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The 10 Golden Rules of Loaning Money to Adult Children

By | Food for thought, SH&J Blog, Tips | No Comments

When faced with the decision of whether to loan money to adult children, parents are often unsure about the proper approach to take. They want to support their children, yet do not want to become enablers. A key to successfully loaning money to adult children is to have a strategic plan in place to help ensure that children are able to address a temporary cash crunch while developing productive money management skills in the process. Below are the ten golden rules of loaning money to adult children.

1) Do not loan money that you do not have.

Loaning money that you do not have can be detrimental in many ways. In addition to worsening your personal financial situation, you set an example for your child that it is okay to borrow money that you may not be able to repay.

2) Clarify the purpose of the loan in advance.

As a parent extending a loan to your child, it’s important to ask how the money you lend will be used. You have the right to refuse your child’s loan request if you feel that the request is unreasonable or if you feel that the funds will be used inappropriately. Be sure to differentiate between a loan and a gift. A loan is expected to be paid back, whereas a gift is given with no strings attached.

3) Create a written “contract” that specifies the terms of the loan.

Making a loan as businesslike as possible increases the chances of a positive result. Prepare a draft that outlines the details below and sign a copy together with your child:

  • The loan amount
  • The purpose of the loan
  • Terms of the loan (when the full amount is due)  
  • The total amount to be repaid, including interest  
  • Any special incentives for early repayment or additional payments

4) Offer an incentive for making additional payments or paying off the loan early.

As a parent, you have the ability to reward your children for paying their loans off as quickly as possible. An example of an incentive could include reduced interest charges.

5) Establish boundaries.

You can love your children unconditionally while also setting boundaries. Be empathic but firm as you talk to your children about the pros and cons of borrowing money. Make sure adult children know that you reserve the right to refuse any future loans if they ignore or fail to abide by the terms that you both agreed upon in your contract.

6) Outline terms for late payments.

Most established lenders and credit card companies charge late fees if customers fail to make loan payments on time. Parents can stress the importance of repaying loans on time by charging penalties or fees for late payments.

7) Get to the heart of the matter.

In some cases, there might be a greater underlying problem contributing to your children’s cash flow troubles. If requests for loans occur with increasing frequency, it is a good idea to sit down with your children and review their income, expenses, and spending habits.

8) Ask your children what plans they have in place to improve their financial situation.

Loaning your children money may provide a short-term solution to a financial squeeze. However, a loan will not help them create a plan to avoid the need for future loans.

9) Require your children to enroll in credit counseling before you agree to lend them additional money if the request for a loan becomes a continuous habit.

Credit counseling helps people develop money management skills. Additionally, this measure helps to foster a sense of accountability that might be lacking in adult children.

10) Consider making payments on behalf of your children instead of handing them the money.

This strategy helps prevent your children from misusing the money you give them on unintended expenses like vacations or other items not outlined in the original loan request.

The guidelines above combine to form a comprehensive strategy for parents facing the prospect of loaning money to their adult children. By following these suggestions, parents can bolster the odds that their children will improve their money management skills.

Inside the Economy with SH&J: Energy Consumption, The Impact of Inflation, and Personal Tax Cuts

By | Economic Discussion, Economy, Larry Howes, SH&J Blog | No Comments

This week on Inside the Economy with SH&J, we take a look at U.S. Energy consumption and the historic and current sources of electricity production. In addition, we review how large the U.S. economy has grown and the impact of inflation. Will a decrease in personal tax cuts encourage Americans to spend more and stimulate the economy? Tune in for an objective view on these issues and more.

Making a Qualified Charitable Distribution vs. Donating Appreciated Stock

By | Food for thought, SH&J Blog | No Comments

For individuals with charitable intent, there are many ways to satisfy a bequest, but which strategy maximizes the tax benefit of the donation? This depends largely on each individual’s circumstances and tax obligation. In this article, we will review three strategies for making charitable donations: donating cash (or writing a check), making a qualified charitable distribution from an IRA, or donating appreciated stock.

Donating Cash

By donating cash or writing a check to a qualified charity or organization, you may be entitled to a charitable contribution deduction if you itemize deductions on your tax return. The IRS website states, “you may deduct up to 50 percent of your adjusted gross income, but 20 percent and 30 percent limits apply in come cases.” So, depending on your adjusted gross income and charitable contribution in a given year, you may not be able to deduct the full contribution amount.

Making a Qualified Charitable Distribution (QCD) from an IRA  

Beginning the calendar year in which you turn 70 ½, you are required to start taking minimum distributions from your IRA. Rather than distributing the funds and reporting them as ordinary income on your tax return, individuals can make a qualified charitable distribution directly from an IRA to a charity without any tax consequences. This strategy is an efficient way for individuals with charitable intent to offset the tax burden of a required minimum distribution dollar for dollar because the funds donated are not included in the taxpayer’s adjusted gross income. Beyond satisfying a required minimum distribution, individuals can make QCD’s of up to $100,000 from an IRA to a charity each year, which can be more beneficial than donating cash due to the 50% of adjusted gross income limits on charitable deductions.

Donating Appreciated Stock

Similar to donating cash, individuals are eligible to take a charitable deduction when filing their tax return for donating an appreciated stock. The amount that can be deducted is the fair market value of the stock (or other investment). This is beneficial when the stock has been held for at least 12 months and has greatly appreciated in value because the taxpayer is not required to recognize the capital gain on the investment. Therefore, the taxpayer benefits from both the charitable deduction as well as avoiding any future capital gains tax liability that otherwise would be due in the future.

To speak with a CERTIFIED FINANCIAL PLANNER™ professional about how to maximize the tax benefits of a charitable contribution specific to your personal situation and charitable intent, call Sharkey, Howes & Javer at 303-639-5100 to set up a complimentary initial consultation.

Source: https://www.kitces.com/blog/ira-qualified-charitable-distribution-qcd-to-satisfy-rmd-vs-donating-appreciated-securities/

Spending Tips for Retirees: What to Consider in a Retirement Spending Plan

By | Food for thought, SH&J Blog | No Comments

Retirement can be a time for relaxing, traveling and exploring new hobbies. However, many seniors are not enjoying their retirement because they never created a realistic spending plan and their assets are insufficient to provide the retirement they desire. A key component of planning for retirement is examining your current expenses as well as estimating future expenses to ensure you’ll have an adequate income to cover all your costs. Understanding your retirement spending plan should be a top priority. In this blog we provide some basic tips for retirees along with what to consider when creating a retirement spending plan.

Housing

Housing is typically the biggest expense for retirees. In fact, the average retiree spends about $1,294 per month on housing. Costs related to housing include homeowners insurance, furniture, utilities, landscaping costs and maintenance. To reduce costs, you may want to consider downsizing to a less expensive house or neighborhood. Some retirees even relocate to communities that offer a lower cost of living. Another option is taking out a reverse mortgage to utilize the equity in your house for everyday living expenses or larger one-time needs.

Healthcare

Healthcare bills can easily eat away at a spending plan, especially for retirees. One way to reduce your healthcare expenses is to compare and contrast the differences between Traditional Medicare (with a supplemental policy) and Medicare Advantage plans. However, before you change a healthcare plan, you’ll need to talk to a specialist who can help you make the best decision given your situation.

Transportation

Besides the cost of your car, you’ll also want to consider additional car-related expenses, such as insurance, maintenance, gasoline and other factors. Transportation costs can be reduced by having only a single vehicle. If you live in a large city and don’t need to travel far to visit family, you could even give up your car and depend on public transportation, if necessary.

Consider Family Expenses

Costs involved with caring for elderly parents can easily compromise your retirement spending plan. Therefore, if this situation affects you, it’s critical that you take this into consideration when developing your spending plan. Your aging parents may need your help with assisted living costs, home healthcare costs, or paying medical bills. Another cost can be helping your parents with everyday living expenses, such as groceries.

Even though your grown children may be financially independent, you still may want to help them with larger ticket items, such as with college expenses or a down payment for a house. Just be sure you’re able to afford these costs and can manage your own expenses prudently.

Other Considerations and Warnings

  • Although you can collect Social Security as early as age 62, the benefits you receive will be permanently reduced.
  • One way to generate some income is by renting out property, such as an unused vacation home.
  • When deciding if and how much money to leave to your children and grandchildren, be confident that it will be used in ways that are in line with your basic values.
  • Don’t forget to set aside some money for fun.

Planning for retirement can be overwhelming for many people. If you would like help, please schedule an appointment with one of Sharkey, Howes and Javer’s CERTIFIED FINANCIAL PLANNER™ professionals to help you create the best financial plan for your specific needs.

 

 

Resources:

https://www.fool.com/retirement/general/2016/01/25/heres-what-the-average-retired-americans-budget-lo.aspx https://www.ssa.gov/planners/retire/agereduction.html http://money.usnews.com/money/blogs/on-retirement/articles/2016-08-10/7-tips-for-budgeting-in-retirement

Veterans Shifting to Civilian Employment

By | Food for thought, SH&J Blog | No Comments

As we celebrate the Fourth of July holiday with fireworks and barbeques, it is also a time to appreciate the men and women who have bravely served our country in the past, and those who are serving our country today. The United States has just over 21 million veterans across the nation, in addition to active military duty. One of the most difficult transitions that a veteran can face is the transition from military life to civilian life, partly because the difference in employment structure can be night and day.  

Corporate America has been increasingly promoting the hiring of employees with military backgrounds for several reasons, from needed skill sets to tax incentives and overall goodwill.  However, the efforts seem to end once the employees are hired. According to the Center for Talent Innovation study, “many veterans feel under-utilized, alienated and uninspired in corporate workplaces…nearly two-thirds of veterans said they felt more purpose in the military than in their corporate jobs…many cited far less camaraderie with their teams at work, and those who were no longer leading other people as they had in the military missed doing so”.

Taking the time to adequately prepare for the transition to civilian employment could be key to finding the best fit possible and pay commensurate with that needed to maintain the veteran’s lifestyle. An article titled Onward and Upward states, Encouraging service members to begin saving for transition well in advance could provide an economic safety net to prevent some of the more extreme unemployment-triggered issues such as health care problems or homelessness, while allowing some the luxury of a more extended job search, potentially resulting in a better initial fit.” Finding the right career path (rather than simply any job) is profitable to both employees and employers in the long run. Saving a healthy cash reserve prior to leaving the military can afford the veteran the ability to go back to school for career training or more thoroughly explore employment opportunities.

In addition to finding fulfilling employment, the learning curve in understanding the change in personal finances can be steep. Although civilian employment may pay higher gross wages, many tax benefits often drop off and the price tag of housing, healthcare, and childcare can quickly devour a new paycheck. However, as outlined on military.com, there are certain benefits that can help veterans navigate civilian life. VA loans can help veterans purchase a home with no down payment in addition to preferential rates and financing. Also, disability compensation, pension programs, job training, and assistance with financial planning or tax preparation can be helpful.

If you would like help navigating your personal finances, call Sharkey, Howes & Javer at 303-639-5100 to schedule a complimentary consultation.

Avoiding the 5 Most Common Mortgage Mistakes

By | Economy, Food for thought, Investing, SH&J Blog, Tips | No Comments

For most people, a house is one of the biggest, most expensive investments that you’ll ever make. The journey to homeownership is often an exciting milestone, but you must be careful in order to ensure that it’s a positive experience.  Whether you are a first time homebuyer or you’ve purchased several homes, avoiding these common mortgage mistakes will help prevent financial problems following the purchase.  

Mistake #1: Making Yourself House Rich, Cash Poor

Home ownership can be more expensive than renting–especially when you add up all the taxes, insurance, and home maintenance costs over several years.  In fact, many people fall into the trap of making themselves “house rich, cash poor”–that is, tying up all of their available income in the house. Suddenly, despite having a reasonable monthly income stream, you have no extra money, and you find yourself living in a tight paycheck to paycheck struggle.

How to avoid the trap: Find out how much house you can actually afford! The fact that a mortgage broker has offered you a mortgage loan in a particular amount doesn’t automatically mean you can afford to spend that much on your house each month. In fact, many mortgage brokers will offer you a mortgage that exceeds the amount you really should spend on a house. This is because mortgage brokers don’t know your regular expenses since they don’t appear on your credit report.  Nor do they take into account the additional monthly savings necessary for you to reach your other short and long-term goals. Review all your expenses and required savings before committing to your mortgage.

Mistake #2: Ignoring the True Cost of Home Ownership

Home ownership expenses don’t just stop at your mortgage. You’ll also have to take into consideration homeowners insurance, property taxes, Home Owner’s Association (HOA) dues, and maintenance on your home. Once a home belongs to you, you no longer have the luxury of calling your landlord to fix something that breaks. You’ll need extra income or an emergency fund to cover those expenses instead! If you’re used to renting, you’re likely used to a fixed monthly housing expense in your budget. The cost of homeownership, on the other hand, fluctuates and can be difficult to predict month to month.

How to avoid the trap: Create a budget estimate that includes all of the costs associated with home ownership, not just your mortgage. Don’t forget to set aside an estimate for maintenance! This more detailed budget may give you a better idea of what you can afford when you’re setting up mortgage payments. One rule of thumb is to put away 1% of the home value in a separate home maintenance account. For example, if the value of your home is $600,000, save $6,000 per year (or $500 per month) toward future maintenance costs.

Mistake #3: Not Shopping Around for the Best Loan

All loans are not created equal! Some mortgage brokers will give you better terms on your loan than others. If you aren’t shopping around–looking for better interest rates or more favorable closing costs–you may end up paying more than you have to for your home.

How to avoid the trap: Take the time to get mortgage information from several lenders–and make sure you know what they’re really saying! Compare interest rates, down payments, fees associated with the mortgage, and private mortgage insurance requirements in order to be sure that you’re getting the best deal for your mortgage.

Mistake #4: Putting Little to Nothing Down

Although there are loan programs where you may not be required to make a 20% down payment, which seems appealing if you don’t already have a lot of money saved, there are some drawbacks to this option.  Unfortunately, lower down payments don’t just lead to more money paid over the lifetime of the loan. It can also lead to higher interest rates, higher monthly payments that are more likely to put you in a financial pinch, and the need for mortgage insurance.

How to avoid the trap: Save for a little while longer before jumping into the home buying process.  Putting down an additional 5-10% can make a big difference over the lifetime of your loan. Be willing to be patient and wait for it!

Mistake #5: Not Checking and Fixing Your Credit Reports

Your credit report has a significant impact on your mortgage: your monthly payment, your interest rate, and how much you have to put down on the loan, not to mention the need (or lack thereof) for mortgage insurance. If there’s something wrong with your credit report–and unfortunately, sometimes, there can be problems on your credit report that aren’t a result of your spending–it may send up red flags for potential lenders.

How to avoid the trap: Take the time to check your credit report before you start looking at mortgage rates. Make sure you don’t have any common red flags. If there are issues, take the time to fix them before you’re ready to buy a house.

Having a mortgage doesn’t have to be terrifying. By avoiding these common mistakes, however, you can save yourself and your family some money and ensure that you’re better prepared for the road to home ownership.

Are you thinking of buying a house? Give us a call or schedule a complimentary consultation to discuss how to avoid these mistakes with a CFP®.

Sharkey, Howes & Javer – Fiduciaries Since 1990

By | SH&J Blog, SH&J News | No Comments

With all the media surrounding the Department of Labor’s “Fiduciary Rule,” we are frequently asked if we are fiduciaries.

Since inception in 1990, the CERTIFIED FINANCIAL PLANNER™ professionals at Sharkey, Howes & Javer have always followed and will continue to follow the Fiduciary Standard as set forth by the CFP Board of Standards. Under this Fiduciary Standard, our commitment to you is to always act in your best interest no matter the topic.

The new Fiduciary Rule requires that all financial professionals put the clients’ best interests first when advising on retirement plans, such as 401(k)s, 403(b)s, SEP IRAs, Simple IRAs, Profit Sharing Plans, Employee Stock Ownership Plans (ESOPs), Pension and Defined Benefit Plans. This rule does not extend the fiduciary duty to accounts other than retirement accounts or to advice on matters such as college planning, estate planning or the myriad of other issues we advise our clients on every day. Sharkey, Howes & Javer chooses to extend our fiduciary responsibility beyond the retirement accounts to which the new Fiduciary Rule applies.

Acting in our clients’ best interest is and will remain the guiding principle of Sharkey, Howes & Javer.

Debunking Myths about Fee-Only Financial Planners

By | Food for thought, SH&J Blog, Tips | No Comments

In an industry swirling with various terms and definitions, it can be easy to develop a few misconceptions about what it means to work with a fee-only financial planner and the services they provide.  Before clarifying some of the various myths, it is important to understand the definition of the term “fee-only”.  According to NAPFA (National Association of Personal Financial Advisors), “a Fee-Only financial advisor [is] one who is compensated solely by the client with neither the advisor nor any related party receiving compensation that is contingent on the purchase or sale of a financial product.”  

The following are common myths regarding fee-only financial planners:      

1. An advisor can be fee-only and still sell insurance.

False. By definition, the term “fee-only” means an advisor cannot receive a commission or any form of compensation from the purchase or sale of a financial product.  In other words, a fee-only financial planner is paid by the client for the advice they give, not by product sales or commissions.  An advisor can still make recommendations on the amount and type of insurance to purchase, but they can’t be the one to sell the product.

2. An advisor can work for a company that sells financial products but still personally be fee-only.

False. The definition of fee-only is applied at a firm level, not an individual level.  Even if an advisor personally acts in a fee-only capacity, if any related party within their company has the ability to earn a commission no one may be deemed as a fee-only advisor.  

3. An advisor or planner only gives advice on investing.

False. Often fee-only planners provide comprehensive financial planning, which encompasses various aspects of an individual’s financial foundation. In addition to investing, insurance, cash flow, retirement, estate planning, taxes, and life goals are taken into account.  

4. Only wealthy individuals need a financial planner.

False. There are fee-only financial planning firms whose intent is to help clients meet their financial goals regardless of their income level or asset base. Sharkey, Howes & Javer is one of those firms, and individuals can gain a second opinion or plan specific to their situation without the pressure of a product sale.     

Contact Sharkey, Howes & Javer at 303-639-5100 to schedule a complimentary meeting and learn more about working with a fee-only financial planner.

Build a New Home or Renovate a Fixer Upper?

By | Economy, Food for thought, Investing, SH&J Blog, Tips | No Comments

Planning a move can be an exciting time for your family. While you are shopping around to see what’s on the market, it feels like the possibilities are limitless. Before you get your heart set on a plan, however, consider the implications of buying a new construction home, or buying a fixer upper to renovate. Now is the time to take a critical look at your financial situation and goals to determine how much house you can afford.  Additionally, take the time to decide upon and make a list of non-negotiable items you want when considering your next home.

The thought of purchasing a brand new house, complete with home automation and an in-ground pool, sounds appealing to just about anyone. Determine exactly what you need in a new home before you start browsing real estate catalogs, and then search for homes that specifically fit those parameters.

New construction homes can provide a sense of security that you won’t get from purchasing a fixer upper. Some of the benefits of new builds include:

  • Low maintenance costs. Everything, from the sinks and counters down to the plumbing and electrical wiring, is brand-spanking new. You shouldn’t have to pay for many repairs for some time.
  • Energy efficiency. While most new build homes aren’t necessarily built to the greenest of standards, they are made to meet more exacting standards than the homes of years past, so they will likely be easier on your utility bills.  
  • Modern conveniences. It isn’t just the house itself that will be new; appliances, alarm systems, entertainment systems, and even lighting options will support a modern, tech-infused lifestyle.  
  • Customization. When you purchase a home before construction is complete, you may have the option to customize it the way you want. Depending on the stage of construction, you might not be able to move the bathroom or add a fourth bedroom, but you may have your pick of countertops, faucets, light fixtures, and paint colors.  
  • Open floor plans. Most older homes you see do not feature the open floor plans, large bedrooms, walk-in closets, and spacious bathrooms that you will find in a new build.  
  • Warranties. Most new homes come with at least a ten-year warranty, and even longer warranties on many aspects of the building.  

If low maintenance, energy efficiency, and modern design elements are a must, you might prefer to buy new. However, if you are more concerned about factors such as the neighborhood, having more land, the price point, or your home’s ability to accommodate some serious personalization, take a look at the benefits of buying a fixer upper:

  • Lower or no HOA dues. Fixer uppers are often found in neighborhoods that have very low or no Homeowners Association (HOA) dues.  In new builds, these dues can greatly increase the cost of owning a home and are often overlooked when considering a purchase.  Buying in an area with low HOA dues can help reduce the annual costs of owning a home.
  • Lower mortgage. When you buy a fixer upper, you will almost certainly get more house for the money, and end up with a lower mortgage payment to boot. Having a lower mortgage can free up cash flow or allow a smaller secondary loan to cover the cost of renovations or remodeling.
  • Better neighborhood. New construction homes tend to be in new developments, where houses are often cookie cutter and wall to wall. Fixer uppers can be found in just about any type of neighborhood, and it’s quite possible to buy into a better neighborhood than you could normally afford by choosing a fixer upper.  
  • More land. Older homes are often situated on larger lots with mature landscaping that offers more privacy than you can usually get in the newer communities.
  • Customization. New construction customization is mostly about the cosmetic aspect of the home. Fixer uppers have much more potential for knocking out walls, adding bathrooms, or setting the kitchen up exactly the way you want it.  

There are financial risks to making any big purchase, especially when you take out a mortgage. There are advantages and disadvantages to both new builds and fixer uppers. The most important consideration is to know specifically what you are looking for in your next home. Before you buy anything, talk to an experienced real estate agent, weigh the advantages and disadvantages of a new build versus a fixer upper, and contact Sharkey, Howes, & Javer to help you determine just how much house you can afford given your circumstances and other goals.

Side Hustles for Seniors

By | Food for thought, SH&J Blog, Tips | No Comments

In today’s culture, the term “side hustles” are popularly used in context with the millennial generation, as they often need flexible part-time income to keep up with increased housing costs, expensive student loan debt, and stagnant wages. A new nickname for Millennials is the “1099 Generation”.

However, Millennials are not the only ones appreciating the benefits that technology has brought to the landscape to make side hustles as efficient and flexible as possible. More and more people in retirement are dipping their toes in the water, too. According to a CareerBuilder survey, 19 percent of those ages 55 and older have a side hustle. Why? As stated in an article titled The Rules of a Side Hustle, “It’s never been easier or cheaper to have a side business, nor has it ever been more potentially scalable. A viable webpage (with an online payment system included) can be thrown together in a couple hours for almost nothing. And simple mobile apps like Uber or Airbnb allow you to monetize your car or home for extra income.”

Many different creative opportunities fall under the category of “side hustle”. An article titled Retirement Side Hustles for Extra Money lists several ideas, such as renting out idle storage space, providing feedback for websites, taking surveys online, teaching skilled lessons, selling goods at a farmers market, becoming a mystery shopper, and the list continues. Many retirees take on “gigs” not just for the extra cash, but also for the social interaction and community support.

Before diving into a side hustle, be sure to research the logistics and fine print. If something sounds too good to be true, it probably is. As with any type of paid work, there are always trade-offs. Be sure to protect your energy, mental capacity, and creativity. Also, be sure to create awareness around the costs involved. Are there start-up costs or maintenance costs involved? Is there a liability that needs to be protected? Also, be sure to keep self-employment taxes in mind. These taxes could be higher than W-2 income taxes.

If you would like a second opinion on how a “side hustle” fits into your overall financial plan, please call Sharkey, Howes & Javer at 303-639-5100 to schedule a complimentary consultation.