Worried about your money these days? You’re not the only one! A recent USA Today survey found that more than 70% of Americans feel financially insecure—and with good reason. Long-term US Treasuries have lost nearly half their value since 2020. Hackers bombard us with scam e-mails and texts trying to get into our financial accounts.
Money is supposed to give us a sense of control and autonomy, but it’s hard to make good choices and maintain our quality of life if we can’t count on it being there when we need it. Bottom Line Personal asked a panel of our financial advisors what they are doing to make their clients feel safer and more secure about their investments, savings, estate plans, taxes and other personal finances…
SAFER INVESTING
Barbell your long-term investment portfolio. Will stock market performance this year look like 2022’s collapse…or 2023’s rebound? It’s hard to tell, and that uncertainty makes it the ideal time for a barbell strategy.
How it works: At one end of your portfolio, hold fixed-rate, ultrasafe cash equivalents that offer principal protection and a guaranteed 4%-to-5% return for the next year or two. These include money-market funds and FDIC-insured certificates of deposit (CDs), as well as multi-year guaranteed annuities (MYGAs), which are major life insurers’ version of bank CDs.
With one end of the barbell offering stability and decent income, you can take calculated risks with the other end by filling it with tech stocks, Japanese stocks, emerging-market bonds and gold and preferred stocks in the hopes that they will continue to appreciate.
Here’s how my barbell portfolio was positioned recently…
Money-market funds, short-term CDs and MYGAs: 42.5%
iShares Gold Trust (IAU): 8.5%
Cromwell Marketfield Fund: (MFADX): 8%
Leuthold Core Investment Fund (LCORX): 8%
Hussman Strategic Growth Fund (HSGFX): 8%
DoubleLine Emerging Markets Local Currency Fund (DLELX): 8%
Franklin FTSE Japan Hedged ETF (FLJH): 6%
Cohen & Steers Limited Duration Preferred Securities ETF (LDP): 6%
KFA Mount Lucas Index Strategy Fund (KMLM): 5%.
Bob Carlson is editor of the Retirement Watch newsletter and a managing member of Carlson Wealth Advisors and former chairman of the board of trustees of the Fairfax County (Virginia) Employees’ Retirement System. RetirementWatch.com
Ask the right questions to judge the potential risk of any investment for your portfolio or to compare the relative risk of two investments. Plenty of sophisticated metrics are available that capture how risky or volatile an investment is. Example: You can look at a stock’s beta (how its ups and downs compare with the market as a whole as represented by an index such as the S&P 500)…or a fund’s standard deviation (how far it swings up and down in price relative to its own long-term average). But these measurements don’t really capture how risky the investment is for your personal plans or your capacity to hold it long-term through good times and bad. Whenever a new client comes to me with a poor long-term performance record, it’s almost always because he/she has jumped in and out of the market.
Ask yourself these questions to gauge an investment’s real risk…
If I owned it, would I have stuck with it and not panicked and sold it in periods of extreme market stress? Use periods like the bear markets of 2007–2009…2020…and 2022. You can research this data at Google.com/finance or PortfolioVisualizer.com.
In the midst of the investment’s maximum drawdown, would I have been willing to buy more if nothing had changed at the company or the fund?
One more real-world test: Some investors want to take a gamble on a high-risk investment with a big potential payoff, but they struggle to know how much to invest. Ask yourself, If my position in this investment went to zero, would my long-term investment plans still be on track? If the answer is no, scale back on how much money you invest.
Justin Carbonneau is managing partner at Validea Capital Management, an investment firm that offers strategies based on the work of investment legends such as Warren Buffett and Peter Lynch, West Hartford, Connecticut. He is host of the investing podcast Excess Returns. ValideaCapital.com
SAFER ESTATE PLANNING
Set up a Medicaid Asset Protection Trust (MAPT). Many retirees who lack long-term-care insurance worry that they will lose their family homes to nursing home costs. If your income and assets are low enough, you can qualify for Medicaid to cover these costs and still be allowed to keep your house. But after you die, the state will demand repayment when the house is sold, forcing your heirs to potentially fork over hundreds of thousands of dollars of their inheritance.
One strategy to avoid this: Transfer ownership of your house to your children at least five years before you expect to enter a nursing home. Downsides: Many folks don’t want to give away their home—even to their children. And it creates a tax headache—when your kids eventually sell the house, their cost basis for the purpose of capital gains taxes is what you originally paid for the home decades ago.
My solution: Have your estate-planning attorney create a MAPT. How it works: The title of the home is transferred to the MAPT. You appoint a trustee to oversee the trust and choose who will inherit it. The trustee can be anyone other than the creator of the trust (Grantor)—typically it is one or more of the Grantor(s)’ adult children. During your lifetime, you keep the exclusive right to use and occupy the home and continue to receive all the tax exemptions on the home.
Once the asset has been in the trust for five years, if you need to go into a nursing home, the full value of your assets in the trust are protected. You even have the option to sell your house without a Medicaid penalty, and the money is paid to the trust. The trustee also may buy a new property, perhaps a smaller home, in the name of the trust so it remains protected. This assumes that the Grantor is not living in a nursing home but, rather, wants to downsize or move to a warmer state. After you die, the IRS allows your heirs a step-up in their cost basis for the house—the new cost basis is the home’s value on the date of your death.
Note: Any assets transferred into a MAPT still are subject to a lookback period of as much as five years to maintain Medicaid eligibility. For assets that were transferred to a MAPT to be fully protected and not countable toward the applicant’s nursing home eligibility, the asset would have had to have been transferred into a MAPT five years prior to applying for Medicaid.
Terence J. Ricaforte, Esq., is a cofounding partner of Landskind & Ricaforte Law Group, Brooklyn, New York. He practices in elder law, Medicaid planning and estate planning. RicaforteLaw.com
SAFER PERSONAL FINANCES
Beef up protection on your online financial accounts. Most banks and brokers now offer two-factor authentication (2FA) to keep your money safe from intrusion, but you still may be vulnerable. How 2FA works: After typing in your username and password on the account website, you are sent a six-digit code via SMS text message to your mobile phone to verify that it’s really you. Problem: There still are ways for hackers to circumvent this extra layer of protection…
Danger #1: A hacker gains access to your lost or stolen phone. If you use an app from your financial institution and it autofills your username and password on your phone, the hacker can request the code and gain access. Self-defense: Don’t save your financial-account passwords on your phone. Memorize them, and get in the habit of inputting them each time you log on.
Danger #2: A hacker accesses your Gmail account, uses it to reset your bank-account password, then requests a code be sent to your mobile phone. The hacker e-mails you posing as a service technician from your bank dealing with a security problem and tricks you into sending him/her the six-digit code you just received. Self-defense: Don’t respond to this supposed technician. Financial institutions will never ask you to reveal a 2FA verification code via phone or e-mail.
Steven J.J. Weisman, JD, is an attorney in private practice and senior lecturer at Bentley University, Waltham, Massachusetts. He is author of Identity Theft Alert and founder of the scam-information website Scamicide.com.
Avoid the stealthiest stealth tax. Most of us rely on our employers to withhold taxes from our paychecks. But when we retire, we may not realize that the US tax system is pay-as-you-go so you’re responsible for quarterly estimated tax payments for the current year on income from Social Security, investments, deposit accounts, part-time work and other sources. If you wait to pay until the following April, penalties for shortfalls are onerous—the IRS charges 8% annual interest compounded on any estimated tax underpayments, up from 3% two years ago. Calculating the correct amount you owe quarterly can be challenging when your income fluctuates during the year and from year to year. The IRS assessed more than
$1.8 billion in penalties for underpaying estimated taxes on more than 12 million individual returns in 2022. Steps to avoid this stealth tax…
Use either the “actual” or “safe harbor” rules to insulate yourself from penalties. Your four estimated payments should constitute at least 90% of the current-year tax bill or 100% of the previous year’s tax bill (or 110% if your adjusted gross income is more than $150,000, or $75,000 if you are married filing separately). Helpful resource: Calculate your estimated tax withholding for the year at IRS.gov/individuals/tax-withholding-estimator.
Use the IRS’s annualized income installment method if your income is uneven over the course of the year. Example: You may make little in the first two quarters of the year, then earn some consulting income in the third quarter and take a large required minimum distribution (RMD) from your IRA in the fourth quarter. Calculate your estimated tax withholding for the year at IRS.gov/individuals/tax-withholding-estimator.
Request a waiver from penalties for underpaying your estimated tax penalties if it is due to a casualty event, local disaster or other unusual circumstance and it would be inequitable to impose the penalty…or if you retired within the past two years (after reaching age 62) or became disabled and had a reasonable cause for missing the estimated tax payments that you should have made. Information on penalty waivers: See IRS.gov, topic no. 306.
Joseph Doerrer, CPA, CFP, is vice president of wealth planning at Mezzasalma CPAs, which provides tax, accounting and wealth-management services to high-net-worth individuals, Tinton Falls, New Jersey. MezzCPA.com
Master your money transfers. Nothing is more stressful than sending money electronically from one account to another, then discovering that the money never arrived or there was an unexpected delay. The most common way to move money is an Automatic Clearing House (ACH) transfer. Banks and credit unions use this network for all kinds of transactions, including direct deposit of paychecks and monthly debits for routine payments. Merchants often enable consumers to pay bills via ACH by providing an account number and bank routing number. To avoid botched transfers…
Double check the account number, as well as the address, contact information and whether it is an individual, joint or retirement account, some of which may have particular rules and limitations surrounding transfers.
If you fill out forms to transfer money, see if any must be notarized, medallion stamped or signed by your spouse. Also, confirm how the check should be made payable—often with retirement accounts, such as IRAs or 401(k)s, the check payable line requires the receiving bank institution’s name plus your name.
Be aware if your accounts have a daily or monthly transfer limit.
Pull ACH transfers…don’t push them. In general, when you attempt to transfer money between banks (especially retirement accounts), you run into fewer problems and delays if you initiate the transfer from the account where the money is to be deposited, rather than initiating it from the account where the money is held. Often, this is the only way to transfer funds between retirement accounts.
Nicholas Bunio, CFP, specializes in retirement planning for doctors, teachers, nurses and federal workers at Retirement Wealth Advisors (RWA). RWA is a fee-only investment-management and financial-planning firm, Berwyn, Pennsylvania. RetirementWealth.com/Nicholas-Bunio
