can do to reduce the tax burden. With a little planning, however, 99.5% of the population of MN can eliminate their estate tax completely.

Minnesota Residents Pay More Estate Tax

shutterstock_133487081 (2)The Federal government assesses an estate or death tax only on estates valued at more than $5.43 million. Married couples can avoid these taxes if their net worth is less than $10.86 million. In fact, only a fraction of a percent of all Americans who die in 2015 will owe any estate taxes.

Unless you’re from Minnesota — or a handful of other states that assess an estate tax at the state level. MN residents who die this year will be assessed an estate tax by the state of Minnesota if the value of their estate exceeds $1.4 million (increasing to $2.0 million by 2018).

How much are you worth?

The value of your estate is calculated by adding up all your assets (house, cabin, 401k, IRA, investment accounts, etc.) and subtracting your liabilities – amounts that you owe others (mortgage, student loans, credit card debt, etc.). For example, if your assets equal $800,000 and you owe $200,000 in mortgages and other debt, your net worth might be $600,000.

At $600,000 you would owe $0 in Federal or state estate taxes.

Don’t forget life insurance.

When calculating their net worth, most people forget to include their life insurance. Generally, the proceeds you receive from the death benefit of life insurance also get included in the value of your estate. In the example above, if your assets minus liabilities add up to $600,000 and you have $1.0 million in life insurance, you have an estate that would be valued at $1.6 million upon death. Since this exceeds the current exemption amount of $1.4 million, $200,000 of your estate would be taxable at a rate of at least 9%.

Most pay no tax.

According to the MN Department of Revenue only about 2% of all deaths in Minnesota will result in the estate being taxed by the state. However, I would take that statistic with a huge grain of salt. If you are the kind of person that reads financial planning blogs and/or works with a financial advisor, odds are pretty good you may subject to a future estate tax.

In the example above, a MN resident who dies with an estate valued at $1.6 million would owe about $18,000 in estate tax. With some basic estate planning, those taxes can usually be avoided – especially if you are married.

In my next post, I will tell you how you can avoid most of these unnecessary taxes.

Save It or Shred It? Know what documents to keep and for how long.

shutterstock_121141942 (2)I have a confession to make. I am not as organized with my personal documents as I would like to be. At work everything is locked up, securely filed away or shredded. At home not so much.

In a previous post, I wrote about how I protect the information and documents that go through my office. We have strict rules regarding data storage and information that must be complied with. At home, no one stands over my shoulder making sure that I am smart about how I store my personal documents.

Admittedly, I am not an expert on this topic, but I know enough to know that getting organized starts with properly destroying any documents that are no longer needed.

On May 5th, Focus Financial is hosting a shredding event in which clients — and advisors — can bring their personal documents to be shredded by a professional shredding company. Shred-it of MN provides “secure document destruction” services to over 300,000 customers around the world, as well as community Shred-it events like the one we are hosting.

If you are a client, you have already received a notice with all the details and are encouraged to come. If you are not a client, here are some tips on what documents to keep and what you should destroy.

Keep forever. This is by no means a comprehensive list, but at a minimum the following documents should be kept in a secure place forever.

• Birth and death certificates
• Social security cards
• Pension plan documents
• ID cards and passports
• Marriage license
• Insurance policies
• Wills, living wills, power of attorney, and other legal documents
• Titles to vehicles you own
• House deed and mortgage documents

Tax returns. You may have noticed that tax returns aren’t on the above list. Most experts recommend keeping your tax returns for up to seven years. However, once your return is organized and stored in a safe place, I say keep it forever. Odds are your tax returns aren’t taking up that much space. Besides, there are some situations in which the IRS can go back and audit you indefinitely. The owner’s manual for the old appliances in the house you used to own? Those you can toss.

Other documents. Unless you need them for tax purposes, most receipts can be shredded after you have cross-referenced them on your credit card statement or the window for returning that item has expired. Other documents should be kept for a longer period of time, then destroyed. How long depends on the type of document.

For a list of what documents to keep and for how long, check out this article by Consumer Reports. Published in 2010, the article is a little dated, but the content is “evergreen” as they say and as valid today as it was then. Bankrate.com also has a handy chart that should help you sort it out. For a direct link, click here.