Fong Law Group

How to Be Smart about an Inheritance

“If you were to receive a sizable inheritance, what should you do with it? This money could help you achieve some of your important financial goals , so you’ll want to think carefully about your choices.”

While there’s no one way that is right for everyone, there are some basic considerations about receiving a large inheritance that apply to almost anyone. According to the article “What should you do with an inheritance?” from The Rogersville Review, the size of the inheritance could make it possible for you to move up your retirement date. Just be mindful that it is very easy to spend large amounts of money very quickly, especially if this is a new experience.

Here are some ways to consider using an inheritance:

Get rid of your debt load. Car loans, credit cards and most school loans are at higher rates than you can get from any investments. Therefore, it makes sense to use at least some of your inheritance to get rid of this expensive debt. Some people believe that it’s best to not have a mortgage, since now there are limits to deductions. You may not want to pay off a mortgage, since you’ll have less flexibility if you need cash.

Contribute more to retirement accounts. If the inheritance gives you a little breathing room in your regular budget, it’s a good idea to increase your contributions to an employer-sponsored 401(k) or another plan, as well as to your personal IRA. Remember that this money grows tax-free and it is possible you’ll need it.

Start college funding. If your financial plan includes helping children or even grandchildren attend college, you could use an inheritance to open a 529 account. This gives you tax benefits and considerable flexibility in distributing the money. Every state has a 529 account program and it’s easy to open an account.

Create or reinforce an emergency fund. A recent survey found that most Americans don’t have emergency funds. Therefore, a bill for more than $400 would be difficult for them to pay. Use your inheritance to create an emergency fund, which should have six to 12 months’ worth of living expenses. Put the money into a liquid, low-risk account, so that you can access it easily if necessary. This way you don’t tap into long-term funds.

Review your estate plan. Anytime you have a large life event, like the death of a parent or an inheritance, it’s time to review your estate plan. Depending upon the size of the estate, there may be some tax liabilities you’ll need to deal with. You may also want to set some of the assets aside in trust for children or grandchildren. Your estate planning attorney will be able to provide you with experienced counsel on the use of the inheritance for you and future generations.

Reference: The Rogersville Review (March 21, 2019) “What should you do with an inheritance?”

Due Diligence Needed, If Retirement Depends on Inheritance, Selling Business

“I am 60 years old, divorced and have never taken an active interest in my finances. I’ve never worried about saving for retirement. I felt that when I retired, I’d be able to sell my business and that along with the inheritance I would receive from my parents, I would be in good shape.”

The first sentence in this article from Hometown Life, “Playing off charge card debt a major priority,” tells the entire story: “I…have never taken an active interest in my finances.” The person never had his business evaluated by a professional and learned at age 60 that his business had no resale value. In addition, he learned that his parents were supporting a sister and any inheritance he was anticipating would not be enough to live on.

Making matters worse, he has more than $80,000 in credit card debt on various cards, at interest rates between 18% and 21%. With next to no equity in his home and a home equity loan and a mortgage, this person has only one asset: an IRA worth around $100,000.

At some point in their lives, most people realize that they must be active participants in their financial lives. They need a budget to contain spending and a savings plan, so they can enjoy their retirement and control of their credit card debt. It sounds like this man just got a wake-up call.

He wonders how to resolve his credit card debt, but it seems there are a number of other issues that need to be addressed.

First, he should pay off his credit card debt. At 18% to 21%, there is no investment he could make that would come near that rate. One way to do this, is to increase his monthly payments. It may take many years to knock down such a large debt, so another option is to use his IRA to pay off the money immediately.

Equally important is for him to commit to use the money he would have otherwise used to pay off credit card debt and invest that into a retirement fund. It doesn’t matter if he uses an IRA, a SEP or a Roth, but he needs to be disciplined and start putting money away for his retirement.

Potential inheritances are troublesome for people who count their chickens before they hatch. Until the inheritance is safely in your own bank account, you cannot count on it. In a time where living expenses are high and people are living longer, fewer and fewer people are expecting to receive inheritances. Basing a lifestyle around an expected inheritance, can only lead to financial disaster.

Preparing for retirement and taking an active role in managing your finances, is a life-long task and part of our responsibility as adults. Another responsibility is to have an estate plan in place, so even people who die in debt, can be assured that what assets they do have will go to their heirs.

Reference: Hometown Life (March 3, 2019) “Playing off charge card debt a major priority”

How to Deal With Student Loan Debt as You Age

Sadly, learning how to deal with this debt is now a fact of life for many seniors heading into retirement.

According to a study by the Consumer Financial Protection Bureau, the number of older borrowers increased by at least 20 percent between 2012 and 2017. Some of these borrowers were borrowing for themselves, but the majority were borrowing for others. The study found that 73 percent of student loan borrowers age 60 and older borrowed for a child’s or grandchild’s education.

Before you co-sign a student loan for a child or grandchild, you need to understand your obligations. The co-signer not only vouches for the loan recipient's ability to pay back the loan, but is also personally responsible for repaying the loan if the recipient cannot pay. Because of this, you need to carefully consider the risk before taking on this responsibility. In some circumstances, it is possible to obtain a co-signer release from a loan after the loan recipient has made a few on-time payments. If you are a co-signer on a loan that has not defaulted, check with the lender about getting a release. You can also ask the lender for payment information to make sure the borrower is keeping up with the payments. 

If the borrower defaulted and you are obliged to pay the loan back or you are the borrower yourself, you will need to manage your finances. Having to pay back student loan debt can lead to working longer, fewer retirement savings, delayed health care, and credit issues, among other things. If you are struggling to make payments, you can request a new repayment plan that has lower monthly payments. With a federal student loan, you have the option to make payments based on your income. To request an "income-driven repayment plan," go to: https://studentloans.gov/myDirectLoan/index.action. 

Defaulting on a student loan may affect your Social Security benefits. If you have a private student loan, a debt collector cannot garnish your Social Security benefits to pay back the loan. In the case of federal student loans, the government can take 15 percent of your Social Security check as long as the remaining balance doesn't drop below $750. There is no statute of limitations on student loan debt, so it doesn't matter how long ago the debt occurred. If you do default on a federal loan, contact the U.S. Department of Education right away to see if you can arrange a new repayment plan. 

If you die still owing debt on a federal student loan, the debt will be discharged and your spouse or other heirs will not have to repay the loan. If you have a private student loan, whether your spouse or estate will be liable to pay back the debt will depend on the individual loan. You should check with your lender to find out the discharge policies. Depending on the loan, the lender may try to collect from the estate or any co-signers. In a community property state (where all assets acquired during a marriage are considered owned by both spouses equally), the spouse may be liable for the debt (some community property states have exceptions for student loan debt). 

A Note to Younger People: Heed the Voice of Experience

“If you could, what financial advice would you give your younger self?”

We like to think that we live without regrets, but it’s not always easy to do, especially when it comes to planning for retirement, says The Washington Post in “The top regrets of retirees.” A study looking at retirees found that many, and especially women, admitted that they had made mistakes in their retirement planning. The report from Global Atlantic was based on data from more than 4,200 retirees and pre-retirees in America. The company wanted to learn how expectations for retirement costs lined up with reality.

The expectations often did not.

The risk of running out of money is real, said the report, noting that 39% of retirees said they had planning regrets. Here are the top reasons for regret:

They found themselves relying too much on Social Security for income.

They did not pay down debt before retiring. Many people today are retiring with a mortgage. People used to pay off their mortgage before retiring, but it’s less and less common now.

They didn’t save enough. Most people didn’t start saving for retirement, until they turned 31. Missing almost a decade in saving can make a huge difference over time. Let’s say an employee puts away $50 every time she gets a paycheck—twice a month—and puts the money into an account with a 6% annualized return. If she started saving at age 23, by retirement age she’d have $227,150 in that account. If she waited to start saving until age 31, the account would be worth $128,578—$88,572 less. If she was able to save $100 per paycheck, by retirement, she’d have $434,299 versus $257,156.

The power of time and compounding makes a huge difference. Compounding is the process through which an asset’s earnings are reinvested to earn additional earnings over time. The more time your assets have to grow, the most compounded growth can occur.

Age 31 seems relatively young to start thinking about retirement, but by waiting that long, workers are missing out on almost a decade of savings, asset accumulation and the associated potential of compound returns.

The survey also revealed that women are more likely than men to have retirement planning regrets. How’s this for a difference: 62% of women had retirement regrets, versus 47% of men. The women also noted that once they realized their mistakes, more women than men adjusted their lifestyles to increase savings, by cutting expenses, like traveling or eating out.

If you have retirement regrets, your best course of action is to do the best you can now, without worrying about what you didn’t know in the past.

Reference: The Washington Post (Dec. 10, 2018) “The top regrets of retirees.”

Fiscal Words of Wisdom from One Who’s Been There, Done That

“There is no doubt that, for the most part, parents are much more involved with their children and their children’s more numerous activities, than parents were when I was growing up.”

If this describes you and your kids, then you need to prepare yourself for the adjustments that happen when the last child leaves the house. It can be emotionally and financially challenging, according to the Daily Messenger in the article “John Ninfo: Some advice for empty nesters”

With one less person in the household, it’s time to re-adjust your budget. Many of your everyday expenses, such as electricity, food and gas, will likely be lower. However, you may have new expenses related to your new life. You may spend more on activities that were put off until the kids grew up or find yourself dining out more often. Go slow when it comes to spending money on pricey vacations or fancy dinners. You want to strike a balance between enjoying your new-found freedom and cash flow, as well as keeping retirement savings in mind.

Assuming your cash flow is easier now, it’s time to commit to paying down outstanding debts, especially credit card debt. Reduce any interest or finance charges that you can. You might even think about paying down your mortgage or paying off a high-interest car loan. If you’ve taken on student loans or a home equity loan, now is the time to try to knock those down. At the same time, try to minimize any new spending or borrowing.

Take another look at how your retirement saving is progressing. Will you have enough at your current rate of spending, or should you ramp up your efforts, if you have room in your budget?

Have you thought about downsizing, or decluttering? Even if you are not planning on moving, your home may be filled with things you don’t need or want anymore. Set some time aside to clear out what you don’t need, donate what you can to a local charity or start planning yard sales. You don’t have to tackle this project all at once.  It is possible to donate a few hours each weekend to the task.

When was the last time you updated your will and other estate planning documents? Now is the time to revisit these matters, as well as looking at any long-term care insurance. If you don’t have a long-term policy in place, this is the time to buy it—if you can.

Are you finding yourself with a lot of free time? We don’t often ask ourselves the important questions, like “What matters to me?” and “How do I want to be remembered?” Many people find the answers to those questions in service to others. If you’re not already volunteering with an organization, find the ones that resonate with your values and get involved.

Don’t immediately start on expensive home renovations or decorations. Give yourself time to adjust to a quieter house and think about where you want to invest those resources before spending. A redecorating project is fun but may be making yourself busy and filling time. The project may not actually be affordable.

The empty nest presents many new opportunities for a fresh start. Use them wisely.

Reference: Daily Messenger (August 26, 2018) “John Ninfo: Some advice for empty nesters”