Financial Independence Day

By Steve Davis, CERTIFIED FINANCIAL PLANNER ™


MANSFIELD, MA:  We recently had a friend from New Zealand staying with us for a few days. One of my sons jokingly asked him, “Andrew, do they have the 4th of July in New Zealand?” He was quick to catch on and replied, “Of course they do, but they don’t celebrate Independence Day.”

Corey Shea Memorial Flagpole, Mansfield, MA

Today, Americans are observing Independence Day. Most of us have been looking forward to this long-weekend because we’re able to enjoy a day off from work and spend our free time with friends and family. And just as we look forward to the 4th of July weekend, most of us look forward to celebrating another type of Independence Day – Financial Independence Day. This, of course, is not a single day free from work, but a period in our lives when we no longer need to work ever again because our expenses are met by unearned income.

While this is a laudable goal, it won’t be achieved by all. Some people work their whole life, while others retire early. Some people retire and live comfortably, while others are dependent on children and friends. Here are three tips to help you achieve financial freedom:

Spend less than you earn.
If you’re looking for a good book to read on the beach during this summer’s vacation, check out the 1996 bestseller, The Millionaire Next Door. While this book is now 15-years old, its message is timeless. Authors Thomas J. Stanley and William D. Danko explain that one of the keys to success is to live within your means. This can be accomplished by earning more – OR – spending less. The theme of the book is that society’s concept of a millionaire is wrong; most actual millionaires live a very simple lifestyle. In general, they are frugal and value achieving financial independence more than displaying high social status. In other words, they don’t try to keep up with the Jones’. After all, the Jones’ may be in debt up to their eyeballs!

Feed your 401k.
One of the most important things you can do to hasten your own Financial Independence Day is to continually save and invest for retirement. Take full advantage of your company’s 401k plan. If your company matches your 401k contributions, be sure to at least contribute the amount they will match; it’s like getting free money! Remember too that the government offers tax advantages to these types of qualified retirement plans. Most contributions are made with pre-tax dollars which means you pay less in taxes. Furthermore, your earnings have the potential to grow on a tax-deferred basis. This means your nest egg may grow quicker because you’re not paying taxes on the account until you begin to take distributions, typically at retirement.

Prepare for emergencies.
If you suddenly discover your home needs a new roof, or if a major appliance or car breaks down, will you have the money available to pay for it? Create an emergency reserve. The amount of your emergency reserve may vary according to the flexibility of your budget and your comfort zone. Bear in mind that this is the money that will see you through financial storms while you maintain a long-term strategy working toward financial independence. Your emergency reserve is not intended to cover all possible risks. For complete protection, get medical insurance, long-term disability insurance and fire protection for your home. Even policies with a large deductible can help if a crisis comes up. You can't avoid emergencies, but living without these types of insurance is an invitation to financial ruin.
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This article was written by Steve Davis and appeared in the column "Talking with Davis about Money Matters" found at http://mansfield-ma.patch.com/articles/financial-independence-day


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Honey, I lost my 401k (and other big mistakes)

By Steve Davis, CFP®

It has been a long winter in New England, but we’ve just moved the clocks ahead and soon spring will be here. The storms are over, the snow has melted and now it’s time to clean up the yard. I recently found a winter hat that had gone missing after the first snow storm of the year. It was in my backyard for months, but we couldn’t find it because the grass has been covered with a blanket of snow since Christmas. The old adage, “out of sight, out of mind” certainly held true because after a week or so I sort of forgot about that hat and resorted to wearing another one we had in the closet.

Lost Accounts:

It is amazing how many people have misplaced 401k accounts. You might think it inconceivable that someone would “lose” the information about an investment worth thousands of dollars, but it is not all that uncommon. For frequent job changers, trying to keep up with the paperwork on several different orphan 401k accounts can be an administrative nightmare. Losing track sometimes happens after a move when the mail forwarding order expires, or after a name change following marriage or divorce.

At other times, the account information is lost when a former employer declares bankruptcy or when the owner of a small company dies and the company closes its doors. Trustees have a fiduciary liability to distribute the plan’s assets, but sometimes this doesn’t occur, especially when the trustee is a former employee who is no longer being paid. The good news is that retirement funds invested in 401k plans belong to the employee, not the employer, so even when a company files bankruptcy or ceases operations, plan participants are protected. Because assets continue to be invested, amounts that can be reclaimed are sometimes substantial. If you think you or a family member may have money in an abandoned plan, search the Department of Labor’s database. http://www.askebsa.dol.gov/AbandonedPlanSearch/

Beneficiary Blunders:

The 401k Beneficiary Form kept in the Human Resource Department of your old company is often more important than the will or trust that was carefully crafted by your attorney. That’s because a will or trust has virtually no effect on how your retirement account assets are distributed to your heirs. Instead, 401k (and IRA) accounts are transferred according to the provisions listed on your beneficiary form. And all too often these forms are hastily filled out during company enrollment meetings and are never given a second thought. Here are four of the biggest Beneficiary blunders:

Mistake #1: You, your heirs or your old employer can’t find the form. In a recent ruling, the US Supreme Court made it clear that without a proper beneficiary form you are stuck with the default provisions of your company’s plan. Don’t take it on faith that the form you filled out a dozen years ago is still filed correctly at your old company. If the form is lost, it doesn’t matter if your will, divorce decree or other legal documents provide different instructions. When the default provisions say your account should be paid to your estate, that’s what will happen even if this action results in thousands of dollars in extra taxes or probate costs.

Mistake #2: The form is filled out incorrectly or is out-0f-date. Sometimes what seems like a simple oversight can accidently disinherit those you want to favor. A million dollar mistake occurred in 2001 after Anne Friedman died of a heart attack and her entire pension of almost $1 million went to her estranged sister rather than her loving husband of twenty years. This travesty happened because the beneficiary form on file was completed years before Ann and her husband met in 1978. The form had been forgotten by all except the sister who refused to give up her new found wealth. Similar tragedies can occur when adult children die before their parents. In cases like this, 401k proceeds usually skip the family of the deceased beneficiary and are instead shared only by the surviving children.

Mistake #3: Listing a minor as beneficiary. When a minor child inherits a 401k directly, a court-appointed legal guardian must be named to administer the funds on the child’s behalf. If this happens, your family will get tied up in the court system with all the cost and aggravation that involves – and with outsiders making decisions that impact your family’s welfare.

Mistake #4: Not naming a contingent beneficiary. If your primary beneficiary isn’t around to collect your 401k, and you haven’t named a secondary beneficiary, the Probate Court will likely liquidate your account in a lump sum and force the immediate payment of substantial federal and state taxes. This simple oversight robs your children and grandchildren of the opportunity to stretch your distributions –and the tax bite—over their lifetimes. Stretching the distributions like this allows the investments to continue to grow tax deferred and may result in substantially greater inheritances.

A Spring Cleaning Reminder:

Don’t make the same mistake I made when my hat was forgotten once out of sight. Instead, when you grab your rake and begin to clean your yard this spring, remember that you may have some old 401k plans that need tidying up too. If you have old 401k accounts, consider rolling that money over to your own consolidated IRA.

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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

This article was written by Steve Davis and appeared in the column "Talking with Davis about Money Matters" found at http://mansfield-ma.patch.com/articles/honey-i-lost-my-401k-and-other-big-mistakes-2