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Esparza Group Frequently Asked Questions

How can I figure out my net worth?

To figure out your net worth, add up the current value of all of your assets, then add up the current amount of all of your liabilities. Subtract your total liabilities from your total assets. The amount you end up with is your net worth. Assets can include cash, checking accounts, certificates of deposit (CDs), mutual funds, stocks, bonds, IRAs, 401(k) plans, automobiles, and real estate. Liabilities can include debt from credit cards, student loans, mortgages, home equity loans, 401(k) loans, and car loans.

If you are married, take this a step further. List your assets and liabilities under the name of the owner, so you can then calculate net worth values for you, your spouse, and the two of you as a couple.

Should I invest my extra cash or use it to pay off debt?

To answer this question, you must decide how your money can work best for you. Compare the money you might earn on other investments with the money you would pay on your debt. If you would earn less on investments than you would pay on debts, you should pay off debt.

Let's assume that you have $1,000 in a savings account that earns an annual rate of return of 4 percent. Meanwhile, your credit card balance of $1,000 incurs annual interest at a rate of 19 percent. Your savings account thus earns $40, while your credit card costs $190. Your annual net loss is 15 percent, or $150, the difference between what you earned on the savings account and what you paid in interest on the credit card balance. It's even worse when you consider the tax effect. The interest on the savings account is taxable, and you have to use after-tax dollars to pay your credit card bill.

How much money should I keep in a savings account for emergencies?

Without an adequate emergency fund, a period of crisis could be financially devastating. Many financial professionals suggest that you set aside three to six months' worth of living expenses for emergencies. The actual amount, however, should be based on your individual circumstances. Do you have a mortgage? Do you have short-term and long-term disability protection? Other factors you need to consider include job security, your health and income. Be sure to review your cash reserve periodically. Since personal and financial circumstances often change, you'll want to make sure your cash reserve fits your current needs/situation.

Are my Social Security benefits subject to income tax?

A portion of your benefits may be subject to income tax if your modified adjusted gross income (MAGI), plus one-half your Social Security benefits, exceeds specific limits. Your MAGI equals:

• Adjusted gross income (or the adjusted gross income of you and your spouse if married and filing jointly), including wages, interest, dividends, taxable pensions, and other sources,
• Tax-exempt interest income (e.g., interest from municipal bonds and qualified U.S. savings bonds), and
• Amounts earned in a foreign country, U.S. possession, or Puerto Rico that are exempt from tax
Up to 50 percent of your Social Security benefits may be subject to income tax if your combined income (MAGI plus one-half your Social Security benefits) exceeds $25,000 for an individual filing single, unmarried head of household, or qualified widow(er) with dependent ($32,000 if married and filing jointly).

If your combined income exceeds $34,000 ($44,000 if married and filing jointly), up to 85 percent of your benefits is taxable. If you are married and filing separately, up to 85 percent of your benefits will be taxed unless you and your spouse live apart for the entire year.

Consult an accountant or other tax professional for more information or view IRS Publication 554, Tax Guide for Seniors.

How can you get an estimate of your future Social Security benefits?

Knowing how much retirement income you might receive from Social Security may help you decide when to begin claiming benefits, and how Social Security might fit into your overall retirement income plan.

One way to get an estimate of your future Social Security benefits is to use the benefit calculators available on the Social Security Administration website, ssa.gov. You can estimate your retirement benefit based on your actual earnings record using the Retirement Estimator calculator, then create different scenarios based on current law that will illustrate how different earnings amounts and retirement ages will affect the benefit you receive.

For example, based on the information you input and your actual earnings history as maintained by the Social Security Administration, the Retirement Estimator generates an estimate of the reduced benefit you would receive if you were to claim benefits at age 62 (the earliest age you can receive benefits), the amount if you waited until full retirement age (which currently ranges from 66 to 67, based on year of birth), and the larger benefit you would receive if you waited until age 70 before claiming retirement benefits. Other benefit calculators are also available that can help you estimate disability and survivor benefits.

You can also sign up for a my Social Security account so that you can view your online Social Security Statement. Your statement contains a detailed record of your earnings, as well as estimates of retirement, survivor, and disability benefits. If you're not registered for an online account and are not yet receiving benefits, you'll receive a statement in the mail every year, starting at age 60.

I’m getting remarried. How will this affect my Social Security benefits?

If you're receiving benefits based on your own work record, your benefits will continue. If you're receiving spousal benefits based on your former spouse's work record, those benefits will generally end upon your getting remarried, but you may be able to receive benefits based on your new spouse's work record, or on your own.

If you're a widow(er) under age 60, or you're disabled but under 50, remarriage ends any benefits based on the record of your deceased spouse. However, if you remarry after age 60 (or after 50 and are disabled), those benefits remain intact, unless you get spousal benefits through your new spouse (at age 62 or older) if those benefits are higher. If your second marriage ends as a result of death, divorce, or annulment in less than 10 years, you will again be eligible to collect benefits on your first spouse's record. Benefits paid to a disabled widow(er) are unaffected by remarriage.

Note, too, that if you were the working spouse during your first marriage, your remarriage does not change the Social Security benefits paid to either your new spouse or ex-spouse. Because the rules surrounding payment of benefits are complicated, and depend on your particular situation, contact the Social Security Administration at (800) 772-1213 for more information.

What is a living trust?

A living trust is a popular estate planning tool that lets you (1) retain control over the trust property while you are alive, (2) avoid guardianship in case you become incapacitated and can no longer handle your own financial affairs, and (3) pass trust property outside of probate when you die.

Legally, a living trust is a separate entity that you create while you are living to "own" property, such as a house, boat, jewelry, or mutual funds. The trust is revocable, which means that you can make changes to it, or even end it, at any time. For example, you may want to remove certain property from the trust or change the beneficiaries. Or you may decide not to use the trust anymore because it no longer meets your needs. A living trust gives you the flexibility to do any of these things.

However, you do pay a price for this flexibility. A living trust does not avoid estate or income taxes, nor does it protect your assets from potential creditors.

A big advantage of the living trust is that it allows a successor trustee to automatically take your place and manage the trust assets if you become incapacitated. For example, you have an accident and are in a coma for six months. Your successor trustee can take your place and manage the trust while you are unable to do so. That way, your affairs continue as usual, and you should suffer no financial setback.

In addition, assets in the living trust do not pass through your will when you die. Instead, the assets in the trust are distributed by the trustee according to the terms you establish in the trust. Also, the assets in the trust are not part of your probate estate. This may get them into the hands of your beneficiaries faster or, if you desire, provide that the assets be held until the beneficiaries meet certain criteria or attain a certain age. Finally, since the trust is not subject to probate, the terms of the trust are private.

Do I need life insurance if I’m single?

Single people with no children often don't need life insurance because no one is relying on their income. But there are some reasons why you might need life insurance if you're single.

If you died, who would pay for your funeral? Even a simple ceremony could be costly. If you don't have life insurance, someone else (e.g., your relatives) may have to foot these bills. Even if you have only a small policy, the death benefits could be used to cover these expenses.

Do you have debts in excess of your assets, or do you owe money together with someone else? Perhaps you're a joint debtor with your sister on her mortgage. If you died, she'd be responsible for the entire debt. Would she be able to make the monthly payments on her own? A life insurance policy naming her as your beneficiary could give her enough funds to cover your share of the mortgage, or perhaps to pay off the entire debt.

Finally, is it possible that your health will deteriorate? Maybe you have a family history of cancer or heart disease. If that's the case, you might have trouble buying life insurance later when you're older, especially if your health has begun to decline. Even if you're single now, you may be wise to buy life insurance now before it gets too expensive or you become uninsurable. After all, you may not stay single forever.

How much life insurance do I need?

To answer this question, you must first answer several related questions. How big a financial burden would your death leave for others to deal with? How much of your salary is devoted to current expenses and future needs? How long would your dependents need support if you were to die tomorrow? How much would it cost to pay all of your final expenses?

When determining your life insurance need, you'll need to consider your life stage and circumstances. Marital status, number of dependents, size and nature of financial obligations, career stage, and your intentions to pass on your property are all important factors you'll want to think about. Your need for life insurance changes as the circumstances of your life change. For example, you may be able to reduce the amount of life insurance coverage that you have once your children have grown and are on their own.

There are several methods you can use to calculate the appropriate level of insurance for you and your situation. Although they all share common features, some methods strive to be more simplistic, such as the income replacement method and rules of thumb. Others, such as the family needs approach and the capital needs method, involve more sophisticated calculations. You may want to investigate these methods and do some preliminary calculations to provide a basis for possible discussions with your financial planner.

Keep in mind that the worst mistake you can make concerning life insurance is to have a need and not have the insurance to cover that need. Having too little (or even too much) insurance can also be a problem. Proper insurance planning can provide peace of mind for you, as well as protection for those you care about.

The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. There are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition, if a policy is surrendered prematurely there may be surrender charges and income tax implications. Any guarantees are contingent on the claims-paying ability and financial strength of the issuing insurance company.

Is it less expensive to buy life insurance while I’m young?

Your insurance premiums will increase as your life expectancy decreases--the older you get, the more life insurance is going to cost you. Whether you buy permanent or term life insurance, it will usually cost you less while you're young.

If you're at high risk for a medical condition that might make it too expensive or impossible for you to get insurance later (e.g., a family history of cancer), consider buying life insurance while you're still young and healthy.

If you buy term insurance, ask about a renewability provision. Although your premiums may increase at renewal time because your life expectancy is shorter, you'll be able to renew your policy without having to prove your insurability again. Please note that several factors affect the cost of life insurance, such as your current health, whether or not you are a smoker, and any pre-existing conditions.

Why do I need life insurance?

Life insurance has several purposes. Its most important function is to replace the earnings that would cease at the death of the insured. For businesses, life insurance is a way to protect key employees and the business itself. A third purpose is to use life insurance to pay potential estate taxes.

If you die during your earning years, your family could suffer a severe economic loss as a result of losing your current and future income. Unfortunately, your family would still have to pay its regular bills, the mortgage, and outstanding debts, and perhaps even continue saving for college and retirement. Unless you're independently wealthy, achieving these goals may be virtually impossible for your family with the loss of your steady income. Life insurance offers a way for your family to continue living comfortably and without worry.

Employers often purchase life insurance policies on key employees to insure against the loss of services or income that might result after an employee's death. Here, the proceeds from the policy are paid to the company. Life insurance works for business partners too, where one business partner purchases a policy to insure against the financial loss that might result from the other partner's death or to buy out the partner's heirs.

Life insurance is also used to pay potential federal estate taxes. Since these taxes must be paid in cash, life insurance can be a good way to ensure the fulfillment of this obligation.

The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. There are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition, if a policy is surrendered prematurely there may be surrender charges and income tax implications. Any guarantees are contingent on the claims-paying ability and financial strength of the issuing insurance company.

Why do people buy annuities?

Annuities are insurance-based financial vehicles that can provide many benefits sought by retirement-minded investors. There are a number of reasons why people buy annuities.

Deferral of taxes is a big benefit, and so is the ability to put large sums of money into an annuity — more than is allowed annually in a 401(k) plan or an IRA — all at once or over a period of time. Annuities offer flexible payout options that can help retirees meet their cash-flow needs. They also offer a death benefit; generally, if the contract owner or annuitant dies before the annuitization stage, the beneficiary will receive a death benefit at least equal to the net premiums paid. Annuities can help an estate avoid probate; beneficiaries receive the annuity proceeds without time delays and probate expenses. One of the most appealing benefits of an annuity is the option for a guaranteed lifetime income stream.

When you purchase an annuity contract, your annuity assets will accumulate tax deferred until you start taking withdrawals in retirement. Distributions of earnings are taxed as ordinary income. Withdrawals taken prior to age 59½ may be subject to a 10% federal income tax penalty.

How can I gauge my risk tolerance?

Risk tolerance is an investment term that refers to your ability to endure market volatility. All investments come with some level of risk, and if you're planning to invest your money, it's important to be aware of how much volatility you can endure. Your tolerance for risk affects your choice of investments and the overall makeup of your portfolio.

If you are attempting to gauge your own tolerance for risk, consider the following factors:

• Personality: Are you able to sleep at night knowing that you've put a portion of your hard-earned dollars at risk in a particular investment? Remember, it might be easy to tolerate a high-risk investment while it is generating double-digit returns, but consider whether you'll feel the same way if the market takes a downward turn with your investment leading the way. It's best to invest at a level of volatility that you are comfortable with.
• Time horizon: The sooner you may need to use your investment dollars, the lower your risk tolerance. For example, for money you plan to use to make a down payment on a house in 2 years, your risk tolerance is lower than if you're investing for retirement in 20 years. If you can keep your money invested for a long period of time, you may be able to ride out any downturns in the market (though time alone is no guarantee of higher returns).
• Capacity for risk: How much can you afford to lose? Your capacity for risk depends on your financial position (i.e., your assets, income, and expenses). In general, the more resources or assets you have to fall back on, the higher your risk tolerance.
Many risk tolerance tests are widely available on the Internet and in books about investing. Most require that you answer a series of questions, and generate a score based on your answers. The score translates into a measure of your risk tolerance and may be matched with the types of investments that the author deems appropriate for someone with your risk profile. Although these tests may be helpful as a reference, your financial plan should be tailored to your unique circumstances. Don't hesitate to get expert help if you need it.

All investing involves risk, including the potential loss of principal, and there is no guarantee that any investment strategy will be successful.

How aggressive should I be when I invest for retirement?

It depends. The right answer in your case will depend on a number of key factors. These include, among others, your income and assets, your attitude toward risk, whether you have access to an employer-sponsored plan at work, the age at which you plan to retire, and your projected expenses during retirement. But it's possible to lay down some guidelines that may be of help to you.

The conventional wisdom has traditionally been that you should invest aggressively when you're young and then move gradually toward a more conservative approach. By the time you retired, you would probably end up with a portfolio made up mostly of high-grade bonds and other low-risk investments. However, the retirement landscape has changed dramatically in the past 20 years or so. As a result, many of our basic assumptions about retirement planning have been overturned.

The dwindling number of traditional pension plans and concerns about Social Security have led people to take greater responsibility for their own retirement. Investing more aggressively over the long term has become common as people realize that, without anyone else to take care of them, they need to build the largest retirement nest egg they possibly can. In fact, many people these days primarily use growth vehicles (e.g., certain stocks and mutual funds) for their investment portfolios and tax-deferred retirement plans (e.g., 401(k)s and IRAs), though the proportion of stocks may still be reduced as they near retirement.

Other factors have changed the way we think about and invest for retirement as well. People tend to retire younger, live longer, and do more during retirement than they used to. With the likelihood that you will have well over 20 years of activity to fund, it may be a good idea to invest more aggressively for retirement than previous generations did. And there's no reason to switch over to fixed-income securities completely upon reaching retirement, especially with interest rates at historic lows. Because bond prices typically fall when interest rates go up, a period of rising interest rates can affect the value of your bond holdings. Many financial planners suggest that you keep a suitably balanced portfolio, including some of your assets in growth-oriented investments, even after you retire.

Don't forget to carefully consider a mutual fund's investment objectives, risks, fees, and expenses, which can be found in the prospectus available from the fund. Read it carefully before investing. All investing involves risk, including the possible loss of principal, and there can be no assurance that any investment strategy will be successful.

How late is too late to start saving for retirement?

This question is difficult because the answer depends on your income and assets, your goals for retirement, and many other factors. Ideally, you should begin saving for retirement in your 20s. More time to save enhances your chances of having the kind of retirement lifestyle you want.

If you're in your 40s or older and haven't saved much (or anything) yet, you may face a challenge in building the retirement fund you need. The shorter your time frame, the less room you have for error. But don't panic — it's never too late to start saving. You may still be able to secure a comfortable retirement for yourself, but you may have to make some tough choices to do so. Here are a few tips if you're getting a late start:

• Save as much as possible: The more you save, the more you'll have when you retire. Try to maximize your contributions to IRAs, 401(k)s, and other tax-advantaged vehicles. Then supplement your retirement fund with mutual funds, savings accounts, and other investments.
• Cut current expenses: Chances are, not all of your expenses are absolutely essential. If you can wipe out or trim certain expenses, such as expensive coffees and daily lunches out, you'll free up more money to invest for retirement.
• Invest more aggressively, if you're comfortable doing so: This may help you build a retirement fund in a relatively shorter period time. Certain stocks and mutual funds may offer potential for your savings to grow more quickly. The tradeoff: These investments are subject to market risk that will expose you to greater volatility, including a possible loss of principal. Before investing in a mutual fund, carefully consider its investment objectives, risks, fees, and expenses, which are contained in the prospectus available from the fund. Review the prospectus carefully, including the discussion of fund classes and fees and how they apply to you.1
• Delay retirement: You may have no choice but to delay your retirement. This strategy will not only reduce the number of years without a paycheck, it will also buy you more time to potentially build a nest egg.
• Rethink your retirement goals: Set more realistic goals for your retirement (no beach house on the Riviera, for example). That way, you won't need as much money to fund your retirement.
If you fear you're getting too late a start, or you're not sure where to start, consult a financial professional. He or she can help you map out a plan to bridge the gap between where you are now and where you need to be when you retire.

I think it’s time to start planning for retirement. Where do I begin?

Although most of us recognize the importance of sound retirement planning, few of us embrace the nitty-gritty work involved. With thousands of investment possibilities, complex rules governing retirement plans, and so on, most people don't even know where to begin. Here are some suggestions to help you get started.

First, set lifestyle goals for your retirement. At what age do you see yourself retiring, and what would you like to do during retirement? If you hope to retire at age 50 and travel extensively, you'll require a lot more planning than other people. You'll also need to account for basic living expenses, from food to utilities to transportation. Most of these expenses don't disappear when you retire. And don't forget that you may still be paying off your mortgage or funding a child's education well into retirement. You will also need to figure out how you will pay for health insurance until at least age 65, when you will be eligible for Medicare. Finally, be realistic about how many years of retirement you'll have to fund. With people living longer, your retirement could span 30 years or more. The longer your retirement, the more money you'll need.

Next, project your annual retirement income and see if that income will be enough to meet your expenses. Identify the sources of income you'll have during retirement, and the yearly amount you can expect to receive from each source. Common sources of retirement income include Social Security benefits, pension payments, distributions from retirement plans [e.g., IRAs and 401(k)s], and dividends and interest from investments. If you find that your retirement income will probably meet or exceed your retirement expenses, you're in good shape. If not, you need to take steps to bridge the gap. Consider delaying retirement, saving more money, or taking more investment risk.

This is just a starting point. The further you are from retirement, the harder it is to project your future income and expenses. If you're ready for more detailed planning, consult a financial professional.

Should I invest in a Roth IRA or a traditional IRA?

There is no easy answer to this question. Traditional IRAs and Roth IRAs share certain general characteristics. Both feature tax-deferred growth of earnings and allow you to contribute up to $6,000 in 2020 (unchanged from 2019) of earned income, plus an additional $1,000 "catch-up" contribution if you're 50 or older. (This is the maximum you may contribute to all IRAs.) Both allow certain low- and middle-income taxpayers to claim a partial tax credit for amounts contributed. But important differences exist between these two types of IRAs. In fact, the Roth IRA is in some ways the opposite of the traditional IRA.

A traditional IRA allows anyone with earned income to contribute the maximum $6,000 in 2020, plus catch-up if eligible. However, your ability to deduct traditional IRA contributions will depend on your annual income, your filing status, and whether you or your spouse is covered by an employer-sponsored plan. You may be able to deduct all, a portion, or none of your contribution for a given year. Any distribution from a traditional IRA will be subject to income taxes to the extent that the distribution represents earnings and deductible contributions. You may also be hit with a 10% early withdrawal penalty if you draw money out before age 59½ (there are exceptions to this rule). Beginning at age 72, you must begin to take annual distributions from a traditional IRA.1

You can also contribute to a Roth IRA, as long as you have taxable compensation. However, your ability to contribute and the amount you'll be able to contribute (up to the annual limit) will depend on your income and tax filing status. Although Roth IRA contributions are not tax deductible, Roth IRAs have other advantages. You're not required to take distributions from a Roth IRA at any age, which gives you more estate-planning options. Another key strength: Qualified withdrawals will avoid both income tax and the early withdrawal penalty if certain conditions are met. Nonqualified withdrawals will be taxed and penalized only on the earnings portion of the withdrawal, since the principal is your own after-tax money.

Your personal goals and circumstances will determine which type of IRA is right for you. If you wish to potentially reduce taxes during retirement or help preserve assets for your heirs, a Roth IRA may be the way to go. A traditional IRA may make more sense if you can make deductible contributions and want to lower your taxes while you're still working.

1Due to the Coronavirus Aid, Relief, and Economic Security (CARES) Act, required minimum distributions (RMDs) are waived in 2020.

Fixed annuities pay a fixed rate of return that can start right away (with an immediate fixed annuity) or can be postponed to a future date (with a deferred fixed annuity). Although the rate on a fixed annuity may be adjusted, it will never fall below a guaranteed minimum rate specified in the annuity contract. This guaranteed rate acts as a "floor" to help protect owners from periods of low interest rates. Any guarantees are contingent on the financial strength and claims-paying ability of the issuing insurance company.

Variable annuities offer fluctuating returns. The owner of a variable annuity allocates premiums among his or her choice of investment subaccounts, which can range from low risk to very high risk. The return on a variable annuity is based on the performance of the subaccounts that are selected. Any guarantees are contingent on the financial strength and claims-paying ability of the issuing insurance company. The investment return and principal value of an investment option are not guaranteed. Variable annuity subaccounts fluctuate with changes in market conditions. When a variable annuity is surrendered, the principal may be worth more or less than the original amount invested.

Variable annuities are long-term investment vehicles designed for retirement purposes. They are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the variable annuity contract and the underlying investment options, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

Of course, there are contract limitations, fees, and charges associated with annuities, which can include mortality and expense risk charges, sales and surrender charges, investment management fees, administrative fees, and charges for optional benefits. Surrender charges may apply during the contract's early years in the event that the contract owner surrenders the annuity. Variable annuities are not guaranteed by the FDIC or any other government agency; nor are they guaranteed or endorsed by any bank or savings association.

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