Because so many aspects of personal finance involve numbers, the field is ripe for modeling; specific values can be placed in formulas for calculation. And for those with an affinity for this type of analysis, there are endless opportunities to keep adding inputs and revising the calculations in the hope of finding the magic formula for financial success. While the assumptions that make up financial models are long and occasionally complex, the following factors could be considered the “big five” of personal finance assumptions that are prone to tweaks and adjustments.
Economic inequality, defined as the difference in the distribution of personal income and economic assets within a social group, is a hot topic for sociologists, economists and politicians. Some see a relatively high degree of income inequality in the United States, and many believe the inequality is growing; a small group of Americans are getting richer while the rest are getting poorer. Further, economic mobility – the prospect of rising to a higher level of financial standing – also appears to be getting harder. A highly stratified culture in which a small minority controls most of the wealth is considered a negative for both the social and economic well-being of a country. These conditions prompt the above-mentioned experts and policymakers to consider programs and regulations that might discourage or reverse the trend. But as more research emerges on economic inequality, the harder it becomes to identify its root causes. Because while many factors may seem to correlate with the differences in wealth acrossAmerica, it is less certain that mandated changes, such as tax laws or entitlement programs, can address the perceived imbalances.
One of the dilemmas for parents is determining how involved they should be in the finances of their emerging adult children. Does financial assistance move them forward, or allow them to procrastinate? Two broad guidelines: Find ways to help that promote “adult” responses, and minimize financial handouts. For parents, life insurance for their emerging adult is affordable financial assistance that anticipates a positive, productive future when their son or daughter finally grows up. While many of the “adult” reasons for buying life insurance may not be current concerns, getting the protection in place today can be a prudent decision, because whatever adult milestones they eventually reach, life insurance benefits can be re positioned to their benefit. Adulthood may be delayed, but insuring human life value doesn’t have to wait.
A planning issue for IRAs is how best to transfer undistributed balances at the death of an account holder, particularly if the beneficiary is not a spouse. Lump-sum transfers to non-spouses usually are immediately taxable. Depending on the tax bracket of the recipient, this can reduce the net proceeds by 40% or more. An alternative distribution plan, known as a “stretch IRA” allows a beneficiary to receive the proceeds as a series of payments, using a formula based on the beneficiary’s life expectancy. In the words of one senator: “Millionaires, billionaires can pass on millions in their IRAs to their heirs without paying taxes for years, if not decades. That was never what IRAs were for. That is a loophole. It has to be closed. With these anticipated changes in mind, is there a better way to pass money to beneficiaries?
What happens to your debts when you die? Do lenders just take the loss, or can they compel surviving family members to pay the outstanding balances? The answers to these questions vary according to the type of obligation, the participants in the borrowing agreement, and even one’s state of residence. And correctly untangling a decedent’s financial obligations may require legal assistance. Generally, when someone dies, their personal debt is not passed on to surviving family members; all debts are either paid from the assets of the deceased’s estate, or written off. However, several factors may result in exceptions to this broad statement.
When billionaire investor Warren Buffett announced he would co-sponsor a $1 billion prize to anyone who could pick the winning teams for all 63 games of the NCAA Men’s Basketball Tournament, he knew the chances of it happening were infinitesimally close to zero. An accurate assessment of risk - both the probability of a claim and its cost - is absolutely essential to the integrity of insurance. Because who would pay premiums if they didn’t believe the insurance company would make good on its promises to pay?