Did you know April is National Financial Literacy Month? With last year’s tax returns (hopefully!) wrapped up, it’s an ideal time to take a fresh look at your financial know-how.
If you’re working with a wealth management professional like the Bartlett team, you probably already have a grasp of basic money matters. But what about some of the more advanced areas within investment management or financial planning?
Based on our own conversations with individuals and families, we’ve identified six potential topics to give your financial literacy a boost. Each item includes a link to more in-depth information from reliable sources such as Investopedia and The Balance.
(Of course, feel free to reach out to us at Bartlett if you have questions or want to discuss how any of these topics apply to you.)
1. Alternative asset classes
Beyond the three primary asset classes—stocks, bonds, and cash—many other types of investments can be used to diversify investment portfolios. The term “alternative assets” is highly flexible. It may include specific physical assets, such as natural resources or real estate, or methods of investing, such as hedge funds or private equity. In some cases, even geographic regions, such as emerging global markets, are considered alternative assets. Their lack of correlation with other types of investments may help increase or stabilize portfolio return.
2. Charitable trusts
One option for charitable giving is to create a trust. There are many types of charitable trusts, but the two most common are:
- Charitable lead trust: This type pays income to your chosen charity for a certain period of years after your death. Once that period is up, the trust principal passes to your family members or other heirs. The trust is known as a charitable lead trust because the charity gets the first, or lead, interest.
- Charitable remainder trust: Think of this as the mirror image of a charitable lead trust. Trust income is payable to your family members or other heirs for a period of years after your death or for the lifetime of one or more beneficiaries. Then, the principal goes to your favorite charity. The trust is known as a charitable remainder trust because the charity gets the remainder interest. Depending on which type of trust you use, the dollar value of the lead (income) interest or the remainder interest produces the estate tax charitable deduction.
3. Social investing
Perhaps the best-known aspect of socially responsible investing is evaluating investments based not only on their finances but on their social, environmental, and even corporate governance practices. Screens based on specific guidelines may eliminate from consideration companies whose products or actions are deemed contrary to the public good. As interest in socially responsible investing has evolved, the screening process has become increasingly advanced. These screens help identify companies whose practices actively further a particular social good, such as protecting the environment or following a particular set of faith-based guidelines.
“…identify companies whose practices actively further a particular social good…”
If you’re the beneficiary of a large inheritance, you may find yourself suddenly wealthy. Even if you expected the inheritance, you may be surprised by the size of the bequest or the diverse assets you’ve inherited. You’ll need to evaluate your new financial position, learn to manage your sizable assets, and consider the tax consequences of your inheritance, among other factors.
5. Exchange-Traded Funds
Exchange-traded funds (ETFs) have become increasingly popular since they were introduced in the United States in the mid-1990s. Their tax efficiencies and relatively low investing costs have attracted investors who like the idea of combining the diversification of mutual funds with the trading flexibility of stocks. ETFs can fill a unique role in your portfolio, but you need to understand just how they work and the differences among the dizzying variety of ETFs now available.
6. Retirement Savings: Goal Setting
Many Americans realize the importance of saving for retirement, but knowing exactly how much they need to save is another issue altogether. Here are some factors to consider when determining a retirement savings goal.
- Retirement age: The earlier you retire, the more money you will need to last throughout retirement. It’s important to prepare for unanticipated occurrences that could force you into an early retirement.
- Life expectancy: Take into account your family history – how long your relatives have lived and diseases that are common in your family – as well as your own past and present health issues. Also consider that life spans are increasing with recent medical developments.
- Future health-care needs: Health-care costs have been rising much faster than general inflation, and fewer employers are offering health benefits to retirees. Long-term care is another consideration.
- Lifestyle: When you retire, do you want to travel? Are you planning to be involved in philanthropic endeavors? Are there any hobbies you would like to pursue? The answers to questions like these can help you decide what additional costs your ideal retirement will require.
- Inflation: Inflation has the potential to lower the value of your savings from year to year, significantly reducing your purchasing power over time. It is important for your savings to keep pace with or exceed inflation.