Since the establishment of our firm, our founding philosophy has been to focus on both the head and the heart. What does this mean? For us at Wellspring, it means that we strive to focus not only on the numbers (the head) involved in managing wealth, but also to focus on the emotional issues (the heart) that surround wealth management with our families. In other words, “preparing the family for the money is just as hard as preparing the money for the family”.

Family Engagement: Moving From Fear-Based to Wish-Based Conversations

On this episode of the Driving Change Podcast, Michael Novak shares his expertise in understanding the communication required to pass on family values and wealth through generations. He emphasizes the importance of transparency and communication within families, regardless of their wealth. Novak discusses different generations’ challenges and the need to address them to ensure successful wealth transfer. He also introduces two exercises that can help families improve communication and identify shared values: a communication exercise that helps family members understand their communication styles and a values exercise that encourages families to discuss and prioritize their core values. He discusses emotional intelligence and the soft skills required to navigate the complexities of family dynamics and values, and emphasizes the significance of communication, vulnerability, and intentional conversations within families. The conversation also touches on the balance between success and significance. The conversation ends with Michael highlighting the role of philanthropy in creating a meaningful legacy.

Takeaways

• Transparency and communication are crucial in passing on family values and wealth through generations.
• The challenges faced by different generations must be addressed to ensure successful wealth transfer.
• Two exercises can help families improve communication and identify shared values: a communication exercise that helps family members understand their communication styles and a values exercise that encourages families to discuss and prioritize their core values. Legacy planning involves more than just financial considerations; it requires emotional intelligence and the ability to navigate family dynamics.
• Communication and intentional conversations are crucial for families to define their values and create a meaningful legacy.
• Success should be defined on a personal level, beyond financial achievements, and significance is the outcome of living according to those values.
• Philanthropy plays a significant role in creating a lasting legacy and giving back to the community.
• Organizations like Bluecoats provide support to families of first responders who have lost their lives in the line of duty.

Philanthropy: Creating a Lasting Legacy

In the grand symphony of progress, where each new technological note is sharper than the last, we find ourselves in an era that’s less “dial-up tone” and more “quantum leap.” Yes, we’ve come a long way from the days when a floppy disk was the epitome of cutting-edge storage (and even then, ‘floppy’ felt like a generous description). In this whimsical journey through the rabbit hole of tech evolution, buckle up as we navigate through the realms of progress, where even your grandma’s refrigerator is now smarter than your college roommate (no offense to Dave, but his idea of a smart fridge was one that could hold a six-pack without freezing the eggs). So, dear reader, grab your gadgets, charge your wireless earbuds, and let’s dive into the dazzling, sometimes bewildering, and always entertaining world of technological advancement. Welcome to the future – where even our toasters have touchscreens, and your thermostat is likely judging your Netflix choices.

Full disclosure: ChatGPT wrote that first paragraph. All I did was prompt it by typing “Write a witty introduction about the advancement of technology.” It didn’t quite nail my humor in prose form, but maybe in time generative AI will get better at that as well.

The Impact of Technology
Technology has made an indelible impact on the experience of human existence and continues to do so with each iteration of change and improvement. The printing press was born in 1440 by Johannes Gutenberg, allowing the written word to be more widely accessible. The spoken word then took a large leap forward in 1876 with Alexander Graham Bell’s invention of the telephone.

Fast forward only a few generations, the personal computer arrived in the 1970s. The mobile phone came in the 1980s, and the world wide web in the 1990s. What happens when you combine these individual advancements into one “device” that can fit in the pocket of a pair of pants? It really does feel like one plus one, plus one equals an infinite possibility set, especially when you consider¹:

• 81.6% of Americans, totaling 270 million people, own a smartphone as of 2023.
• There are roughly 6.92 billion smartphone users across the world (or 86.29% of the global population) as of 2023.
• The average American spends 5 hours and 24 minutes on their mobile device each day.
• Americans check their phones on average 96 times per day, or once every ten minutes.
• 59.16% of website traffic comes from mobile devices, as of 2022.

As we highlighted in our most recent Wellspring Portfolio and Market Insights slide deck, investors have been betting heavily on tech during 2023 – with the focus squarely on the “magnificent seven” stocks leading nearly the entire S&P 500.

Source: MarketDesk Research
Disclosures: Data is based on constituents of the S&P 500. The 7 Tech Titans include Apple (APPL), Microsoft (MSFT), Alphabet (GOOGL), Amazon (AMZN), Nvidia (NVDA), Tesla (TSLA), and Meta (META). Latest available data as of 9/30/2023.

The performance chart on the left separates the S&P 500 into two groups:

1. The seven tech titans, which includes the leading tech firms exposed to the AI theme, and
2. The remaining companies in the S&P 500, which we refer to as the “S&P 493”.

The seven tech titans, represented by the dark blue line, have produced an average return of 88% in 2023 as investors chase the Artificial Intelligence theme. In contrast, the remaining S&P 493 stocks have produced a market cap-weighted return of only 1% (i.e. when the seven tech titans are excluded).

What is Artificial Intelligence and how does it work?²
Artificial intelligence (AI) is the simulation of human intelligence processes by machines, especially computer systems. Specific applications of AI include expert systems, natural language processing, speech recognition, and machine vision. AI systems work by ingesting large amounts of labeled training data, analyzing the data for correlations and patterns, and using these patterns to make predictions about future states. New, rapidly improving generative AI techniques can create realistic text, images, music, and other media. AI programming focuses on cognitive skills that include the following:

• Learning – This aspect of AI programming focuses on acquiring data and creating rules for how to turn it into actionable information. The rules, which are called algorithms, provide computing devices with step-by-step instructions for how to complete a specific task.
• Reasoning – This aspect of AI programming focuses on choosing the right algorithm to reach a desired outcome.
• Self-correction – This aspect of AI programming is designed to continually fine-tune algorithms, and ensure they provide the most accurate results possible.
• Creativity – This aspect of AI uses neural networks, rules-based systems, statistical methods, and other AI techniques to generate new images, new text, new music and new ideas.

Will AI change industries?
A common question (and fear) is whether AI will forever change certain industries and eliminate jobs. According to a working paper by Harvard economist James Bessen, only one of the 270 detailed occupations listed in the 1950 US Census has since been eliminated by automation. The one exception: an elevator operator. A McKinsey study published in 2017 titled “Harnessing Automation for a Future that Works” indicated very few jobs can be fully automated.

I asked ChatGPT “Can AI replace my family office?”, to which it responded:

While AI technology has made significant strides in various fields, including finance and wealth management, it’s important to note that the role of a family office often involves a highly personalized and nuanced set of services. As of my last knowledge update in January 2022, AI has not reached a point where it can fully replace the functions and emotional intelligence provided by a family office.

ChatGPT offers several reasons why AI is unlikely to replace a family office:

• Personalized relationships – Family offices typically build long-term relationships with their clients, understanding not just their financial goals but also their family dynamics, values, and unique needs. AI lacks the emotional intelligence and interpersonal skills required to navigate these complex relationships.
• Holistic planning – Family offices often provide comprehensive financial planning services that go beyond simple investment strategies. They may handle estate planning, tax optimization, philanthropy, and more. While AI can assist in certain aspects, it may struggle with the holistic and interconnected nature of these services.
• Decision-making in complex situations – Many decisions within a family office context involve a deep understanding of the family’s dynamics and long-term goals. AI may lack the intuition and contextual understanding required to make decisions in highly complex or emotionally charged situations.
• Adaptability & creativity – Family offices often need to adapt to changing circumstances and provide creative solutions to unique challenges. AI, while excellent at processing data and providing insights, may struggle with the adaptability and creativity required in certain situations.
• Trust & confidentiality – Trust is a crucial element in the relationship between a family office and its clients. While AI can offer secure data handling, the personal touch and trust-building abilities of human professionals are often considered irreplaceable.
• Navigating legal & regulatory frameworks – Family offices must navigate complex legal and regulatory landscapes. Human professionals, with their ability to interpret and apply nuanced regulations, currently outperform AI in this area.
• Handling unpredictable events – Family offices often deal with unforeseen events, such as sudden changes in the market, family emergencies, or geopolitical shifts. The adaptability and real-time decision-making required in such situations are areas where AI may currently fall short.

No where does ChatGPT say that it can’t help create a budget (it can), or that it can’t explain an income tax question (it can), or that it can’t teach you about certain investment (it can). What it does say is that the human component of the family office (the relationship building, the understanding of family dynamics, and technical recommendations based on contextual clues of those family dynamics) cannot currently be replaced by AI.

It’s essential to recognize that AI can be a valuable tool to augment the capabilities of a family office, enhancing data analysis, risk management, and operational efficiency. However, human touch, emotional intelligence, and the ability to navigate complex personal and financial situations are aspects where AI has limitations. As technology continues to advance, the relationship between AI and family offices may evolve, but complete replacement seems unlikely in the near term.

Many RIAs say that they offer “family office services”, which is another way of saying they offer decoupled solutions to certain parts of the holistic financial planning process. I’d argue that ChatGPT and other technologies are starting to do that as well – and they will continue to learn how to do those things better, faster, and more efficiently moving forward. Will AI technology take over the financial planning industry? I don’t think it will take it over, but it could take certain tasks over, and thus it will likely change how our industry operates.

It is imperative, therefore, for financial professionals to determine how to utilize these technological advances in their planning practices. At Wellspring, we will always look to evolve “what we do”. But equally, (or I would argue, more importantly), we will continue to differentiate through “how we do it”; focusing on the parts of our job that may never be fully automated: the application of emotional intelligence, family governance, personalized relationships, and holistic planning.

We appreciate the confidence you have placed in Wellspring to be your trusted advisor. Please feel free to contact us at any time to discuss changes to your financial situation.

Sources
(1) Zippia. “20 Vital Smartphone Usage Statistics [2023]: Facts, Data, and Trends On Mobile Use In The U.S.” Zippia.com. Apr. 3, 2023, https://www.zippia.com/advice/smartphone-usage-statistics
(2) Tech Target. Definition artificial intelligence (AI) techtarget.com. Nov. 2023, https://www.techtarget.com/searchenterpriseai/definition/AI-Artificial-Intelligence

Author: Mac McLaughlin, CFP®, Senior Wealth Advisor, Managing Director, Wellspring Financial Advisors, LLC
Information as of December 21, 2023

Investing involves risks, including the possible loss of principal and fluctuation of value. Past performance is no guarantee of future results.

This communication is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date noted above and may change as subsequent conditions vary. The information and opinions contained in this letter are derived from proprietary and nonproprietary sources deemed by Wellspring Financial Advisors, LLC (“Wellspring”), to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by Wellspring, its principals, employees, agents, or affiliates. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, and forecasts. There is no guarantee that any forecasts made will materialize. Reliance upon information in this post is at the sole discretion of the reader.

Please consult with your Wellspring financial advisor to ensure that any contemplated transaction in any securities align with your overall investment goals, objectives, and tolerance for risk. In addition, please note that Wellspring, may have positions in one or more securities that are recommended to Wellspring clients. Please note that Wellspring, including its principals, employees, agents, affiliates, and advisory clients may take positions or effect transactions contrary to the views expressed in this or future communications based upon individual or firm circumstances. Any decision to effect transactions in securities should be balanced against the potential conflict of interest that Wellspring has by virtue of its investment in one or more of these securities.

Will AI Take Over the Financial Planning Industry?

This article provides a range of insights into the complexities of Social Security and Medicare, focusing on when and how to enroll, strategies to maximize benefits, and the potential future challenges of these programs. It discusses key concepts such as the “Older Spouse Strategy” and the “Higher-Earner Deferral Strategy” for optimizing Social Security benefits. Additionally, it highlights the importance of considering individual circumstances and financial needs when making enrollment decisions. The article also addresses Medicare, including enrollment periods and the importance of understanding healthcare coverage options. It emphasizes the significance of income-related factors in determining Medicare costs and the need for financial planning in retirement.

1. Social Security is a government agency established in 1935 to provide income to retired workers, aiming to promote economic security. Eligibility for Social Security benefits is based on work records, requiring ten or more years of work and Social Security tax contributions.
2. The age to start receiving Social Security benefits varies, with early initiation at 62 resulting in reduced payments, and delaying benefits until 70 increases them.
3. Strategies to maximize Social Security benefits include the “Older Spouse Strategy” and the “Higher-Earner Deferral” strategy, considering factors like financial needs and longevity.
4. Medicare is a government-provided health insurance program for individuals aged 65 and older, with enrollment periods based on various factors. The annual open enrollment period allows beneficiaries to make changes to their Medicare coverage. Medicare has different parts, and beneficiaries can make changes during open enrollment from October 15 to December 7th.

Costs for Medicare vary, including Part A and Part B premiums, with income-related adjustments and considerations for supplemental plans and prescription drug plans. High-income individuals may face increased Medicare premiums due to the Income-Related Monthly Adjustment Amount (IRMAA).

A few years ago, my mother called me, saying “I am turning 62 – how do I apply for Medicare?” I quickly and politely explained that at age 62, you can enroll early into Social Security, but Medicare will kick in at age 65. Needless to say, she realized retirement may need to wait for three more years and was grateful someone could help her understand the differences between the two systems.  This conversation and confusion is common among the Baby Boomers heading into this phase of their lives.

As you will read below, 62, 65, 66.7 and 70 are ages used in relation to Social Security and Medicare.

In this article, we will explain when someone can enroll in Social Security and Medicare coverage and summarize the differences between each system. As you approach these milestones, it can be daunting from an emotional standpoint as you transition into the next phase of your life and from a financial standpoint, as these enrollments and elections can significantly impact your post-retirement needs.

What is Social Security and who is eligible for benefits? 
Social Security is a governmental agency that provides retired workers a continuing income after retirement. It was signed into law in 1935 as part of the New Deal and the goal was to promote the economic Security of the nation’s people. What-is-Social-Security.pdf

You can be eligible for benefits on your work record if you worked and paid Social Security taxes for ten years or more. Or you can qualify for benefits based on your current or former spouse’s work record. Plus, your children may be eligible for a benefit if they are under age 18, age 18 or 19 and attend elementary or high school full time or are of any age and have a disability. (Source: https://www.ssa.gov/retirement/eligibility

When can someone start receiving benefits?
Initiating benefits can occur between ages 62 and 70. Starting early reduces benefits but allows for a longer accumulation period while delaying increases benefits but shortens the accumulation phase. Below are some considerations for when to start enrollment:

• Claiming Early: Initiating benefits at 62 results in a roughly 30% reduction in monthly payments compared to waiting for full retirement age (66 or 67, depending on the birth year). Note that if you continue to work between the ages of 62 and full retirement age (“FRA”), your benefits will be reduced even further. The benefit is reduced by $1 for each $2 you earn above the annual limit (in 2023, the limit is $21,240). How-Work-Affects-Your-Benefits.pdf
• Delaying Benefits: Each year delayed after full retirement age until 70 increases benefits by 8%. This offers a hedge against longevity risk and can be a significant upside for those with a longer life expectancy.

Everyone’s situation is different and will require understanding various factors when choosing the age to enroll. The factors include but are not limited to health and life expectancy, financial needs, and other sources of retirement income.

What are strategies to maximize benefits?
The Older Spouse Strategy
One of the key decisions that individuals face when planning for retirement is when to claim their Social Security benefits. This decision becomes even more crucial for married couples, as it can significantly impact their overall retirement income. One strategy that is often recommended in certain situations is the “Older Spouse Strategy.” This strategy involves the older spouse waiting until age 70 to claim their Social Security benefits to maximize the benefits available to the younger spouse after the older spouse’s demise.
Let’s consider an example to understand how the “Older Spouse Strategy” works. Suppose John is 65 years old and his wife, Sarah, is 60 years old. John has a higher earning history and is eligible for a higher Social Security benefit. If John were to claim his benefits at 65, he would receive a reduced benefit amount. However, John will receive the maximum benefit if he waits until he is 70 to claim his benefits.

Now, let’s fast forward to the unfortunate event of John’s demise. As a surviving spouse, Sarah would be eligible to receive survivor benefits based on John’s earnings record. The survivor benefit is equal to the amount that John received at the time of his death, or the maximum benefit amount he would have received at 70. By waiting until 70 to claim his benefits, John has effectively increased the survivor benefit that Sarah will receive.

The Older Spouse Strategy offers several advantages for married couples. Here are some key benefits:

1. Maximizing benefits: By delaying the older spouse’s claim until 70, the couple can maximize their overall Social Security benefits. This can provide them with a higher income during their retirement years.
2. Protecting the surviving spouse: The strategy ensures that the surviving spouse, who is typically younger, can receive a higher survivor benefit for a longer duration. This can be particularly beneficial if the surviving spouse has a longer life expectancy.
3. Increasing financial Security: By maximizing their Social Security benefits, couples can enhance their financial Security in retirement. The higher benefits can help cover essential expenses and provide a buffer against unexpected costs.

The Older Spouse Strategy can be a valuable approach for married couples looking to maximize their Social Security benefits and provide financial Security for the surviving spouse. By waiting until age 70 to claim benefits, the older spouse can ensure that the younger spouse receives a higher survivor benefit in the event of their demise. However, carefully evaluating individual circumstances and seeking professional advice before implementing this strategy is crucial. Making an informed decision can help couples optimize their retirement income and achieve their financial goals.

Higher-Earner Deferral strategy
The “Higher-Earner Deferral” strategy is based on the fact that delaying Social Security benefits beyond the full retirement age can increase monthly benefits. Each year benefits are delayed, the monthly benefit amount can increase by a certain percentage, known as the Delayed Retirement Credits (DRCs). Waiting until age 70 can increase your benefits by up to 32%.

In the context of couples, the Higher-Earner Deferral strategy focuses on the higher-earning spouse delaying their benefits until age 70, while the lower-earning spouse claims their benefits at their full retirement age, or even earlier if necessary. By deferring the benefits of the higher-earning spouse, the couple can ensure that the surviving spouse will receive the highest possible benefit amount in the event of the higher-earning spouse’s passing.

Advantages of the Higher-Earner Deferral Strategy:

1. Maximizing Lifetime Benefits – By deferring benefits until age 70, the higher-earning spouse can significantly increase their monthly benefits. This can result in a higher total payout over their lifetime, especially if they have a longer life expectancy. The surviving spouse can then claim the higher benefit amount, providing a more substantial income stream throughout their retirement.
2. Protecting the Surviving Spouse – The Higher-Earner Deferral strategy protects the surviving spouse’s financial well-being. Since the surviving spouse is entitled to the higher of the two benefit amounts, by maximizing the benefits of the higher-earning spouse, the surviving spouse can receive a larger benefit, potentially providing them greater financial Security.
3. Tax Planning Opportunities – Delaying Social Security benefits can also have tax planning benefits. By deferring benefits until age 70, retirees may have a lower taxable income during earlier retirement years. This can lower tax liabilities and enable couples to use other tax-saving strategies.

While the Higher-Earner Deferral strategy can be advantageous, there are several considerations and limitations to consider.

1. Financial Needs and Longevity – Before implementing this strategy, it is important to assess your financial needs and consider your life expectancy. If the higher-earning spouse has a shorter life expectancy or the couple requires the additional income earlier, claiming benefits earlier may be more beneficial.
2. Delayed Retirement Credits Stop at Age 70 – It’s important to note that delayed retirement credits stop accumulating once you reach age 70. Therefore, there is no financial advantage to delaying benefits beyond this age. If the higher-earning spouse has already reached age 70, there may be other options than employing this strategy.
3. Individual Circumstances – Each couple’s financial situation is unique, and the Higher-Earner Deferral strategy may not be the best approach for everyone. Factors such as other sources of income, health conditions, and financial goals should be taken into account when determining the optimal Social Security claiming strategy.

The Higher-Earner Deferral strategy is a powerful approach couples can utilize to maximize their Social Security benefits. By deferring benefits until age 70 for the higher-earning spouse, couples can ensure a higher monthly benefit for the surviving spouse and potentially increase their total lifetime benefits. However, it’s crucial to carefully evaluate individual circumstances before making a decision.

What does the future hold for Social Security?
The potential depletion of the Social Security Trust Fund by 2033 highlights the importance of strategic planning when it comes to Social Security benefits. Individuals and couples must carefully consider various factors, especially considering the possibility of benefit reductions. A recent analysis indicates that, without policy adjustments, a typical newly retired dual-income couple could face an annual reduction in benefits of approximately $17,400 by 2033. While legislative measures can alter the trajectory of the Trust Fund’s solvency, adopting a conservative approach and planning for uncertainties is a prudent course of action.

What is Medicare?
Medicare is a government-provided health insurance program that offers coverage to individuals who are 65 years or older. It is designed to help older adults and certain individuals with disabilities access medical services and reduce the financial burden of healthcare expenses. While Medicare provides essential coverage, it is important to understand the factors that can influence the cost of premiums and the availability of supplemental coverage.

It is important for individuals considering Medicare to research and compare the available plans and supplemental coverages in their county. This can help them understand the premiums associated with different options and choose a plan that best suits their healthcare needs and budget. The Medicare website (medicare.gov) provides tools and resources to help individuals navigate the available options and make informed decisions.

When can you enroll in Medicare?
Enrollment in Medicare can commence three months prior to your 65th birthday, during the month of your 65th birthday, and continues for three months following your 65th birthday. Failure to enroll during this period, and if you lack coverage through an employer, may result in a lifelong late enrollment penalty applied to your premiums. If you continue working past the age of 65 for an employer with more than 20 employees, you have the option to delay signing up for Medicare Part B (more details on Medicare parts will be provided later). Your employer-provided insurance becomes the primary payer, with Medicare as the secondary payer. However, if your employer has fewer than 20 employees, you may need to enroll in both Parts A and B when you turn 65, with Medicare as the primary payer. Different rules apply to those who are self-employed or have Medicaid or Marketplace insurance. In such cases, it is advisable to seek guidance from a qualified expert.
Source: https://www.medicare.gov/basics/get-started-with-medicare/medicare-basics/working-past-65

What are the “Parts” of Medicare?

Once you enroll in Original Medicare or a Medicare Advantage Plan, you have the opportunity to join, drop, or switch to another plan annually during the open enrollment period. Open enrollment commences on October 15 and concludes on December 7. This period provides beneficiaries with the chance to make adjustments to their Medicare coverage to better align with their healthcare needs.
Medicare_Inforgraphic_Choosing-your-own-path.pdf

During the open enrollment period, if you initially enrolled in Original Medicare, you have the option to switch to a Medicare Advantage Plan. However, if you are already enrolled in a Medicare Advantage Plan and wish to return to Original Medicare with Supplemental plans, this change can only be made during the Medicare Advantage Open Enrollment period, which runs from January 1 to March 31. It’s essential for beneficiaries to be aware of these enrollment periods to make informed decisions about their Medicare coverage.
Source: https://www.medicare.gov/basics/get-started-with-medicare/get-more-coverage/joining-a-plan

When enrolling in Original Medicare plans with supplemental coverage, it’s crucial to have answers to the following questions to make informed choices about your healthcare coverage:

1. What hospital system do you use? Understanding which hospital systems are in-network or preferred can help you access the healthcare facilities that best suit your needs.
2. Do you have a preferred provider? If you have specific healthcare providers you prefer to see, knowing if they are part of the plan’s network is important to ensure continuity of care.
3. Will you need coverage in multiple states? If you travel frequently or split your time between different states, you should consider coverage options that provide benefits in multiple locations.
4. What prescriptions do you take? How are they delivered? Listing your current prescriptions and understanding how they are covered, including copayments or mail-order options, can help you choose a plan that meets your medication needs.

Having answers to these questions can guide you in selecting the most suitable Medicare plan and supplemental coverage for your unique healthcare requirements.

The costs for Medicare can vary depending on individual circumstances. Here’s an overview of the typical costs associated with Medicare:
Medicare Part A:

• For those who qualify for “Premium-free Part A” (usually based on work history), there is no monthly premium.
• If you don’t qualify for premium-free Part A, the monthly premium can be either $278 or $506 in 2023, depending on your work history and Medicare tax payments.

Medicare Part B:

• The standard monthly premium for Medicare Part B in 2023 is $164.90 per month.
• However, some individuals may pay higher premiums based on their income through the Income-Related Monthly Adjustment Amount (IRMAA). The IRMAA affects individuals with higher incomes.

It’s important to note that while Part A covers hospital services and Part B covers medical services and doctor visits, they do not cover all healthcare expenses. Many individuals also choose to enroll in additional coverage, such as Medicare Advantage Plans (Part C) and Medicare Prescription Drug Plans (Part D), which come with their own premiums and costs.

Supplemental plans like Parts G and F, as well as Part D plans, can have premiums that vary depending on the insurance carrier and your individual prescription drug needs. To get accurate quotes for these plans tailored to your specific circumstances, it’s advisable to consult with a Medicare expert.

Additionally, it’s essential for high-income taxpayers to be aware of the Income-Related Monthly Adjustment Amount (IRMAA) mentioned earlier. IRMAA can result in higher Medicare Part B and Part D premiums if your income exceeds certain thresholds. Staying informed about these adjustments and planning accordingly is crucial for individuals with higher incomes.

It’s also important to be aware of the income thresholds that can trigger higher premiums for Medicare Part B and prescription drug coverage. These thresholds can significantly impact your annual healthcare costs, so understanding where you fall in terms of income is essential for financial planning in retirement.

For those who file income taxes as “married, filing jointly” with a total adjusted gross income plus tax-exempt interest income of $194,000 or more, or for individuals who file individual tax returns or joint tax returns as a married couple, the specific income-related monthly adjustment amounts (IRMAA) mentioned in the chart will apply. These IRMAA amounts can lead to higher Medicare premiums, so individuals falling into these income categories should be prepared for potential increases in their healthcare expenses. Proper financial planning can help individuals optimize their retirement finances and ensure they are prepared for potential premium increases based on their income.

If you’re single and filed an individual tax return, or married and filed a joint tax return, the following chart applies to you:

https://www.ssa.gov/benefits/medicare/medicare-premiums.html

Author: Katie Madzsar, CFP®, AEP®, Senior Wealth Advisor, Managing Director, Wellspring Financial Advisors, LLC
Information as of September 20, 2023

Any suggestions contained herein are general, and do not take into account an individual’s or entity’s specific circumstances or applicable governing law, which may vary from jurisdiction to jurisdiction and be subject to change. Distribution hereof does not constitute legal, tax, accounting, investment, or other professional advice. Recipients should consult their professional advisors prior to acting on the information set forth herein.

Navigating the Crossroads of Retirement

As we celebrate Mother’s Day this weekend, I reflect on my late mother and the lessons she taught me and my older sister, many of them about money. I learned to appreciate finance from her, and while there were several lessons over time dealing with money, the one that stands out the most is the lesson of “The Ledger”.

Just a moment on my mother. She was an incredibly hard worker and a major role model for me. She lost her father early on in life and started working at age sixteen to help support her family. She worked at the same company until she retired in her 50s, in part due to her condition with MS, and later in life, dementia. Over those 40+ years she served many roles in that company: receptionist, secretary, bookkeeper, office manager and the assistant to the President of the company. Sadly, we lost mom in February of 2021, just days before her 76th birthday. I miss her still.

Growing up, I had my own bank account. Well, it wasn’t an actual account with a bank – it was more of an account with the “Bank of Mom”.  She called it The Ledger.  When we received a gift of cash for a birthday or holiday, we would give it to her, and she would put it in the account. If we ever needed money, for example $2.50 for going to the movies (Yes, it really was that inexpensive back then – more on inflation later), she would deduct that from the account balance and record that in The Ledger.  If The Ledger balance ever went negative, that was the amount we would need to pay her back. I was only ten years old at the time The Ledger started, but I learned some hard lessons over the years, like the perils of deficit spending and compounding interest.

As a country, we have our own “Ledger” of sorts– the national deficit. We also have some real issues of deficit spending with our annual federal budget. And not to make matters worse, but as inflation has gotten higher and interest rates have increased over the last two years, so too has the cost to pay for our borrowing.

As you can see from the chart below, the U.S. really hasn’t been too good with spending over the past decade and especially over the last several years. In part some of this was post-pandemic spending from COVID where we needed to help get our economy back on its feet, get people back to work and our country out of a short-lived, but very severe recession. The current debt level is almost 100% of our GDP, and if we keep it up, will be close to 120% by 2023. While my mother loved me very much, I am not sure she would have allowed me to get that deep into debt on my ledger.

Well, if we know we have been spending too much and see this debt issue becoming worse in the future, we must be getting better and starting to spend less, right? Nope. The chart below reflects our annual budget for this year. All you need to do is look at the borrowing portion of how we source our financing to realize that almost a quarter of our annual spending comes from borrowing more. How can we do that? How much longer can we afford to keep this up? Again, not sure mom would let me keep doing that year after year.

While inflation has been all the talk the last couple of years, as you can see by the chart on the following page, it really hasn’t been an issue for us since the late 1970s and early 80s. However, with all our spending, inflation has really increased as well – reaching a high of 9% in 2022. Last week we got some good news that the inflation rate is now around 5% (year over year), but still much higher than the Fed would like it to be, which is closer to 2%. We have some real progress to make in order to bring it down, and the fears are real that inflation will remain much higher than both the Fed and consumers would like.

The good news for me was that mom never really charged a high interest rate on the ledger balance back in the late 80s/early 90s – it was always around 1-2%.  Cheap back then, and frankly by today’s standards as well. She was such a saint.

Looking back to the second chart, what happens to our annual deficit when the cost of servicing our annual debt increases due to interest rates?  It’s one thing when you are paying 2% on debt, but what happens when that doubles – now we are paying twice as much just to cover the interest cost. If we are already using debt to pay for our annual budget, how do we cover the increased shortfall? Do we borrow even more? Not a good answer.

Clearly, we have some serious financial issues facing our country. In the coming weeks we need to solve the near-term issue with our debt ceiling, not to mention the much more difficult long-term issue of spending more than we make as a county. We have kicked that can down the road for far too long, and some hard decisions need to be made soon.

I wish my mom was still here – maybe she could help us fix these problems. She fixed so many other things for me growing up. She was the best mom I could ask for.

To all the children out there, please remember to acknowledge all the hard work your mother does for you, and all the lessons she teaches you. She works hard so many days of the year, she deserves at least one day for herself. Remind her of that, and how much you appreciate her. It’s never too often to tell her what she means to you. To all the moms, Happy Mother’s Day!

Author: Michael Novak, CPA/PFS, AEP​^®, President & CEO, Wellspring Financial Advisors, LLC
Information as of May 14, 2023

Any suggestions contained herein are general, and do not take into account an individual’s or entity’s specific circumstances or applicable governing law, which may vary from jurisdiction to jurisdiction and be subject to change. Distribution hereof does not constitute legal, tax, accounting, investment, or other professional advice. Recipients should consult their professional advisors prior to acting on the information set forth herein.

Money Lessons From My Mom

Financial capacity, the ability to manage your finances in your own best interest, involves everything from paying bills to reading a brokerage statement and weighing an investment’s potential risks and rewards. And preparing for the potential decline of that capacity is as important as planning for long-term-care expenses or keeping your estate plan up to date. Declining financial abilities may not only result in a few unpaid bills but can also leave you vulnerable to financial abuse and exploitation, drain your nest egg, and place heavy burdens on your loved ones.

Nobody likes to think about financial decision-making ability declining with age, yet “it’s extremely common. In fact, I might say it’s inevitable,” says Daniel Marson, a neurology professor at the University of Alabama at Birmingham. While many people assume they’ll only need help managing their finances if they develop dementia, the normal aging process can adversely affect faculties such as short-term memory and “fluid” intelligence, or the ability to process new information, Marson says. “Just the fact that you’re 70 or 80 years old may be impacting your financial skills,” he says, “quite apart from the fact of whether you have Alzheimer’s or any cognitive disorder of aging.”

However, many people remain perfectly capable of managing their own money as they age. According to a study by researchers at University of California Riverside and Columbia University, credit scores increase by an average of 13 points for each decade lived among people ages 18 to 86.

Yet, all older adults should consider organizing and simplifying their finances to make their money easier to manage at an advanced age and prepare for the possibility that someone else may need to step in to help.

As the population ages, regulators, lawyers, doctors and financial advisors are becoming more vigilant (and sometimes the first to notice) signs of diminished financial capacity. More financial advisors are also becoming successor agents within clients’ financial powers of attorney to be able to speak and act on behalf of their finances, if needed. The North American Securities Administrators Association approved a model rule that requires financial advisors to report suspected financial exploitation of seniors to the state securities regulator and adult protective services. And the Investor Protection Trust, a nonprofit investor education organization, is training doctors and lawyers to recognize when older people may be vulnerable to financial abuse.

But seniors themselves, along with family members, close friends, and a trusted advisor, may be best positioned to recognize signs of diminishing capacity. And simply watching for red flags isn’t enough. It’s best to start planning for possible problems before warning signs appear. When planning for this scenario, it’s best to 1) simplify your finances (where you can), 2) determine, in advance, who will be the “quarterback” of your finances, and 3) have appropriate estate documents in place and conversations with those individuals named in your documents.

Keep It Simple
Your first step: Organize and simplify your finances. Complex investments and scattered bank, brokerage, and retirement accounts raise the odds that you, or someone acting on your behalf, will make costly financial mistakes. Spreading your assets across many different accounts also makes it tougher for financial institutions to detect fraud in your accounts.

Take a hard look at each of your accounts and challenge yourself to describe its purpose in one sentence. Is the account meant to generate income to help cover daily living expenses? Is it an emergency fund? Or is it a legacy you plan to leave to your child? Consider writing that sentence at the top of each of your most recent account statements. That can help you, and anyone who might later help manage your money, think about how to allocate and rebalance those accounts.

To further simplify your financial life, consider automating bill payments and arranging for direct deposit of regular income sources, such as Social Security. To minimize solicitations and reduce the risk of fraud, you should also consider adding your telephone number to the National Do Not Call Registry by going to www.donotcall.gov or calling 888-382-1222. While scammers could still call your phone number, this could reduce the number of calls you receive from telemarketers and solicitors.

Once you’ve simplified your finances, we recommend making a list of all your assets along with key contacts such as financial advisors, accountants, insurance agents and lawyers. Such a list can be a “lifesaver” after someone has lost capacity and you have no idea how many accounts they have, who their attorney is or where their tax documents are.

A Helping Hand
Next, consider whom you might trust with all the information you’ve just organized. Which family members, friends or professionals might help you manage your money as you age?

One place to start: If your spouse generally steers clear of all things financial, get them involved now. Financial novices who are suddenly forced to take over household money management – perhaps because a spouse has become incapacitated – are particularly vulnerable to making costly mistakes, according to a recent study by the Center for Retirement Research at Boston College. Make sure your spouse knows how to handle things in case something happens to you.

Next, consider getting another trusted family member or friend involved in your finances. This doesn’t mean turning over the keys to your financial life. Instead, you’re helping that person learn how you manage your money, in case they need to take some control later on, and getting another set of eyes to help you watch for unpaid bills or suspicious activity.

Planning Ahead
As family members begin to help informally, it may be tempting to add a relative’s name to your bank account so that person can help pay the bills. That may work fine as a short-term solution, but it shouldn’t be your primary long-term plan for dealing with a potential loss of financial capacity. Joint accounts can easily lead to disputes over misuse of funds, gift tax considerations, inheritance and other issues. If you add your daughter’s name to your bank account, for example, that account will go to her when you die, even if you intended to split your money evenly among your children.

Instead of relying on such ad hoc arrangements, all seniors should have a durable power of attorney for finances. With this document, you designate someone you trust, known as your “agent,” to manage your finances. The “durable” part is key – that means the power of attorney remains in effect even if you become incapacitated. While you have capacity, you can always change your agent or revoke the document completely.

It’s critical to not only choose an agent (and backup agents) whom you trust completely, but also to work with an estate attorney when preparing the document.

To minimize the risk of abuse, the power of attorney can limit the agent’s ability to make gifts or transfer assets to a certain dollar amount and restrict changes in life insurance and retirement plan beneficiaries.

The more you trust your agent, however, the more flexibility you’ll have to customize the power of attorney to meet your needs. Seniors concerned about planning for long-term-care costs, for example, might grant the agent powers such as the ability to transfer assets to a trust. If you’re facing nursing-home costs of $100,000 a year and hoping to rely on Medicaid while preserving some assets for your spouse’s living expenses, a power of attorney that grants such broader authority may be critical on continue to qualify for Medicaid.

The time to take all these planning steps, of course, is well before you have problems managing your money.

With our “one phone call approach”, Wellspring has acted as the quarterback for clients in this capacity by offering bill pay services, taking notice if there is declined mental and financial capacity of clients, simplifying client assets (where appropriate and possible), tracking their net worth and advising on purpose of all assets and accounts, and coordinating the appropriate estate documents for future planning purposes.

No matter where they are in the planning process, seniors, their advisors, and their loved ones should keep watch for signs that financial capacity is slipping. That may be a signal to accelerate your planning or reach out to trusted family members or your Wellspring advisor for help.

There are at least six key warning signs to watch for: Is it taking Dad/Mom much longer than it did previously to pay the bills or perform other financial tasks? Is he/she having trouble understanding visual financial information, such as reading his/her bank statement? Is he/she having trouble doing mental math, such as figuring the tip in a restaurant? Is there a loss of conceptual understanding, such as confusion about why he/she needs to make his/her mortgage payments? Is his/her once-tidy desk now stacked with old, unopened mail? And is he/she investing more aggressively than he/she did in the past, focusing on the potential benefits of an investment rather than the risks?

Remember, these issues are only warning signs if they represent a change from the person’s prior behavior. But once you start seeing warning signs, don’t ignore them because usually, bad things happen in their wake. As always, please do not hesitate to reach out with any questions or concerns regarding your unique situation.

Copyright © 2023 The Kiplinger Washington Editors. All rights reserved. Distributed by Financial Media Exchange
Additional Contributions: Bill Ambrogio, CFP^®, Senior Wealth Advisor, Managing Director, Wellspring Financial Advisors, LLC
Information as of April 19, 2023

Any suggestions contained herein are general, and do not take into account an individual’s or entity’s specific circumstances or applicable governing law, which may vary from jurisdiction to jurisdiction and be subject to change. Distribution hereof does not constitute legal, tax, accounting, investment, or other professional advice. Recipients should consult their professional advisors prior to acting on the information set forth herein.

How to Help Aging Parents

Family Banks offer a range of benefits for families looking to manage their wealth and investments more effectively. By creating a centralized platform for managing financial resources, families can work together to build long-term financial security and ensure their wealth is preserved and passed down to future generations. Family Banks also provide a way to strengthen family ties and communication around money, which can be beneficial for maintaining family harmony and building a strong financial legacy. In this Insights piece, we explore the benefits of Family Banks and how they can help families achieve their financial goals over time.

The Power of a Family Bank