You've conquered your professional goals, and now it's finally time to settle into some well-deserved downtime, dedicated entirely to you. But before you can plan your retirement party and start making travel plans, you have to make sure all your affairs are in order.
In other words: You're ready to start seriously thinking about retiring in the next few years, but you're unsure if you're financially prepared to do so. You're not alone. A recent study conducted by the Boston College Center for Retirement Research found that 40 percent of working-age Americans have an unrealistic understanding of their progress toward secure retirement.
Life happens quickly, bringing a continuous mix of opportunities, uncertainty and even potential peril. The British saying from World War II Keep Calm and Carry On gives us insight into how a population kept themselves together when faced with grave and prolonged uncertainty. Now in the 21st century we need a new version of this motto, Keep Calm and Carry Very Little. We also need a skill set to put the motto into action. At Northstar, we talk about How to Thrive While Life Happens.
Financial transitions come in many forms: selling a business, death or divorce, inheritance or a windfall. Regardless of the reason, managing a financial transition can be overwhelming, difficult and exciting – all at the same time.
We refer to ‘transitions’ as that period of change in which “what was” no longer exists and “what will be” has not yet taken shape. Transitions are temporary states, but that does not mean they are short-lived. By their very nature, transitions have broad-reaching implications for people’s lives – their finances, important relationships, where to live and how to live.
We’ll wrap our series, the ABCs of Behavioral Biases, by repeating our initial premise: Your own behavioral biases are often the greatest threat to your financial well-being.
We hope we’ve demonstrated the many ways this single statement can play out, and how often our survival-mode brains trick us into making financial calls that foil our own best interests.
We have come to the end of our alphabetic run-down of behavioral biases. Today, we’ll present the final line-up: sunk cost fallacy and tracking error regret.
SUNK COST FALLACY
What is it? Sunk cost fallacy makes it harder for us to lose something when we also face losing the time, energy or money we’ve already put into it. In “Why Smart People Make Big Money Mistakes,” Gary Belsky and Thomas Gilovich describe: “[Sunk cost fallacy] is the primary reason most people would choose to risk traveling in a dangerous snowstorm if they had paid for a ticket to an important game or concert, while passing on the trip if they had been given the ticket for free.” You’re missing or attending the same event either way. But if a sunk cost is involved, it somehow makes it more difficult to let go, even if you would be better off without it.
In a study done by Merrill Lynch in partnership with Age Wave, it was found that 70 percent of women believe that men and women have a fundamentally different life journey when it comes to career, family expectations, aging, and finances, reinforcing the need to better understand women’s financial concerns and opportunities. In recent decades, there has been a seismic shift in women’s personal and financial representativeness.
Since 2015, women or female run households have had control of more than 50% of our nation’s wealth. With this new wave of women investors and financial heads of household comes the need to identify what can be done to reinforce independence, mitigate longevity risk, encourage financial knowledge and education, and empower women to find their path to financial wellness. Financial independence affords women the confidence in meeting their financial obligations, experience the life that they want, achieve their goals and take care of loved ones.
The Social Security Administration recently reported that it had underpaid $224 million to about 25,000 widows and widowers. In a random sample of this group, it found that 82 percent could have gotten a higher monthly benefit if they had claimed survivor benefits first and delayed claiming their own retirement benefits until age 70. The audit also found no evidence that SSA employees informed the people about their option to delay their retirement benefits to age 70, which is required. If you believe that you have been underpaid, we recommend contacting your local social security office to determine if they will give you any retroactive benefits.
Widow’s social security benefits are complex so we recommend that you call or visit your local SSA branch to get an initial determination of your options and then get a second opinion with an expert on social security claiming strategies to help you fully understand your benefit.
It’s been approximately a decade since the Great Recession began. By year-end 2008, the U.S. Federal Reserve (the Fed) had lowered the target federal funds rate to near-zero and embarked on an aggressive quantitative easing campaign, hoping to resuscitate the economy with a big booster shot of lending, borrowing and spending dollars.
Perhaps the economic recovery that followed was a direct result of these and other Fed initiatives. More likely, there were a number of contributing factors. Either way, the Fed has begun to reverse course, restoring its policies and targets closer to historical “norms” through quantitative tightening and gradually rising rates.
After the Tax Cuts and Jobs Act (TCJA) was passed, there was concern that the beloved mortgage interest deduction for home equity loans had met its demise. While, on its face, that is what the law says, there is a loophole that taxpayers can use if they meet certain criteria.
As long as the loan is secured by a qualified residence (primary home or vacation home) and not for an investment property then you can begin evaluating whether the loan qualifies for the technique we are discussing that was approved by the IRS on February 21, 2018.
• The proceeds from the loan must be used for home improvements. • The loan must be characterized as an acquisition debt. The law states that the debt was incurred to “buy, build or substantially improve” a qualified residence.
So many financial behavioral biases, so little time! Today, let’s take a few minutes to cover our next batch of biases: overconfidence, pattern recognition, and recency.
OVERCONFIDENCE
What is it? No sooner do we recover from one debilitating bias, our brain can whipsaw us in an equal but opposite direction. For example, we’ve already seen how fear on the one hand and greed on the other can knock investors off course either way. Similarly, overconfidence is the flip side of loss aversion. Once we’ve got something, we don’t want to lose it and will overvalue it compared to its going rate. But when we are pursuing fame or fortune, or even going about our daily lives, we tend to be overconfident about our odds of success.
Now that the tax season is a wrap for most Americans, it’s time to start contemplating how the 2017 Tax Cuts and Jobs Act (TCJA) will impact your 2018 and future tax plans. One of the frequently asked questions we’ve been fielding is on charitable giving: How can you keep giving, and get a little back on your taxes? Following are four practical possibilities to consider for charitable giving under the TCJA rules.
No New, But Possibly Improved Opportunities
It’s worth mentioning that none of these four tax--planning possibilities are new; they’ve all been available well before the TCJA passed. The difference is, they may be more applicable to you under the new tax codes.
