Financial Planning

Whether planned or unplanned, many are unsure of how to proceed after inheriting money. Here are a few steps you can take to make the most of it.

So, you’ve inherited money. Depending on the circumstances, it may have been expected or unexpected, and it may or may not have come with a great deal of heartache. Nevertheless, too few people know what to do when they inherit large sums of money, imposing more pressure than they might have imagined. Here are a few things you should consider when you inherit money.

1. Take a Brief Moment to Think

When you first inherit money, it can be overwhelming, but it’s a good idea to take a moment to consider all of your options. Although it’s a myth that all lottery winners end up destitute, there is some truth to the fact that it’s easy to spend too much of a good thing too fast and blow through money that could have cleared debt, funded college costs or paid for your retirement. Know that your hand isn’t forced, and you don’t have to make a decision as to what you’re going to do with it or how you will allocate it on a timeline that you aren’t comfortable with. Additionally, the time at which you inherit money is naturally stressful, and making decisions under duress can cause unforced errors and complications. Take some time to determine a course of action you feel comfortable with and confident in.

2. Familiarize Yourself with Tax and Inheritance Laws ^[1,2]

Once you’ve let the initial pressure of the situation dissolve, it’s a great idea to understand the implications of your inheritance. Whether those implications are determined by the terms of your inheritance or the tax obligations on the funds, it’s crucial that you know how the money may or may not be used. For example, even if your inheritance comes with no tax obligations, it can come with time requirements or required minimum distributions. As of the signing of The SECURE Act of 2019, non-spousal beneficiaries must drain an inherited traditional IRA, 401(k) or similar tax-deferred retirement account within 10 years, and that money is taxed as ordinary income unless it is a Roth IRA, potentially pushing you into a higher tax bracket.

It’s important to be aware of the implications of retirement accounts subject to income taxes, but depending on the amount you inherit, you may also owe federal or state estate taxes. The federal estate tax exclusion is currently $12.92 million per person, but it is set to drop back down to 2017 levels of around $6.8 million in 2026. Some states’ estate tax threshold amounts are much lower than federal levels; for example, from $1 million in Oregon and Massachusetts to $9.1 million in Connecticut. It’s important to check with a tax professional familiar with both federal and state tax laws.

3. Pay Outstanding Debt ^[3]

After knowing what you’re obligated to do with the money, you can start to explore some of the freedom offered by coming into extra funds. One option that many tend to lead with is paying outstanding debt. Debt can hang over the heads of investors, pre-retirees and retirees, causing stress and potentially getting in the way of greater saving and investing goals. It can be extremely helpful to pay off debt, especially if it comes with higher-than-average interest rates. For instance, while personal loans, credit cards and student loans can be beneficial in the short term, they can be accompanied by unfavorable repayment terms. Paying them off can be a great way to prevent interest from piling up even further. If you are getting close to retirement, paying off your mortgage may also make sense depending on your situation.

4. Establish an Emergency Fund

An emergency fund can offer flexibility when unexpected expenses arise, and while having one can be extremely beneficial, for some it can be difficult to grow the balance of your emergency fund while trying to maintain your current lifestyle. Committing at least a portion of your inheritance to an emergency fund can mean that you can easily tap into a flexible and liquid account to pay the deductible for a new roof after a storm, replace an appliance that goes bad or afford an unexpected auto repair. Most experts advise putting away at least three to six months’ worth of expenses, but you may want to put away more depending on your age and employment situation.

5. Invest in Your Future

This can truly mean anything, whether you’re looking to grow your investment portfolio, you want to pay for classes to grow one of your skills or you’d like to provide yourself with the financing you need to start a new business venture. The opportunities for investing in your own future are virtually endless. A larger sum of money can also give you the opportunity to employ different investing strategies, like further diversifying your portfolio. Furthermore, freeing up cashflow so that you can contribute the maximum amounts to your 401(k) and IRA accounts might be a great idea depending on your circumstances, and other retirement strategies could offer lifetime monthly income that could allow you to retire sooner. There’s no doubt that inherited funds can offer you more flexibility and options.

6. Finance Higher Education ^[4]

Higher education, attending college or pursuing an advanced degree can offer a leg up, both in the job market and with general skills; however, it can be an extremely expensive endeavor. Using inherited money to fund that further education can be a great way to avoid student loans and achieve the skills you’ll use for the rest of your life. Moreover, it doesn’t necessarily have to be for your own education. There are options like 529 plans for grandparents and permanent life insurance with cash value that can help pay for your children’s or grandchildren’s educational expenses, too—without causing them to qualify for less financial aid.

7. Speak to Your Financial Advisor

It’s always best to speak with your financial advisor—as well as attorneys and tax professionals—before making any major financial decisions about inherited money. Your team of advisors should work together and have a good grasp on your goals so that they can offer custom-tailored advice that can best benefit you and your family now and in the future.

If you have any questions about inherited money, please give us a call. You can reach Bulwark Capital Management at 253.509.0395.

Sources:

1. https://www.unionbank.com/private-banking/perspectives/protecting-your-assets/inherited-ira-rules-cutting-through-the-confusion
2. https://www.thinkadvisor.com/2022/12/07/the-estate-and-gift-tax-exclusion-shrinks-in-2026-whats-an-advisor-to-do/
3. https://www.nerdwallet.com/article/finance/good-debt-vs-bad-debt
4. https://www.savingforcollege.com/intro-to-529s/what-is-a-529-plan

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This article is provided for general information only and is not to be construed as financial or tax advice. It is recommended that you work with your financial advisor, tax professional and/or attorneys when you inherit money.

Though the United States may avoid a full-fledged recession, it’s undoubtedly a difficult time to be a consumer. Here are some ways to protect yourself.

The fear of a recession looms large, and though it isn’t certain that we’ll enter recession territory in 2023, there’s no doubt we’re in a period of constraint for consumers. Inflation is still high despite the efforts of the Federal Reserve to cut spending with interest rate increases, and 2022 brought the worst annual performance for all three major indexes since 2008^[1,2,3].

Understandably, this can cause panic among American consumers and pre-retirees, whether they have assets invested in the market or they’re simply looking to continue with their current lifestyle. With the times, however, our behavior and spending habits must change to give us the best chance to protect ourselves during periods of financial downturn. Here are some things you can do to counter volatile markets and economic declines.

1. Cut Unnecessary Spending

One of the best ways to avoid a financial crisis is to cut unnecessary spending. That could mean more trips to the grocery store instead of your favorite restaurant, fewer luxury purchases or delaying your upcoming vacation. A properly structured and maintained budget typically accounts for all of your incoming and outgoing funds, so it can likely be a great place to start when looking for places to cut back. You may be forced to make some hard decisions, but the idea is for those decisions to pay dividends in the long run.

2. Build an Emergency Fund

While an emergency fund might be seen as the most obvious form of protection against difficult financial times, nearly one-in-four consumers don’t have one ^[4]. Furthermore, 39% have less than a month’s worth of income saved in an emergency fund, and less than half would be able to cover a surprise $1,000 expense. A general recommendation is to have three to six months’ worth of expenses saved in your emergency bucket, giving you some flexibility if you’re forced to access that money. Additionally, you don’t need to make one lump sum contribution to your emergency fund. You can build it gradually, adding little by little until you have a balance you’re comfortable with.

3. Pick Up an Extra Job

One way to supplement the difference in difficult times is to pick up an extra job to increase your total income. Though your finances often seem cut-and-dried, this is one area where you have the freedom to be a bit flexible and creative. Some ideas for an extra job include freelance or contract work, consulting, starting your own business, or even finding a part-time role at a local establishment where you already enjoy spending time, like a golf course. The possibilities are nearly endless, allowing you to have some fun with this secondary source of income. And who knows? It could lead you down a different career path that leaves you even more satisfied than your primary source of income does.

4. Prioritize Financial Obligations

Market volatility, inflation, high interest rates, supply chain issues and other economic factors can be scary, but they’re even scarier when compounded with outstanding debt. It can always be a good idea to tackle debt to avoid falling into a situation where you’re beholden to that debt, seemingly allowing you little-to-no flexibility with your income. The sooner you enact a plan and clear that debt, the sooner you can begin building your emergency fund, making larger contributions to your retirement accounts or enjoying the perks of increased financial freedom.

5. Look for Advantageous Investment Opportunities

While there are certainly no guarantees when it comes to investing in the market and no current iron-clad ways to dictate market performance or protect yourself from declines, opportunistic investors with a long time-horizon to retirement can take advantage of dips. Investors may be able to utilize these periods to their benefit by entering the market at a low point, or they could use a strategy called dollar cost averaging to continue investing or putting away money in their 401(k) at consistent intervals, thereby lowering their average cost per share. Though the big three indexes were down in 2022, they have a sustained history of long-term growth, potentially making declines a favorable time to enter the market.

6. Use Protection-Based Strategies

Though growth can be enticing, sometimes protection for what you already have can be even more important. Diversifying your portfolio with a protection-based asset class, such as an annuity or a permanent life insurance policy, could be helpful through guaranteeing principal protection and index-linked growth. Despite allowing you to participate in market upside, these policies are not investments. Rather, they’re contracts with issuing insurance companies, and the guarantees are made by the claims-paying ability of those companies. These products and strategies can help you create a tax-free stream of income in retirement while protecting you from market volatility on the way there. If you think a protection-based approach may be the right strategy for you, we can help you decide based on your unique circumstances.

If you have any questions about protecting yourself from financial downturn, please give us a call. You can reach Bulwark Capital Management at 253.509.0395.

1. https://www.macrotrends.net/2526/sp-500-historical-annual-returns
2. https://www.macrotrends.net/1319/dow-jones-100-year-historical-chart
3. https://www.macrotrends.net/1320/nasdaq-historical-chart
4. https://www.marketwatch.com/picks/this-is-the-surprising-generation-least-likely-to-have-even-1-000-in-savings-and-heres-what-they-need-to-do-about-it-01650321688

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This article is for informational purposes only and is accurate to the best of our knowledge. It is not to be taken as investment or tax advice. in all cases we recommend that you work with financial, tax and legal professionals to find the strategies best suited to your individual situation.

College is an investment in your child and your family, but it can come at a hefty price. Here are some tips to save!

College and other forms of higher education have always been a vital part of planning a career. The foundation of any resume, a recent study interviewing 500 professional recruiters showed that all 500 look for candidates with a college degree ^[1]. Some common rebuttals to the argument for college might start with names like Zuckerberg, Jobs, Gates and Oprah Winfrey, all who dropped out school. Those four have incredible stories, but they’re the exception, not the rule.

The average college graduate with a bachelor’s degree has a lifetime earnings of $2.8 million while a person who achieved a high school diploma earns an average of $1.6 million over their career^[2]. At the same time, that average increase in lifetime earnings can come at a steep price, and that price is only rising. Tuition has climbed 211% for in-state universities over the last 20 years ^[3], escalating panic in students and their families who are forced to shoulder the burden. Without a plan to tackle them, loans can hang over a student’s head for decades. To alleviate some of that stress, here are a few tips for saving for and funding your child’s college education:

1. Assess early options

Many high schools around the United States offer Advanced Placement (AP) and dual-enrollment classes. By taking these higher-level courses while still in high school, students can be awarded college credits early, potentially at an even lower cost. AP classes are generally more difficult classes targeting more specific areas of study within a subject. They’re widely accepted and acknowledged throughout U.S. colleges, and they are free to students who elect to take the challenge. End-of-year tests for AP classes do cost $96 per exam ^[4] in the U.S., but colleges may award credits based on scores that would be evident of the student mastering the material.

Dual-enrollment classes, on the other hand, function as a partnership between high schools and colleges. A dual-enrollment class holds high school students to the college-level standard and curriculum. The students then pay per credit at the partnered college’s rate and receive those credits upon class completion as if they were taking those courses on the college campus. Both types of classes can save students and parents valuable time and money in their pursuit of higher education.

2. Familiarize yourself with the aid process

There are many types of student aid, and amounts can vary based on a plethora of factors. The most obvious form of assistance provided to students is scholarship money. It can be awarded based on test scores, academic results, athletics or extracurricular activities, and amounts can fluctuate based on a student’s choice of school. There are also opportunities for privately-funded scholarships that can be awarded by foundations, religious groups or other organizations on a need or merit-based basis. Students can typically find these opportunities online and apply if they meet predetermined criteria.

Students should also fill out the Free Application for Federal Student Aid, otherwise known as the FAFSA ^[5]. The FAFSA uses a student’s information to determine how much aid they might qualify for, including money from grants or state-funded assistance. It can also determine how much a student could qualify for in loans if those become necessary.

3. Familiarize yourself with current legislation

Legislation is always changing for parents looking to get a jump-start in funding their child’s education. For example, the FAFSA Simplification Act of 2020 opened new doors for students trying to qualify for need-based assistance. Prior to the FAFSA Simplification Act of 2020, the FAFSA calculated the expected family contribution, or the EFC. The EFC estimated the amount family members would be able to contribute to a student’s education based on income, assets and other benefits. EFC has now been replaced by student aid index, or SAI. Where EFC bottomed out at $0, SAI can go as low as -$1,500, meaning students can qualify for more need-based aid ^[6]. SAI also simplifies the form itself, cutting down the number of questions and the factors that figure into assistance a student might receive from family.

Where this could truly be a boon to students who need more aid is through family members whose contributions were accounted for in the EFC but are not accounted for in the SAI. The popular 529 plan, which provides tax-advantaged savings for designated beneficiaries, is often used by grandparents to help their grandchildren pay for college. Funds from a 529 plan no longer factor into the expected contributions from family members meaning that they will not have negative implications for the FAFSA’s estimation of how much aid a student requires ^[7].

4. Research schools prior to selection

Cost can differ by school selection, and though some students have their hearts set on a specific university, financials could play a large role in deciding on the best fit for your child. For example, students who do not expect to receive much aid from family or scholarship opportunities can opt for community college. Community colleges generally offer favorable per-credit prices for in-state students. The average cost per credit hour at a two-year community college is $141 while a public, four-year university costs $390 per credit hour on average ^[8].

After two years at a community college, students can usually transfer their credits to a university to finish a four-year degree. Wide-ranging opinions also exist about college selection ^[9]. Some researchers and surveys suggest that attending a prestigious college could be nothing more than a status symbol. Employers can look for many qualifications such as experience, extracurriculars, ability or the simple fact that a candidate attended any college. At the end of the day, the right choice of school will be different for each student.

If you have any questions about saving or planning to help your family, please give us a call! You can reach Bulwark Capital Management at 253.509.0395.

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Sources:

1. https://www.ellucian.com/assets/en/white-paper/credential-clout-survey.pdf
2. https://www.forbes.com/sites/michaeltnietzel/2021/10/11/new-study-college-degree-carries-big-earnings-premium-but-other-factors-matter-too/?sh=6fd5ad4035cd
3. https://www.usnews.com/education/best-colleges/paying-for-college/articles/2017-09-20/see-20-years-of-tuition-growth-at-national-universities
4. https://apcentral.collegeboard.org/exam-administration-ordering-scores/ordering-fees/ordering-exam-materials/help/cost-of-exam
5. https://studentaid.gov/
6. https://unicreds.com/blog/student-aid-index
7. https://www.usnews.com/education/best-colleges/paying-for-college/articles/tips-for-grandparents-using-a-529-plan-to-save-for-college
8. https://educationdata.org/cost-of-a-college-class-or-credit-hour
9. https://www.nbcnews.com/business/business-news/does-it-even-matter-where-you-go-college-here-s-n982851

Spring is here! Time to get your finances in shipshape condition. Here are five ideas to get you started.

1. Check your credit reports.

While you’re reviewing your expenses and debts in order to see how you are faring in terms of staying within your personal budget, make sure that there aren’t any expenses or debts on your credit report that aren’t yours.

It’s free to check your credit reports once a year to ensure no one has used your name or identity to make unauthorized purchases. Here is what to do: https://www.consumer.ftc.gov/articles/0155-free-credit-reports

2. Consider banking / credit card changes.

If you find yourself with open accounts at multiple banks, it may be time to consolidate, depending on your total balance/s. (FDIC insures each account up to $250,000.) By consolidating, you may be in a better position to negotiate for lower fees and better interest rates.

You may find that you want to move your banking life online in order to reduce clutter and find a bank paying the highest rates / charging no fees. But be sure to download and back up your statements (and make backups of the backups) since most banks only keep them around for 12-18 months.

While you’re taking stock of your banking situation, take a look at your credit cards and assess whether or not you’re getting the best deals. It’s easy to do a little online investigating about cards have the best cash back benefits. (But make sure you pay off the balances monthly.)

3. Home maintenance to save money in the long run.

Your home is often one of your bigger assets, so consider putting these important home maintenance projects on your financial to-do list:

• Repair any roof leaks the minute you spot them to help prevent mold, structural damage and loss of personal property. Make sure your gutters and downspouts are clean and debris-free every year.
• Water on the ground can cause even more expensive problems. Grading and drainage issues need to be dealt with lest they damage your home’s foundation or cause flooding, often not covered by insurance.
• Deal with plumbing leaks immediately. Inspect and caulk around showers and tubs as well as windows and doors on a regular basis. Caulk is cheap, but water damage is very expensive.
• Just like you remove lint from your dryer vent with each load of laundry, you should change your HVAC filter monthly to prevent system problems as well as reduce monthly electric bills.
• Take immediate measures to eliminate pests like termites, roaches, ants or rodents if they take up residence. Waiting can only lead to more damage.

4. Tax changes / tax record storage.

Very importantly this year, get up to speed on the new tax changes and how they might affect you by meeting with your financial advisor and tax specialist. The two disciplines often have different perspectives and you can often benefit by including both of them in your discussions. Make sure you review your retirement tax distribution plan in terms of RMDs (Required Minimum Distributions) which start at age 72, because there may be ways to mitigate income taxes for the long term if you start early.

In terms of tax document storage, Kiplinger recommends keeping your tax returns indefinitely, and supporting documentation for seven years. If you decide to clean out old tax supporting documents, make sure to shred them to reduce the possibility of identity theft.

5. Beneficiary review: Insurance policy / retirement accounts / estate plans.

You may not realize that the beneficiaries you have listed on your insurance policies and retirement accounts take precedence over wills and trusts. It’s really important to keep all of your documents, including your estate documents, up to date at all times. Life changes, and so does your family. You probably don’t want an ex-spouse receiving your 401(k) money if you pass.

If you have a lot of assets and a very large estate, you may want to meet with your financial advisor and estate attorney since the new, higher estate tax exclusion sunsets in 2026 (or may be changed sooner by Congress under the new Biden Administration.)

If you want to discuss any of these ideas, or have questions about your financial or retirement plan, please don’t hesitate to contact us. You can reach Bulwark Capital Management at 253.509.0395.