Risk Management

Estate Planning for Young Adults

Though it might seem like a plan for the distant future, estate planning is important crucial in the lives of young adults. Once someone reaches adulthood in the eyes of the state, parents do not have control anymore over their children’s finances and health care. If the child is unable to make an important financial or health related decision, the parents cannot step in and make sure the situation is handled the way they want it to be. These situations can range from being far away geographically (at college), or being in critical condition, or having other health problems. It is important to create an estate plan for your child as they become adults, and these are the steps to take in creating an estate plan:

Financial Power of Attorney and Health Care Power of Attorney

These powers are both critical as they allow someone to appoint a trusted person to make important decisions for them in the case that they themself are unable to. Both of these powers allow a parent to make final decisions for their child that relates to their finances or health if the child is unable to do so.

Financial Power of Attorney (POA) is specifically helpful in business or financial situations when your son or daughter cannot be present (e.g. renewal for a passport or car registration); this allows you to make decisions for ongoing legal situations on behalf of your children. This POA allows the parent to also have access to financial accounts for their children, such as 401(k) plans and other retirement accounts.

Health Care Power of Attorney is equally important, which allows a parent to access important legal information for their child and to make decisions.

These decisions can be in important and emotional situations, where the instructions that the child has left can be executed by the parent. Health Care Power of Attorney is also often connected with a living will, the next important element of a young adult’s estate plan.

Living Will

A living will specifies what someone wants to be done in specific medical cases if they are still living. This includes directions regarding life support if one becomes ill and dependent on life support. One can also include preferences on receiving certain medications and any other special instructions. Many people have not created their living wills, resulting in many cases in which people who become terminally ill have families that are unable to make decisions for them without taking legal action. By making your living will, it facilitates their ability to take care of you if put in that situation.

Will

A will is also important, even at a young age. Recently, 27-year-old actor Anton Yelchin (known for his role as Pavel Chekov in Star Trek) passed away without a will; this left his family having to go through extensive legal action to settle his $1.4 million estate. A will is also important in the case of having young children, as you can make sure that the guardian of your children does not become “...your boorish, derelict brother-in-law”, according to Charlie Douglas, a board member of the National Association of Estate Planners.

How to Begin

A good place to start is to just be thinking about these situations and developing a plan to obtain these documents. The processes and laws for POAs are different in each state, so it is important to make sure you have all the information for your specific location. Once you have prepared these documents, it will give yourself peace of mind, allowing your family to remain calm in difficult situations.

Sources:

Legal Zoom

Investment News

*Disclaimer: This commentary is provided for educational purposes only. The information, analysis and opinions expressed herein reflect our judgment as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation. All investments carry a certain risk and there is no assurance that an investment will provide positive performance over any period of time. Information obtained from third party resources are believed to be reliable but not guaranteed. Past performance is not indicative of future results.

Investment Advisory Services offered through Asset Strategy Advisors, LLC (ASA), a SEC Registered Investment Advisor. Securities offered through Triad Advisors, LLC, a broker-dealer, Member FINRA/SIPC. Insurance offered through Charles River Financial Ins Agcy (CRFG). ASA, CRFG and Triad are separate companies.

All About Credit Scores

It's difficult to imagine functioning in today's world without credit. Whether buying a car or purchasing a home, credit has become an integral part of our everyday lives. Having easy access to credit goes hand in hand with having a good credit score, so it's important to know how to maintain a positive credit score and credit history.

The importance of having a good credit score

Your credit score is based on your past and present credit transactions. Having a good credit score is important because most lenders use credit scores to evaluate the creditworthiness of a potential borrower. Borrowers with good credit are presumed to be more trustworthy and may find it easier to obtain a loan, often at a lower interest rate. Credit scores can even be a deciding factor when you rent an apartment or apply for a new job.

How is your credit score determined? The three major credit reporting agencies (Experian, Equifax, and TransUnion) track your credit history and assign you a corresponding credit score, typically using software developed by Fair Isaac Corporation (FICO).

The most common credit score is your FICO score, a three-digit number that ranges from 300-850. What's a good FICO score? For the most part, that depends on the lender and your particular situation. However, individuals with scores of 700 or higher are generally eligible for the most favorable terms from lenders, while those with scores below 700 may have to pay more of a premium for credit. Finally, individuals with scores below 620 may have trouble obtaining any credit at all.

Factors that can negatively impact your credit score

A number of factors could negatively affect your credit score, including:

  • A history of late payments. Your credit report provides information to lenders regarding your payment history over the previous 12 to 24 months. For the most part, a lender may assume that you can be trusted to make timely monthly debt payments in the future if you have done so in the past. Consequently, if you have a history of late payments and/or unpaid debts, a lender may consider you to be a high risk and turn you down for a loan.
  • Not enough good credit. You may have good credit, but you may not have a substantial credit history. As a result, you may need to build your credit history before a lender deems you worthy of taking take on additional debt.
  • Too many credit inquiries. Each time you apply for credit, the lender will request a copy of your credit history. The lender's request then appears as an inquiry on your credit report. Too many inquiries in a short amount of time could be viewed negatively by a potential lender, because it may indicate that you have a history of being turned down for loans or have access to too much credit.
  • Uncorrected errors on your credit report. Errors on a credit report could make it difficult for a lender to accurately evaluate your creditworthiness and might result in a loan denial. If you have errors on your credit report, it's important to take steps to correct your report, even if it doesn't contain derogatory information.

Fixing credit report errors

Because a mistake on your credit report can negatively impact your credit score, it's important to monitor your credit report from each credit reporting agency on a regular basis and make sure all versions are accurate.

If you find an error on your credit report, your first step should be to contact the credit reporting agency, either online or by mail, to indicate that you are disputing information on your report. The credit reporting agency usually must investigate the dispute within 30 days of receiving it. Once the investigation is complete, the agency must provide you with written results of its investigation. If the credit reporting agency concludes that your credit report does contain errors, the information on your report must be removed or corrected, and you'll receive an updated version of your credit report for free.

If the investigation does not resolve the issue to your satisfaction, you can add a 100-word consumer statement to your credit file. Even though creditors are not required to take consumer statements into consideration when evaluating your creditworthiness, the statement can at least give you a chance to tell your side of the story.

If you believe that your credit report error is the result of identity theft, you may need to take additional steps to resolve the issue, such as placing a fraud alert or security freeze on your credit report. You can visit the Federal Trade Commission (FTC) website at ftc.gov for more information on the various identity theft protections that might be available to you.

Finally, due to the amount of paperwork and steps involved, fixing a credit report error can often be a time-consuming and emotionally draining process. If at any time you believe that your credit reporting rights are being violated, you can file a complaint with the Consumer Financial Protection Bureau (CFPB) at consumerfinance.gov.

How student loans affect your credit score

If you've graduated college within the last few years, chances are you're paying off student loans. The way in which you handle your student loans during the repayment phase can have a significant impact--positive or negative--on your credit history and credit score.

Your main goal when paying back student loans is to make your payments on time. Being late with even one or two loan payments can negatively affect your credit score. If you are in default on your student loans, don't ignore them--they aren't going to go away. If necessary, contact your lender about loan rehabilitation programs; successful completion of such programs can remove default status notations on your credit report. Of course, if you are making your loan payments on time, make sure that any positive repayment history is being correctly reported by all three credit bureaus.

Even if you are paying your student loans in a timely manner, having a large amount of student loan debt can have an impact on another important factor that affects your credit score: your debt-to-income ratio. Having a higher-than-average debt-to-income ratio could hurt your chances of obtaining new credit if a creditor believes your budget is stretched too thin, or if you're not making progress on paying down the debt you already have. Fortunately, there are steps you can take to help improve your debt-to-income ratio:

  • Consider a graduated repayment option in which the terms of your student loan remain the same but your payments are smaller in the early years and larger in the later years.
  • Consider extended or income-sensitive repayment options. Extended repayment options extend the term you have to repay your loans. You'll pay more interest over the long term, but your monthly payments will be smaller. Income-sensitive plans tie your monthly payment to your level of discretionary income; the lower your income, the lower your payment.
  • If you have several student loans, consider consolidating them through a student loan consolidation program. This won't reduce your total debt, but a larger loan may offer a longer repayment term or a better interest rate.

*Disclaimer: This commentary is provided for educational purposes only. The information, analysis and opinions expressed herein reflect our judgment as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation. All investments carry a certain risk and there is no assurance that an investment will provide positive performance over any period of time. Information obtained from third party resources are believed to be reliable but not guaranteed. Past performance is not indicative of future results.

Investment Advisory Services offered through Asset Strategy Advisors, LLC (ASA), a SEC Registered Investment Advisor. Securities offered through Triad Advisors, LLC, a broker-dealer, Member FINRA/SIPC. Insurance offered through Charles River Financial Ins Agcy (CRFG). ASA, CRFG and Triad are separate companies.

Monitoring Your Portfolio

You probably already know you need to monitor your investment portfolio and update it periodically.

You probably already know you need to monitor your investment portfolio and update it periodically.

Even if you've chosen an asset allocation, market forces may quickly begin to tweak it. For example, if stock prices go up, you may eventually find yourself with a greater percentage of stocks in your portfolio than you want. If stock prices go down, you might worry that you won't be able to reach your financial goals. The same is true for bonds and other investments.

Do you have a strategy for dealing with those changes? You'll probably want to take a look at your individual investments, but you'll also want to think about your asset allocation. Just like your initial investing strategy, your game plan for fine-tuning your portfolio periodically should reflect your investing personality.

The simplest choice is to set it and forget it--to make no changes and let whatever happens happen. If you've allocated wisely and chosen good investments, you could simply sit back and do nothing. But even if you're happy with your overall returns and tell yourself, "if it's not broken, don't fix it," remember that your circumstances will change over time. Those changes may affect how well your investments match your goals, especially if they're unexpected. At a minimum, you should periodically review the reasons for your initial choices to make sure they're still valid.

Even Things Out

To bring your asset allocation back to the original percentages you set for each type of investment, you'll need to do something that may feel counterintuitive: sell some of what's working well and use that money to buy investments in other sectors that now represent less of your portfolio. Typically, you'd buy enough to bring your percentages back into alignment. This keeps what's called a "constant weighting" of the relative types of investments.

Let's look at a hypothetical illustration. If stocks have risen, a portfolio that originally included only 50% in stocks might now have 70% in equities. Rebalancing would involve selling some of the stock and using the proceeds to buy enough of other asset classes to bring the percentage of stock in the portfolio back to 50. The same would be true if stocks have dropped and now represent less of your portfolio than they should; to rebalance, you would invest in stocks until they once again reach an appropriate percentage of your portfolio. This example doesn't represent actual returns; it merely demonstrates how rebalancing works. Maintaining those relative percentages not only reminds you to take profits when a given asset class is doing well, but it also keeps your portfolio in line with your original risk tolerance.

When should you do this? One common rule of thumb is to rebalance your portfolio whenever one type of investment gets more than a certain percentage out of line--say, 5 to 10%. You could also set a regular date. For example, many people prefer tax time or the end of the year. To stick to this strategy, you'll need to be comfortable with the fact that investing is cyclical and all investments generally go up and down in value from time to time.

Forecast the future

You could adjust your mix of investments to focus on what you think will do well in the future, or to cut back on what isn't working. Unless you have an infallible crystal ball, it's a trickier strategy than constant weighting. Even if you know when to cut back on or get out of one type of investment, are you sure you'll know when to go back in?

Mix it up

You could also attempt some combination of strategies. For example, you could maintain your current asset allocation strategy with part of your portfolio. With another portion, you could try to take advantage of short-term opportunities, or test specific areas that you and your financial professional think might benefit from a more active investing approach. By monitoring your portfolio, you can always return to your original allocation.

Another possibility is to set a bottom line for your portfolio: a minimum dollar amount below which it cannot fall. If you want to explore actively managed or aggressive investments, you can do so--as long as your overall portfolio stays above your bottom line. If the portfolio's value begins to drop toward that figure, you would switch to very conservative investments that protect that baseline amount. If you want to try unfamiliar asset classes and you've got a financial cushion, this strategy allows allocation shifts while helping to protect your core portfolio.

Points to consider

  • Keep an eye on how different types of assets react to market conditions. Part of fine-tuning your game plan might involve putting part of your money into investments that behave very differently from the ones you have now. Diversification can have two benefits. Owning investments that go up when others go down might help to either lower the overall risk of your portfolio or improve your chances of achieving your target rate of return. Asset allocation and diversification don't guarantee a profit or insure against a possible loss, of course. But you owe it to your portfolio to see whether there are specialized investments that might help balance out the ones you have.
  • Be disciplined about sticking to whatever strategy you choose for monitoring your portfolio. If your game plan is to rebalance whenever your investments have been so successful that they alter your asset allocation, make sure you aren't tempted to simply coast and skip your review altogether. At a minimum, you should double-check with your financial professional if you're thinking about deviating from your strategy for maintaining your portfolio. After all, you probably had good reasons for your original decision.
  • Some investments don't fit neatly into a stocks-bonds-cash asset allocation. You'll probably need help to figure out how hedge funds, real estate, private equity, and commodities might balance the risk and returns of the rest of your portfolio. And new investment products are being introduced all the time; you may need to see if any of them meet your needs better than what you have now.

Balance the costs against the benefits of rebalancing

Don't forget that too-frequent rebalancing can have adverse tax consequences for taxable accounts. Since you'll be paying capital gains taxes if you sell a stock that has appreciated, you'll want to check on whether you've held it for at least one year. If not, you may want to consider whether the benefits of selling immediately will outweigh the higher tax rate you'll pay on short-term gains. This doesn't affect accounts such as 401(k)s or IRAs, of course. In taxable accounts, you can avoid or minimize taxes in another way. Instead of selling your portfolio winners, simply invest additional money in asset classes that have been outpaced by others. Doing so can return your portfolio to its original mix.

You'll also want to think about transaction costs; make sure any changes are cost-effective. No matter what your strategy, work with your financial professional to keep your portfolio on track.

*Disclaimer: This commentary is provided for educational purposes only. The information, analysis and opinions expressed herein reflect our judgment as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation. All investments carry a certain risk and there is no assurance that an investment will provide positive performance over any period of time. Information obtained from third party resources are believed to be reliable but not guaranteed. Past performance is not indicative of future results. Investment Advisory Services offered through Asset Strategy Advisors, LLC (ASA), a SEC Registered Investment Advisor. Securities offered through Triad Advisors, LLC, a broker-dealer, Member FINRA/SIPC. Insurance offered through Charles River Financial Ins Agcy (CRFG). ASA, CRFG and Triad are separate companies.

There is no guarantee that any investment strategy will be successful; all investing involves risk, including the possible loss of principal.