How much should a financial planner cost you?
Dear Liz: I know you advocate for fee-only financial planners, but is it worth it to pay someone 1% to 1.5% annually to “manage” your accounts? Especially if the accounts are fairly simple, such as a pension and a 401(k)? A fee of 1.5% seems high to me.
Answer: That depends on what you’re getting for your money. If you’re just getting investment management — someone to pick your investments and rebalance them occasionally to a target asset allocation — then even 1% of your portfolio value probably is too high.
You can find automated investment services, known as robo-advisors, that can manage your investments for a fee of about 0.25%. If you have a good 401(k) plan, you might have access to target date funds that manage your investments for even less.
If you’re getting comprehensive financial planning, however, then 1% is pretty standard. The planner would start by creating a financial plan with reviews of your cash flow, tax situation, insurance coverage, savings goals and estate plans and offer recommendations or referrals.
After that, the planner would meet with you regularly to update the plan and be available for any questions you might have. As you near retirement, the planner can help you make crucially important decisions about when to apply for Social Security, what Medicare coverage to choose and how to tap your savings.
You have options other than paying a fee based on your investments, however. You can find financial planners who charge by the hour at Garrett Financial Planning and those who charge monthly retainer fees at XY Planning Network.
Most people would be smart to have their homes paid off by the time they retire. But refinancing into a long-term mortgage is a good option for some.
Should you sell or bequeath a home?
Dear Liz: I am 80. I moved from my condo a number of years ago and have been renting out my condo for the income. It’s valued at $350,000. I’m writing my will, and I want to divide the condo proceeds among three people. Would it be better to have the executor sell the property and divide the proceeds three ways, or sell the condo now and put $100,000 in three separate accounts, naming each person a beneficiary on each account? It would be nice to have a nest egg.
Answer: Selling now probably would generate a tax bill that your heirs probably wouldn’t face if you bequeathed the home.
If you lived in the home at least two of the previous five years, you could exempt as much as $250,000 of home sale profit from capital gains taxes. You would have to deal with depreciation recapture, however. Rental properties typically get a tax break known as depreciation and that has to be paid back when you sell. (A tax pro can help you calculate this.)
If you bequeath the home, the property would get a new value for tax purposes on the date of your death known as a step-up in basis. All the appreciation that happened during your lifetime would never be taxed. In addition, there would be no depreciation recapture.
President Biden has proposed doing away with the step-up, but in the past such proposals haven’t gained much traction.
Taxes aren’t everything, however. The property may become more than you want to manage, or you may be able to invest the money elsewhere for a better return. Talk to the tax pro so you understand the potential tax impact, but make your decision based on what’s best for you.
The 8% annual growth is difficult get elsewhere, so planners often urge clients to tap other money first when they retire.
Social Security delay decision
Dear Liz: You always counsel people not to start taking Social Security benefits until age 70 if they can afford to do so. What about after then? Is there ever a reason to delay starting benefits once you have reached age 70? Or is each month you delay after that leaving money on the table?
Answer: Your Social Security benefit maxes out at age 70, so there’s no point in delaying your application beyond that point.
Liz Weston, Certified Financial Planner, is a personal finance columnist for NerdWallet. Questions may be sent to her at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form at asklizweston.com.