How to Start the New Year on the Right Financial Foot

Slide 2: Mission

This webinar series is brought to you by AAFMAA Wealth Management & Trust. Our mission is to be the premier provider of financial planning, investment management, and trust services to the American Armed Forces Community.

AAFMAA Wealth Management & Trust is a fully owned subsidiary of AAFMAA. AAFMAA, has proudly served America's Armed Forces since 1879. AAFMAA is a non-profit, tax-exempt (501[c] (23)), member-owned mutual aid association offering life insurance to all branches of the U.S. Armed Forces and their families.

Slide 3: Disclaimer 

Also, a few disclaimers: This presentation is educational.  It is for general information only and is not specific investment, legal, or tax advice for any of you individually.  Do not rely on this presentation alone to guide your investment management decisions. Since each situation is unique, your needs for financial services will differ. For individual advice, please contact us directly.  We produce this webinar series in-house with our professional staff as a service to our members to help them better understand the resources that are available to them.  We have highlighted here two distinct characteristics that separate AAFMAA Wealth Management & Trust from other service providers: [1] Our fiduciary standard, which requires us to always act in our clients’ best interests, and [2] we exclusively serve the U.S. Armed Forces Community.

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Thanks Kathleen for that great introduction. Thank you for joining me today for our webinar.

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Today I’m going to walk you through “How to Start the New Year on the Right Financial Foot.” We made it to 2022, so let’s make the most of it! Financial preparedness is the key to long-term success, and today we’ll discuss mission readiness for your finances. The goal is to end 2021 on a high note and enter 2022 with a financial strategy that you feel confident in.

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So why are we meeting today? The most common New Year’s resolution is to prioritize health. It is critical to recognize that one’s financial health is the root of all other forms of health. Personal health is taking care of yourself. Maybe this means introducing a new gym routine and a better diet for the New Year? Family health is taking care of those that are closest to you -- making sure your loved ones are comfortable and safe. Charitable giving health can simply be giving in the form of donation or time. It just feels good to pay it forward.

Unfortunately, it’s very difficult to be able to support any forms of health without addressing your financial health first. Worries about money and saving for the future can drive a lot of stress and anxiety, which can affect any one or more of the supported health forms.

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Today, we will take the time to walk through each of the steps you should be taking to ensure you’re starting 2022 on the right financial foot. These are: goals, risk tolerance, cash flow analysis, protection of assets, investments, estate planning, and the importance of implementation and monitoring your decisions.

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When thinking about my financial goals I like to envision the future. Where do I see myself and my family in two years? Five years? Ten years? How do I envision retirement? Where will I live? What activities will I enjoy? A fun New Year’s activity is to create a vision board. You can display this in your home to help keep you motivated throughout the months to come.

Your life goals and financial goals should be SMART. Specific, measurable, attainable/achievable, relevant, and timely. Otherwise, you will become easily discouraged and that’s when your planning will derail.

Select someone to be your accountability partner. This can be a loved one to help monitor your progress, or a professional who can also act as a mentor and guide. I would definitely suggest building your financial team as your financial goals and situation becomes more complex. This should consist of your financial planner, tax professional, estate planning attorney, and insurance broker.

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Risk tolerance is the degree of variability in investment returns that you are willing to withstand in your financial plan. Each individual will have their own unique risk tolerance and should consider financial goals, time horizon, age, life cycle phase, and current economic and political conditions. Although you might know if you are conservative, risk-averse, neutral, aggressive, or risky, it is important to match those phrases with numbers. Sometimes seeing the bottom line can change your intuition about risk tolerance. I would suggest using a risk questionnaire like Riskalyze that quantifies your acceptable levels of risk and reward to a single number. Think of it like a speed limit -- you should never drive faster than the speed limit, so don’t invest in funds that are over your risk score.

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This is a list of commonly overlooked items that should be considered when drafting your budget, like pet care and bank account fees. Everyone’s spending is different, and there is no right or wrong, so budgets are not always about the details. However, you have to know your cash flow. Determine where the money is going so you can determine financial needs and opportunity for improvement. Once you’ve identified how much you spend on a monthly and annual basis, then you can do some analysis.

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The Emergency fund consists of non-discretionary expenses. These are expenses that do NOT go away if you lose your job. Such as rent/mortgage, utilities, food, auto loan, property taxes, and insurance premiums. Include whatever expenses you believe you will continue to incur if you face financial hardship, keeping in mind that during financial challenges, it is best to pause the Netflix subscription and maybe postpone the fancy steak and lobster dinner date. It’s always better to err on the side of caution and have too much money saved than not enough.

Consumer debt includes credit card purchases as well as auto loans and student loans. Generally speaking, it’s best to keep this ratio as low as possible.

The housing debt ratio would be a great one to reference if you are renting and considering purchasing a home. If you are planning to stay in a property for over three years, you can typically justify the closing costs and other risks associated with purchasing the property. Use the housing debt ratio to guide your decision on the value of home to purchase. The numerator in this equation includes principal, interest, taxes, and insurance. By staying under 28% of your GROSS income, you can feel confident that you won’t feel house-poor.

The savings rate is suggested to be 10-12%, but this definitely depends on when you begin saving for retirement and if you have other goals to consider. For example, if you are saving to fund your children’s college expenses, then you should add another 5%.

These ratios are an important part of our financial health check up. To ensure we start the year off on the right foot, take the time to identify your budget. Use your spending habits to check these numbers. If consumer debt is really high, let’s craft a strategy together to pay down that debt for the year. This might require your savings rate to be reduced temporarily, but that’s ok.

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Now let’s ensure you have the appropriate insurance tools in place to protect your assets. Property like home and auto should cover at least 80% of Fair Market Value. FMV takes into account depreciation, so if you want to cover replacement value, you’ll need to ask about an endorsement on your policy.

Life Insurance can be thought of in two forms, term and permanent.

Term is suitable for young families starting out. There is no cash value, savings, or investment component. Premiums are usually less expensive compared to Permanent. It would be appropriate to acquire Term Life Insurance when looking to cover major expenses at death like a mortgage and provide income to a living spouse.

Permanent consists of whole life, universal life, and variable universal life. Permanent is suitable for lifetime needs such as income, retirement funding, and estate tax planning. Each type of permanent life insurance has a unique investment or savings component. Whole Life provides fixed returns in which the policy owner has no control over the investment strategy. Universal offers variable returns in which the policy owner still has no control over investment strategy. Variable Universal Life provides the most flexibility with variable returns and control over investment strategy. Variable Universal Life will typically have the highest premiums. 

Conducting a simple Net Worth exercise will be important in identifying what to insure and how much insurance may be needed. This figure is a good starting point for determining the appropriate amount of coverage to hold in a Personal Liability Umbrella Policy. A PLUP will provide protection against legal obligations that arise from negligent acts at home or away.

Long-Term Care insurance isn’t right for everyone. However, the conversation about Long-Term Care Strategies is essential. LTC events can happen at any time, not just during elderly years. LTC events can be funded by LTC insurance, whole life insurance, dedicated savings, dedicated principal investment, continuing care retirement facility, reverse mortgage, and spend down assets. Know the pros and cons of each before making your decision. Additionally, take time together as a family to make your wishes for end-of-life health care and burial arrangement very clear. 

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Regardless of Qualified or Non-Qualified investment vehicles, the account will consist of bonds or fixed income, stocks, or equities. Both of which can be held individually or as a part of a mutual fund. It comes down to investment strategy, so you need to consider -- are you active or passive? An active investor believes the markets are inefficient so you need to actively trade to achieve above-average market returns. A passive investor believes the markets are efficient, and therefore is comfortable buying and holding. A professor once shared with me, “It isn’t about timing the markets, it’s about time IN the markets.”

Before selecting an investment vehicle, know your options. Each investment vehicle has unique contribution limits, withdrawal restrictions, and tax advantages for retirement planning.

If your employer offers a match to your contribution, this should be your first priority. The employer is essentially putting free money on the table and you should strongly consider taking it. However, each employer-sponsored plan does have unique sets of rules that will apply. It’s best to partner with your CPA or a CFP(R) practitioner to review the vesting periods and rollover options to ensure this is the right vehicle for you.

The IRA is suitable for someone who believes that their tax bracket will be lower in the future and anticipates needing income in retirement. Many times, this doesn’t apply to the military community since retirees often collect VA disability and pension after service. IRA contributions are tax-deductible, therefore the IRS created the Required Minimum Distributions in order to collect their taxes. RMDs begin at age 72 and are taxed at ordinary income rates.

The Roth IRA is suitable for someone who believes they will be in a higher tax bracket later in life. The advantage is you pay taxes on the contributions now, but are not subject to the RMD later in life. You still can’t withdraw the money until age 59 ½ without penalty, although exceptions apply. When you do need the money in retirement, you won’t pay taxes on the growth.

As you can see, there are other qualified accounts to include the 457b, 457f, and TSP, which operate like a 401(k). SEP and SIMPLE but we’ve addressed the most common types so now let’s move on to non-qualified accounts.

Non-qualified accounts are taxable. They are not subject to the rules and restrictions of qualified accounts. However, this flexibility exists because they don’t offer any tax advantage. This is suitable for the person who might need access to their investments before retirement and desires flexibility when investing.

Still wondering what’s best for you? The objective of a complimentary Investment Review will be to establish return requirements for your financial goals and risk tolerance. During this review, we will address constraints like time horizon, liquidity, taxes, and laws and regulations pertaining to assets held in trust, and any other unique circumstances to find the right investment vehicle for your journey.

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Just like LTC, estate planning will be unique to each family’s situation - the conversation is essential.

A Letter of Instruction or Testamentary Letter is an informal, non-legal document that generally expresses your personal thoughts and directions regarding what is in the will. This includes your burial wishes and where to locate specific documents and user names/passwords for accounts. Unlike the will, this document remains private. However, it is NOT a substitute for a will and/or trust. The letter is only a suggestion and is not legally binding.

Will and/or Trust are legally binding documents that should be drafted by an Estate Planning Attorney. Each state has their own Estate Planning Laws, so make sure to partner with someone local if you have recently moved. A will passes your assets through probate for retitling. This is an open, orderly legal process. The disadvantages can be that probate is costly, there are delays with the courts, and publicity. A trust will provide privacy, management of assets beyond life, creditor protection, and avoids taxes by reducing gross estate.

Durable General Power of Attorney can help protect your property in the event you become physically unable or mentally incompetent to handle financial matters.There a two types. The first is immediate, which means that it is effective immediately. This may be appropriate for deployment or when facing a serious operation or illness. The second is springing, which is not effective until incapacitation. This is not permitted in some states, so be sure to partner with your Estate Planning Attorney.

Durable Power of Attorney for Health Care designates a person to make health care decisions on your behalf, if for any reason you should lose the capacity to do so. In writing, this DPOA survives disability but not death, so you will need DGPOA at death.

Advanced Medical Directive lets others know what medical treatment you would want or allows someone to make medical decisions for you in the event you can’t express your wishes for yourself. If you don’t have this directive in place, medical care providers must prolong your life using artificial means if necessary. You might feel like this is very similar to the above powers of attorney and you’re correct. Each state allows only a certain type or certain types of medical directives. You may find that one, two, or all three types are required to carry out all of your wishes for medical treatment. This includes: (1) a Will, (2) a Durable Power of Attorney for Health Care, and (3) a Do Not Resuscitate - DNR.

Slide 15: And finally, implement and Monitor. What’s the best part about all of these action items? They are all FREE! In conversation, we can refine your financial goals, then we can use Riskalyze to identify your tolerance for risk. If your bank doesn’t already provide a budgeting tool, let’s get you set up on eMoney. Take the time to verify your insurance coverages and calculate your net worth to ensure your financial future. If you already have investments in place or are new to investing, our Relationship Managers can offer a complimentary review to help determine the right investment strategy and vehicle. Lastly, reach out if you need help finding an estate planning attorney in your area. It is important to interview a few attorneys in hopes of establishing a reliable, trusting relationship. Just like your tax professional, insurance broker, and financial planner, this is someone you should plan to work with for many years to come.

Slide 16: Thank you so much for your time today! It’s been my pleasure sharing with you how to ring in the New Year with your financial health as your main priority.

Please reach out to schedule a follow-up conversation in which we can continue to discuss these topics personalized to your unique family’s needs.

Slide 17: Disclaimer

Slide 18: Thank You