Fact vs. Fiction & Tips

Market analysis

 

Fact vs. Fiction: 

We understand that it can be tricky navigating through the world of financial services. Everyone seems to have an opinion, and it can become difficult knowing what to believe. We've created this series, "Financial Fact vs. Fiction," as a way to present and debunk some of the most popular financial myths.

Fiction: Financial planning is for the wealthy.

Fact: Financial planning is for anyone who wants to take control of his or her financial goals. Plenty of wealthy individuals have reached that point because they created smart financial plans and acted on them. And what does wealthy mean, anyway? The fact is, even millionaires may define themselves as middle class or upper middle class. No matter your level of assets, talking with a professional is a great first step toward improving your financial standing.

Fiction: The government decides who receives financial aid.

Fact: Once the student has completed the Free Application for Federal Student Aid (FAFSA), he or she submits it to a federal processor for review. A federally established formula is used to determine the expected family contribution (EFC). Then, using the information on the FAFSA and the EFC, the college itself determines the student's award based on its resources and the student's financial need.

Fiction: I don't need to budget because it's just not necessary.

Fact: For many, budget is a dirty word—but it doesn't have to be. Done correctly, a budget does account for every dollar and cent you spend, but instead of considering this a tedious task, think about the real difference it can make in your financial health. In good times or bad, a budget can help you gain a true picture of your spending and where you may be able to save more to keep your other goals on track. One of the greatest insights a budget can provide is an understanding of essential versus nonessential expenses (e.g., housing, electricity, and heat versus that daily latte and dining out multiple times a week).

Fiction: There's no reason for me to get disability insurance.

Fact: Disability insurance isn't a popular subject, but it's one everyone should consider. According to the Council for Disability Awareness, today's 20-year-olds have a more than one in four chance of becoming disabled before they retire. Beyond the physical challenges, disability also means lost income for the worker's family. When you can't work because of illness or an accident, disability insurance will replace a certain percentage of your income, depending on the policy. Self-employed professionals and small business owners are ideal candidates. Individuals whose salary represents their family's sole or primary source of income also risk financial trouble if they're not covered. In general, people who would find it difficult to maintain their lifestyle if their income were interrupted should look into disability coverage.

Fiction: Financial planning is for the wealthy.

Fact: Financial planning is for anyone who wants to take control of his or her financial goals. Plenty of wealthy individuals have reached that point because they created smart financial plans and acted on them. And what does wealthy mean, anyway? The fact is, even millionaires may define themselves as middle class or upper middle class. No matter your level of assets, talking with a professional is a great first step toward improving your financial standing.
Fiction: The government decides who receives financial aid.
Fact: Once the student has completed the Free Application for Federal Student Aid (FAFSA), he or she submits it to a federal processor for review. A federally established formula is used to determine the expected family contribution (EFC). Then, using the information on the FAFSA and the EFC, the college itself determines the student's award based on its resources and the student's financial need.

Fiction: I don't need to budget because it's just not necessary.

Fact: For many, budget is a dirty word—but it doesn't have to be. Done correctly, a budget does account for every dollar and cent you spend, but instead of considering this a tedious task, think about the real difference it can make in your financial health. In good times or bad, a budget can help you gain a true picture of your spending and where you may be able to save more to keep your other goals on track. One of the greatest insights a budget can provide is an understanding of essential versus nonessential expenses (e.g., housing, electricity, and heat versus that daily latte and dining out multiple times a week).

Fiction: There's no reason for me to get disability insurance.

Fact: Disability insurance isn't a popular subject, but it's one everyone should consider. According to the Council for Disability Awareness, today's 20-year-olds have a more than one in four chance of becoming disabled before they retire. Beyond the physical challenges, disability also means lost income for the worker's family. When you can't work because of illness or an accident, disability insurance will replace a certain percentage of your income, depending on the policy. Self-employed professionals and small business owners are ideal candidates. Individuals whose salary represents their family's sole or primary source of income also risk financial trouble if they're not covered. In general, people who would find it difficult to maintain their lifestyle if their income were interrupted should look into disability coverage.

Fiction: I have enough insurance, and besides, I won't need it until I'm older.

Fact: The amount of insurance you need is based on several factors; age is only one of them. People often purchase some form of insurance and then forget about it, thinking they're all set. But, as life circumstances change, your need for insurance may change, too. Insurance can help safeguard your personal income, your standard of living, and your legacy. Whether you're 35, 55, 65, or older, it's worth revisiting your level of protection.

Fiction: The only way I'll qualify for Medicaid is if I give away enough of my money.

Fact: To ensure that you haven't transferred assets in order to qualify for Medicaid, the program requires you to provide financial statements for five years prior to your application (the "look-back period"). If you feel you may need nursing care within the next decade, consider purchasing long-term care insurance and start keeping detailed and accurate financial records. Your financial advisor can also advise you on different ways to qualify for Medicaid.

Fiction: A will covers everything.

Fact: Wills are the most commonly used estate planning tool, but there are pitfalls to relying exclusively on a will as your estate plan. If you pass away and the will is probated in court, it will be fully public and open to inspection by anyone who wants to know about your affairs. Additionally, wills offer direction only in the event of your death, not in the event of your mental disability, and they don't cover insurance proceeds, retirement benefits, or jointly owned property. There are many other reasons for preparing a complete estate plan, such as providing creditor protection for your loved ones, remarriage protection, and catastrophic illness protection.

Fiction: I don't need a will if I have little money.

Fact: Even if you don't have a large estate, there are many reasons to draw up a will. In the absence of a will, the state will decide who gets your property and in what manner. If you have minor children and die without a will, most states will select a guardian for your children—and for their inheritance.

Fiction: We won't qualify for financial aid because we have money and assets saved for our child's college education.

Fact: Not necessarily. The federal formula makes allowances for savings and assets. You are not expected to sacrifice your home equity or retirement savings to pay for your child's education. Only a small percentage of parental assets are expected to be contributed for education.

Fiction: I can handle my finances on my own.

Fact: The onslaught of information available to consumers has given many people the impression that they can manage their investments and financial planning alone. The truth is that there are few things more important than your financial security, and having a professional on your side makes a world of sense. Financial professionals possess a sound understanding of complex financial issues and can provide objective advice, helping you pursue the most practical path toward your financial goals.

Fiction: Young people have a long time to go before retirement, so they don't need to worry about taking on risky investments.

Fact: Typically, younger investors do have a longer time horizon for their goals (e.g., retirement), but that doesn't necessarily mean they should take on high-risk investments. Time horizon is one of the defining factors of an individual's risk tolerance, but it's not the only factor. Overall goals and timelines for each goal, as well as personal feelings about volatility and risk in general, must be explored. Like anyone else, a young person needs a sound long-term strategy tailored to his or her situation.

Fiction: If I want to invest in a 529 college savings plan, I have to choose a plan sponsored by my state of residence.

Fact: Most 529 college savings plans do not require the account owner and student beneficiary to reside in the sponsoring state. Conversely, most 529 prepaid tuition programs do restrict enrollment to the state residence of either the account owner or the beneficiary.

Fiction: It's a good idea to claim fewer withholding allowances than necessary on my form W-4 so that I receive a big tax refund.

Fact: Many people love getting a big tax refund at year-end, but, essentially, what they've done is given the government an interest-free loan instead of keeping those extra dollars in their own pockets. You also run the risk of inflation, since the money you give to the government won't be worth as much by the time you get it back. It's important to examine your withholding closely to ensure that you aren't claiming too few or too many allowances.

Fiction: I should start taking my social security as soon as I'm eligible at age 62.

Fact: This may or may not be true based on your personal situation. If you have other sources of income and have planned appropriately, collecting your benefits early may make sense. If you have a financial professional who can invest the proceeds (because you have other income sources) to help you garner more income—all the better!

If you have not taken the time to evaluate your income needs and how close you are to reaching them, you will want to do so prior to making the decision to begin collecting social security benefits. Many people find that it makes more financial sense to wait until a later age to take their benefits, as it will result in an increased income amount.

 

View the Fact vs. Fiction Archive

Last Updated: 8/1/2015

Financial Planning Tips:

Are You Subject to the Pease Limitation?
(Updated: 04/12/2016)

With tax day fast approaching, it's important to be aware of certain limitations that may affect your tax liability. Do you know what the income threshold is for married couples filing jointly who wish to itemize their deductions (i.e., the Pease limitation)?

  1. A) $310,500
  2. B) $250,000
  3. C) $311,300
  4. D) $405,100

_________________________

Answer: C.

The Pease limitation was reintroduced to the Internal Revenue Code by the American Taxpayer Relief Act of 2012. It reduces itemized deductions by the lesser of 3 percent of the amount by which the taxpayer's adjusted gross income exceeds the income threshold, or 80 percent of the amount of the itemized deductions otherwise allowable for the tax year. For married couples filing jointly, the threshold is $311,300 in 2016.

If you have questions about how you might reduce the impact of the Pease limitation in future tax years, contact us today.

View the Financial Tips Archive

Last Updated:5-3-2016

 

These materials have been provided for general informational purposes only and do not constitute either tax or legal advice. You should consult a tax preparer, professional tax advisor, and/or a lawyer regarding your individual situation.

 

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Robert Donaldson (CA Insurance License #0541081) is a Registered Representative and Investment Adviser Representative with/and offering securities and advisory services through Commonwealth Financial Network, Member FINRA / SIPC, a Registered Investment Adviser. Additional advisory services offered by Advisory Group West, a registered investment adviser, are separate and unrelated to Commonwealth.

This communication is strictly intended for individuals residing in the states of AZ, CA, FL, HI, LA, NY, TX, UT, WA.