Does The Rule of 100 Work in Retirement?

A rule of thumb around risk is the “Rule of 100.”  If you haven’t heard of this rule before, we’ll outline everything for you below so that you have a better understanding of it. Keep in mind that risk in investing is somewhat subjective, and needs to be discussed on a case-by-case basis.

We have people ask, “What is my risk based on my age?” And this isn’t something that we really recommend. The “Rule of 100” is the rule of risk based on age.

What in the World is the “Rule of 100?”

The Rule of 100 takes your age and subtracts it to help you determine how much risk you can take when investing. For example, let’s assume that you’re 50. The equation would be: 100 – 50 = 50.

In this case, “50” is how much risk you can take.

So, based on this figure, you should keep 50% of your money at risk. If you’re like many 50-year-olds who feel like they have plenty of years left, it doesn’t make sense to stop 50% of your money from its growth potential. You can still have good risk control and keep this 50% of your money growing with relatively little risk.

Now, imagine you hit 70. You take 100 – 70 = 30, so 30% of your money can be at risk and in the market. For some people, this formula works well, but there are many people who want more risk.

You can have two people who earn the same money, accrued the same debts, and are the same age but have different risk tolerance based on their individual situations. One person may be fine with 4% growth per year, while another wants to achieve 12% growth and invest in riskier investments because they want to pay for their grandkids’ education.

What’s right for you?

We’ve adopted our own method of risk calculation that looks at the bigger picture to help you better understand your goals and what risks you must take to reach them.

Walking Through Our Conversation on Risk with Our Clients

Retirement planning is truly unique to each person. You may want to travel the world, while another person wants to spend their golden years tending to their garden. The goals and aspirations that you have for life in retirement must, in our belief, be a major contributing factor to your risk tolerance.

Our system is numerically driven and asks:

  • How do you feel about risk in a six-month window?
  • Say you have $1 million and lose 10%. Are you comfortable losing $100,000 in six months?

Many people believe that they’re comfortable with losing 10% of their investments until they see the hard figure in front of them. Let’s walk through an example of how we help our clients understand and determine their risks.

$1 million Retirement Roleplay

In this example, Radon has $1 million and has just walked into our office. 

Murs

Radon, you have $1 million to work with. We want to set you up for your retirement. We want to take risks and earn you money, but we want to create a portfolio that allows you to sleep well at night. We need to understand what that number is for you because everyone is different. 

If you look at the screen, Radon, we’ve put your million dollars here and have a slide rule in place that allows us to adjust your investment risks.

The slide starts in the middle here, and the middle is 14%. At this percentage, you have a risk of losing $140,000, but you can also have a nice gain, too.

Radon, I am going to move the slide all the way to the left, which is –4%, or $40,000. What I want you to do is, as I start moving the slider to the right, tell me where you think you feel uncomfortable with your losses.

We’re at 7%, or around $68,000 of loss. We’re now at 10%, or a $100,000 loss.”

Note

What we find happens during this example is that the client starts to talk to themselves. For example, they may say that they didn’t feel good about losing 20% in 2022. The person then weighs their risk on what happened last year.

We recommend trying to look forward because the losses last year may never happen again. We often see clients tend to stop at 10% because losing $100,000 is tough to swallow. However, most people realize they need to let the market breathe a bit and can sleep at night with a 10% loss.

We’ve established our baseline at 10% because that’s our initial gut reaction, where we become uncomfortable with any further losses. The screen that is in front of the client will have the 10% in the middle and then have numbers on the left and right, which show lower and higher risk figures.

Now, let’s get back to our example discussion from above.

Radon

Radon, during this discussion, determines that he’s comfortable with a 10% loss on his $1 million, and this is the figure he doesn’t want to pass. 

Murs

Radon, you told me 10% on the downside is your limit, but what if we can improve that? Let me tell you. It’s different for different families. 

  • One person may receive the same reward of 10% while only having a 6% loss potential, or $60,000. This would be the left side.
  • One person may be comfortable with a 10% loss, but what if I can increase my gain potential to 16%? This would be the right side.

Radon, what looks better to you?

Radon

In this case, I think I am comfortable with the risk. I feel confident with a 10% risk, and if I had more reward, I would move to the right.

Note

This exercise is thought-provoking because some people are comfortable with going to the right to have more reward, but others find it a no-brainer to lower their risk.

Keep in mind that Radon wouldn’t mind earning a little more at 10% risk. The software shows us that we can stay where we are at –10% downside, or we can go 16% – 19% growth. However, this would mean a 12% risk, or $120,000 potential loss.

Murs

Radon, which one looks better to you? Would you like to stay in the middle or take a little more risk for a lot more potential?

Radon

The rationale that I’m looking at right now is that I get quite a bit more upside for a little more risk, which is kind of in my comfortable range. Again, I am kind of nervous, but I think I can take it a little higher to make up for some of the losses in 2022. I don’t want to miss out on the potential that’s coming.

Let’s take it up one notch and see what happens.

Murs

Great. Pushing it up one notch, we’ve moved from a –10% to a –12% comfort level. Now, the last one is, what if we can earn better by going to –14% downside in a 6-month window?

Radon

I was already pushing it with the 12% risk, so I think I feel most comfortable staying in this range and not pushing my downside any higher.

Summing Up

These few questions and scenarios show a client the hard figures, which makes it possible to really identify their risk tolerance and the losses they feel most comfortable with in their portfolios.

Using these figures, we can create an investment plan that is within a risk category and create a growth plan that doesn’t exceed the client’s risk tolerance.

We will then use our bucket strategy to allocate all the clients’ funds to help them achieve the growth they want from their retirement accounts. The three buckets include: cash, income and safety, and then a growth bucket.

Risk tolerance allows us to create a one-page investment strategy that we give to our clients that helps them understand exactly how their portfolio will look.

We find that using this type of risk tolerance assessment works much better than saying a “moderately conservative” plan that may be losses of 10% or 20%. Moderately conservative is a subjective term, and we take the subjectiveness out of the equation with the assessment we create.

Click here to schedule a call with us to help you better understand your retirement risk tolerance.

May 30, 2023 Weekly Update

We do love it when someone refers a family member or friend to us.  Sometimes the question is, “How can we introduce them to you?”   Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage.

Here are this week’s items:

Portfolio Update:  Murs and I have recorded our portfolio update for May 30, 2023

This Week’s Podcast – How To Manage Risk in Volatile Markets

Learn how we use data/numbers to identify and align with the best asset classes to be invested in. You will also learn why an active asset management strategy allows you to make a decent rate of return, not lose a bunch of money, and have peace of mind in your retirement.

 

This Week’s Blog – How To Manage Risk in Volatile Markets

Growing your money to secure your retirement is something that everyone should do as part of their retirement planning. Active management, which is what we do, is something that clients come to us for because they want us to manage their portfolios.

How To Manage Risk in Volatile Markets

Growing your money to secure your retirement is something that everyone should do as part of their retirement planning. Active management, which is what we do, is something that clients come to us for because they want us to manage their portfolios.

If you wanted a very low-risk investment you could keep your money in treasury bonds, CDs, or a savings account. However, growth opportunities with these types of investments are very limited. You might put some of your money in these accounts, but not 100%, because the potential to grow your money falls too much with a conservative investment portfolio.

Managing risks, especially in a volatile market, is more difficult for many investors because if you put all your money into an S&P 500 index, you take on all the associated risks in the process.

In the years 2000–2002, the S&P 500 was down 50%, meaning many retirees had their portfolios cut in half. Imagine if you’re withdrawing money from this portfolio at the time of a major decline, causing a compounded problem in the process.

Now, you could take 60% of your money and put it in the market and the other 40% into bonds. Come 2021 and 2022, and the bond market goes into a crisis, causing a lot of people to lose the money that they thought was very low risk.

Active Management to Lower Portfolio Risks

Managing your account actively helps negate these risks because we move within the market and take a very hands-on approach to growing your money.

Metrics and data points are used to help a person maximize their money within their own risk threshold. For example, hedge fund managers often try and make their clients the most money possible. The issue is that big returns also come with larger risks.

In an active management strategy like ours, our clients want safety and security and aren’t chasing the homerun gains that some of the other managers strive for with their clients. Instead, our active management approach maximizes returns while keeping risk at a minimum.

Many people are 10 years from retirement and have been through 2008 and 2020-2021, when the markets took a nosedive, and they don’t want to shoulder large risks any longer. As you get closer to retirement, earning and income potential begins to fall. At this point, you need to mitigate risks as well as you can.

When you have an active management strategy, the goal is to put your money into the best investment vehicles at the time.

Data allows an active management strategy to take place because we focus more about what the data is telling us and less about specific news on inflation and the debt ceiling.

Investing comes with pros and cons, but if you pick an investment strategy that works well for you, it can also help you secure your retirement.

Example from an Industry Podcast

Recently, on an industry podcast, they had a few financial advisors as guests to speak about how they manage their clients’ money. There was one response that stood out the most. This individual used to take part of the clients’ money and invest it actively, as we discussed above, and mentioned that the logistics of the approach were too complex and resource-intensive. Ultimately, they transitioned into a buy-and-hold strategy for their clients. The manager wasn’t set up for the trading involved in an active management environment, and a buy-and-hold strategy is easier to manage. 

With a buy-and-hold strategy, the most that needs to be done is balancing the portfolio on a monthly or quarterly basis. Technology makes this a touch-of-a-button scenario. Simply put in the wanted parameters, tap a few buttons, and rebalance a portfolio.

Instead, when we actively manage a portfolio, we check risk daily and will readjust a portfolio regularly. It’s unlikely that we need to perform a readjustment every day, but we’re ready to when it’s necessary.

At Peace of Mind Wealth Management, we like to manage our clients’ money in the same way that we invest our money: actively.

We find that an actively managed portfolio reduces risk greatly, which in turn reduces immense emotional tolls from portfolio losses.

Imagine losing 10% of your portfolio, realizing you lost $100,000 or $200,000. It doesn’t feel good. You can have a portion of your retirement savings in the market and another portion in safer investments that still offer plenty of opportunities.

This is why active management in a portfolio can be a powerful tool in retirement planning.

Asset Classes in a Portfolio

During any given year, some asset classes in a portfolio may be working and others are not. Asset classes can be a lot of things, such as:

  • Large-cap stocks
  • Mid-cap stocks
  • Small cap stocks
  • International markets
  • Emerging market investments
  • REITs
  • Investment bonds
  • Treasuries
  • Cash

Year-over-year asset classes move around, just like we saw in 2022 when the S&P 500 was down nearly 20%. Cash and treasuries were the leaders of asset classes in 2022 because they provided some level of return.

In 2021-2022, the 60/40 flaws started to show because a lot of the investment bond yields were down 11% – 13%. Bonds, for some people, were down as much as their market investments. At the time, many people thought it wasn’t possible to lose money in bonds.

Monitoring asset class movements and structuring a portfolio is how we like to invest our clients’ money. Monthly and quarterly data analysis and restructuring of asset allocation empower us to put investments in what’s performing well right now.

If the upswing and downswing of the market don’t bother you, then a buy-and-hold investment strategy may be better for you.

However, a lot of clients of ours love making a good return with minimal risk. Clients may sleep better at night and have peace of mind that they won’t wake up with a portfolio loss of 20%. This is what an actively managed portfolio provides.

Click here to schedule a 15-minute complimentary call with us to learn how your investment portfolio can be actively managed.

May 22, 2023 Weekly Update

We do love it when someone refers a family member or friend to us.  Sometimes the question is, “How can we introduce them to you?”   Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage.

Here are this week’s items:

Portfolio Update:  Murs and I have recorded our portfolio update for May 22, 2023

This Week’s Podcast – Important Age Milestones in Retirement

Listen in to learn about the different financial milestones that happen in the life of a child from birth all the way to retirement. You will also learn when to work on your catch up contributions, the social security eligibility age, when to withdraw all your retirement assets and much more.

 

This Week’s Blog – Important Age Milestones

Important age milestones seem to come in waves, especially once you secure your retirement.  A lot of rules around financial planning and tax issues impact people at different ages, which everyone should know about when retirement planning.

Important Age Milestones

Important age milestones seem to come in waves, especially once you secure your retirement.  A lot of rules around financial planning and tax issues impact people at different ages, which everyone should know about when retirement planning.

Important Age Milestones for Parents or Grandparents

Some of the most important age milestones may or may not apply to you, so keep this in mind.

Age 0: Birth of a Child

If you have younger kids or grandkids, you can set up a 529 account for the child. These accounts are college savings accounts for the child. You can also set up a UTMA or UGMA account, which are types of custodial accounts that you can set up for minors.

Age 13: Child and Dependent Care Credit

At age 13, a child is no longer eligible for the child and dependent care credit.

Age 17: No Longer Eligible for a Child Tax Credit

When a child reaches age 17, the tax credit helps you deduct as much as $2,000 per child from your taxes if they’re a dependent.

Age 18: Age of Majority

Children reach the age of majority at age 18 in most states. The government now sees the child as an adult and the accounts you set up for them, such as the UTMA or UGMA, are now transferred to the “new adult.”

You’ll revoke your power over these accounts and need to go through the transfer process.

Age 21: Age of Majority

In some states, the age of majority is 21, and this is when all the custodial transfers for these accounts must take place.

Age 24: Full-Time Student Loses Kiddie Tax

A full-time student is no longer eligible for a “kiddie tax” at 24.

Age 26: Child No Longer Eligible for a Parent’s Health Insurance Coverage

When the adult child reaches age 26, they’re no longer eligible for their parent’s health insurance under the Affordable Care Act. We hear about this one a lot. Parents help get their kids through college, the child stays on the parent’s health insurance and then they’re shocked to learn that they’re no longer eligible to be on their parent’s plan.

Important Age Milestones for Retirement Planning

Age 50: Retirement Contribution Catch-ups

As young as age 50, there’s an important milestone that occurs. You can make “catch-up” contributions for your 401(k), 403(b) and 457 plans. In 2023, if you’re under 50, you can contribute $22,500 each year.

If you’re 50 or older you can add an additional $7,500 to the account, for a total of $30,000 per calendar year.

IRAs also have a catch-up contribution that you should consider.

Age 50: Social Security Benefits for Disabled Widows and Widowers

If you are a disabled widow or widower, you can file for Social Security benefits.

Age 55: HSA Catch-up Contribution

If you have a health savings account (HSA), you have catch-up contributions of an additional $1,000 on top of regular limits of $3,850 for a single person and $7,750 for a family.

Age 59 1/2: Reach the Age of Retirement Asset Withdrawal Without Penalties

In most cases, if you take money out of your retirement account before the age of 59 ½, you’ll be penalized for doing so. The early withdrawal penalty is 10%. Now that you’re 59 ½, you still pay taxes on many of these accounts, but you aren’t penalized for the withdrawals.

You also have the option, in most cases, to rollover from a 401(k) to an IRA. When you do a rollover, you now have the option to invest in stocks and ETFs. An IRA frees up the option of investing your retirement money in a way that is not possible with an employer retirement account. 

You can work with an advisor to help you with the retirement planning at this point.

Age 62: Social Security Eligibility at a Reduced Rate

You’ve paid into Social Security your entire life, and now you can begin taking from this account at a reduced rate. We are having major discussions with our clients on what to do at this critical age. In 2023, you have a limit of $21,240 in income.

If you make more than this amount, for every two dollars you make, one dollar in your Social Security is reduced. We don’t recommend that anyone making more than the $21,240 figure above take Social Security because of this reduction rule.

Age 65: Medicare Eligibility

You can receive Medicare at the age of 65, but you can apply for it at age 64 and 9 months. Now is the time to review plans and learn costs.

If you have an HSA that you’ve been funding, you can use your HSA for non-medical withdrawals because you’re eligible for Medicare. Before this age, any funds in your HSA are designated for medical and healthcare purposes.

Age 66 – 67: Full Retirement Age for Social Security

If you’re working and still bringing in income, you may want to wait until full retirement age to take Social Security. The income limit we mentioned at age 62 is now removed, allowing you to take your benefits while earning as much money as you can.

You can still work, receive good money, and still get 100% of your Social Security Benefits.

The full retirement age has changed a lot in the past decade or so, and the age for full retirement depends on the year you were born. The current ages are:

  • Born between 1943 and 1954: 66
  • Born in 1955: 66 and 2 months
  • Born in 1956: 66 and 4 months
  • Born in 1957: 66 and 6 months
  • Born in 1958: 66 and 8 months
  • Born in 1959: 66 and 10 months
  • Born in 1960 and beyond: 67

We believe that this age may be adjusted again in the future.

Age 70: Maximum Social Security Benefit

Deferring your Social Security until age 70 allows you to receive your maximum Social Security benefits. Your benefits will no longer increase after this age, even if you continue contributing to the system.

For 99.9% of people, this is the age when you want to take your benefits if you haven’t already.

Age 70 1/2: Charitable Contributions from Your Retirement Accounts

At the age of 70 and a half, you can begin taking contributions from your retirement accounts, such as your IRA, and then give them to charity using a qualified charitable distribution. If you use this method of charitable contributions, the key is that the money never hits your bank account.

The money goes from the retirement account directly to the charity, allowing you to avoid any taxes on it while also maximizing the amount you give to charity.

Age 73: Required Minimum Distributions (RMDs)

Age 73 is when you start taking your RMDs. This used to happen at age 70 and a half, but now you can wait until age 73 to take RMDs. You must begin taking RMDs at age 73 if you were born before 1960.

If you were born in or after 1960, the required age is 75.

For us, when it comes to retirement planning, these are some of the things that we like to discuss. A lot of milestones change and are easy to miss. If you would like to have a review of important milestones for you, be sure to reach out to us.Click here to talk to us about important age milestones.

May 15, 2023 Weekly Update

We do love it when someone refers a family member or friend to us.  Sometimes the question is, “How can we introduce them to you?”   Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage.

Here are this week’s items:

Portfolio Update:  Murs and I have recorded our portfolio update for May 15, 2023

This Week’s Podcast -Why do You Need a HIPAA Authorization?

Listen in to learn how your HIPAA Authorization can connect with your living will or health care power of attorney for information to be shared. You will also learn about the medical information that can be released to an authorized person per HIPAA standards.

 

This Week’s Blog – Why do You Need a HIPAA Authorization?

Estate plan packages are something we advise all of our clients to think about, and it often starts with a discussion of a will, power of attorney, and if the person needs a trust. However, there’s one element that should never be overlooked: HIPAA authorization forms.

Why You Need a HIPAA Authorization

Estate plan packages are something we advise all of our clients to think about, and it often starts with a discussion of a will, power of attorney, and if the person needs a trust. However, there’s one element that should never be overlooked: HIPAA authorization forms.

As part of your retirement planning, you must think about the future and what will happen to you if there’s a medical emergency in your life.

What is a HIPAA Form and What Does It Stand For?

When you’re in a doctor’s or dentist’s office, it’s not uncommon to come across a HIPAA form. You’ll need to sign one of these forms, and it’s not always 100% clear as to what you’re signing. 

HIPAA is short for the Health Insurance Portability and Accountability Act of 1996, and it transformed healthcare. A few things to know are:

  • The HIPAA law protects your information so that all medical issues are kept between you and the doctor
  • A HIPAA form allows for the release of the information to certain parties, such as a spouse or children 

Many people assume that if they’re in the hospital, the hospital will have to call and inform somebody. Unfortunately, this is not accurate and that is why we recommend filling out a HIPAA authorization form.

What is a HIPAA Authorization?

There are two different types of HIPAA authorization forms. The first is when you’re switching health insurance providers and need to release your medical information from one provider to the next.

However, we’re going to be discussing the second type of authorization.

The second type of authorization prevents your doctor from divulging information about your medical condition to someone else. You may incorrectly assume that if you’re in the hospital, you can talk to your doctor and your doctor will be able to release your medical information to specific loved ones.

You can connect your Estate Plan and your HIPAA forms. If you cannot communicate and someone needs to carry out your wishes as outlined in your estate plan, they’ll likely need medical information from your doctor. Asking someone to carry out your wishes will place a huge burden on them, and you don’t want them to be unable to obtain information on your current medical condition and prognosis.

Connecting your HIPAA forms to an estate plan can resolve this problem.

Example of Why HIPAA Forms Are Important

In the last year, we’ve had a few “reminders” of why filling out these forms is crucial in 2023.  We had one couple who was fine one day and then the next, the husband had a massive stroke. He could not communicate or make any facial movements.

The doctors stated that the person had the mental capacity to communicate their wishes, but they were unable to physically communicate.

The wife was left with the burden of communicating with the doctors about what she thought her husband’s wishes were. She had to guess what her husband’s wishes were because he didn’t have any of the appropriate documents in place that stated his desires.

A healthcare power of attorney allows you to list one or more people to make medical decisions. The person in our example has adult children, and the wife was extremely stressed out in this situation. 

A power of attorney, living will and HIPAA form that are all connected would have allowed the husband’s information to be shared with the wife and children. Her children could have taken on some of the burden of making decisions if all of these documents were connected.

I have another example of my own. I was talking to an estate planning attorney and had a son who was turning 18 at the time. My attorney reminded me that once my son reached adulthood, I would only receive limited information from doctors. 

If my son had been in a medical emergency, the hospital would not have been able to share certain medical information with me.

My attorney advised me to have my son sign a HIPAA form that authorizes my wife and I to speak with doctors and have them release information to us on his medical condition. We also have a daughter who will be turning 18 shortly and will need her to sign a HIPAA form as well.

Imagine being a parent and not having the ability to speak to the doctors about your child’s medical condition. It’s a scary prospect that also applies to your parents, spouse or anyone who would want you to know about their medical condition.

What Information is Shared When a HIPAA Authorization Form is Signed?

HIPAA forms authorize medical professionals to give your medical information to those listed on the form. The person listed on the form also has a right to request any information from the medical professional.

Is every piece of information shared?

No.

Social Security numbers, dates of birth and other sensitive information are protected. Medical professionals must also act within the HIPAA standard of minimum necessary. These professionals only need to provide you with the bare minimum of information.

Medical professionals do not need to go through all of your medical history. Instead, they need to provide you with enough information to make a decision on the person’s health.

On the HIPAA authorization, there is no need for a notary or witness. You only need to have the person’s signature and the name of the people they are authorizing information to be released to in the event they’re in the hospital.

The form requires:

  • Signature 
  • Date
  • How you want the form to be used
  • Names of who you want to access your information
  • Form timeframe (length of authorization)
  • Ability to revoke authorization

On the HIPAA form, you just state your medical wishes and who will receive information on your behalf. These forms authorize the individual to receive just the minimum info necessary to make a medical decision if you are unable to make it yourself.

If you name someone who you decide you no longer want on the form, you can revoke the authorization, too.

We truly believe everyone needs a HIPPA form. 

Anyone who wants to sign HIPAA forms can contact us and we’ll walk you through the process.  We do not charge for this. You can also consult with your estate planning attorney to have them fill out these forms with you.

May 8, 2023 Weekly Update

We do love it when someone refers a family member or friend to us.  Sometimes the question is, “How can we introduce them to you?”   Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage.

Here are this week’s items:

Portfolio Update:  Murs and I have recorded our portfolio update for May 8, 2023

This Week’s Podcast -What Issues Should You Consider Before You Retire?

Listen in to learn the importance of understanding your cash flow needs and budget and building some type of plan for your retirement. You will also learn the importance of budgeting for health insurance if you retire earlier than age 65 and the options to consider for long-term care planning.

 

This Week’s Blog – What Issues Should You Consider Before You Retire?

Are you considering retiring? After working your entire life, you’ve come to this beautiful ending where you’ve hit all your milestones to secure your retirement and can pursue the things that you truly love to do. Many companies offer early retirement options to their employees, it’s an important time to consider a few things before retirement.

What Issues Should You Consider Before You Retire?

Are you considering retiring? After working your entire life, you’ve come to this beautiful ending where you’ve hit all your milestones to secure your retirement and can pursue the things that you truly love to do.

Many companies offer early retirement options to their employees, it’s an important time to consider a few things before retirement.

In our most recent podcast, we go through all the things we think you should consider before retirement. Even if you’ve spent decades on retirement planning, these are things that you need to sit down and think about before transitioning into retirement.

Want a sneak peek at what we’ll be talking about?

  • Cash flow
  • Healthcare
  • Assets and debts
  • Tax planning issues
  • Long-term care

If you’re not considering all these points already, you need to go through them for yourself to better understand each one.

5 Issues to Consider Before Retirement

1. Cash Flow

Cash flow from your own financial perspective will change a lot when you retire. You’ve spent a lifetime working, receiving a check, and enjoying steady cash flow as a result. When you close out your life chapter of working, your cash flow will change.

Instead of cash being given to you for the hours you put in every week, you’ll take money out of the retirement accounts you’ve built up.

You’ll need to consider:

  • Your cash flow needs.
  • Where will the money come from- Social Security, pensions (we’re seeing far fewer of these), retirement accounts, etc.

Often, many of our clients have income from their careers, but do not have a strict budget in place. You need to spend time learning what your true cash flow needs are every month so that you can determine whether retirement is even a possibility.

If you’re lucky enough to have a pension, be sure to know your options:

  • Single life is often the highest payout
  • Spouse benefits

Are you retiring early? Social Security defines retirement as around 67, but there are benefit implications to retiring “early”. If you retire before 59.5, you are penalized on your IRA withdrawals. There are a lot of things to work through to understand what retiring early truly means.

For example, if you retire early, there is an income limit for Social Security that you need to consider. The limit is $21,240 (currently). If you hit full retirement age, the income limit is bumped up to $56,520.

Keep in mind:

  • Retiring before 55 comes with an IRA penalty
  • Retiring at 55 with a 401(k) doesn’t have a penalty

If you’re married, you also need to consider what that means for you and your spouse. You want to consider that one spouse likely has a higher income than the other. If you have a higher Social Security amount, your spouse will get credit if you’re married for 10 years or longer. The spouse, if they never worked, can receive up to 50% of the Social Security benefits that you have. However, if the person did work and their own benefits were higher, then they will receive the benefits they earned.

We recently had a client who didn’t know this and was shocked when they found out that their spouse would also get benefits. Even if you are now divorced but had been married to your ex-spouse for at least 10 years, there may be some benefit there for you in Social Security.

Healthcare is the next big point to consider.

2. Healthcare 

At 65, you qualify automatically for Medicare. Retiring before this age means that you must put a lot of thought into your healthcare because healthcare is very expensive. Medicare will save you a ton of money, but you need to bridge the few years between retirement and Medicare.

We’re seeing costs from $1,000 to $1,500 for people at 62 or so to get private health coverage. That figure is for a single individual and not a couple.

Employers cover your healthcare while you’re working, but when you retire, you’ll need to consider:

  • Dental
  • Vision
  • Healthcare

If you are contributing to an HSA, you will want to think about using this account, too. At age 65, you still need to take IRMAA into account, which is a Medicare surcharge for someone making over a certain threshold. We have a whole episode on this very topic, which you can listen to here or read here

3. Asset and debts 

Many of our clients have the majority of their money in an IRA or 401(k). One of the first things we are asked is, “Should I pay off my house?” If you need to take the funds from a 401(k), the answer is likely going to be: no. You need to pay taxes on your 401(k) withdrawals, and paying off your home can have a significant impact on the money you’ve saved. Instead, small distributions to make an extra payment often work better.

Low mortgage rates, such as 2.8 percent, can often be left because you may make more money with the cash in a brokerage account.

Let’s say that you have $100,000 left on your mortgage and your principal and interest payment is $1,200. If you had this $100,000 in a savings account, it might only net you $600 a month. In this scenario, paying off the house is a wise choice.

Bump your mortgage balance to $300,000, and it may not be beneficial to pay off your mortgage.

Beyond mortgage, you also need to consider risk exposure.

Transitioning to retirement means that you need income for 30-something years from the asset accounts that you have. When you retire, you want to have as little risk exposure as you can with your assets because you don’t want to experience a situation like we did in 2020 when some indexes fell 20% – 30%.

Reevaluating your investments and how you’re invested in the market will help you to limit your risk exposure.

4. Tax planning issues 

If you retire prior to 72 or 73, tax planning can save you a lot of money. 

Imagine retiring at 62 and you have $1 million in assets in your IRA growing at a little over 7% per year. By the time you’re 72, you’ll have $2 million and need to take a required minimum distribution of $80,000 or so per year. If you have Social Security and a pension, these distributions can push you into a higher tax bracket.

We can take a strategic approach to retirement by looking at a Roth conversion. We had a client who retired, had cash in the bank and lived on these funds to allow for significant Roth conversions at a low tax bracket.

5. Long-term care

The least fun part of retirement planning is long-term care planning. You never want to think about yourself in a long-term care situation, but it’s a reality that all of us are at risk of being in at some point.

And long-term care is not cheap.

You need to have a scenario in place where you are prepared to pay for this care. We’re seeing a lot of people pay $8,000 a month for long-term care, with durations being 4 or 5 years. This form of care can cost you $400,000 to $500,000 in total.

Can you afford to take on this financial burden?

You can pay insurance premiums out of pocket, or you can go with an asset-based plan. We’re seeing premiums soaring 50% to 70%, causing many people to be unable to pay for their long-term care.

Instead, you can put $100,000 in a long-term care annuity that grows to $300,000 and can be used for your long-term care. You still have access to this money if you need it and can also name beneficiaries on the account. A beneficiary will receive the total of the account if you pass and never use it, or they may receive any unused funds in the account.

If you pay insurance premiums on long-term care insurance, you will not receive any of these funds back. An annuity can be a great option because if you don’t need to use the funds in the account, they aren’t just going to an insurance company.

We also recommend that you have a will in place or review your will and beneficiaries on all accounts before you retire. If you don’t have all of your estate planning documents in place, you are putting a major burden on your family. You want to go as far as confirming all your beneficiaries and loved ones know the types of documents you have and where these documents are just in case you are ever unable to show them.

P.S. We are working off our own internal checklist titled “2023: What issues should I consider before I retire?” Call the office or email us if you would like a copy of this checklist. We also have a checklist for anyone who is updating their estate plan so that you don’t miss any key points along the way.

Click here to schedule a 15-minute call with us to discuss the things to consider before retirement.

May 1, 2023 Weekly Update

We do love it when someone refers a family member or friend to us.  Sometimes the question is, “How can we introduce them to you?”   Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage.

Here are this week’s items:

Portfolio Update:  Murs and I have recorded our portfolio update for May 1, 2023

This Week’s Podcast -Maximizing Tax Benefits by “Bunching” Charitable Contributions

Listen in to learn how to bunch your charitable contributions into one year using the donor-advised fund. You will also learn why the donor-advised fund is the most flexible version of giving through the bunching strategy.

 

This Week’s Blog – Maximizing Tax Benefits by “Bunching” Charitable Contributions

Taxes are something very few people are excited to talk about. We know that it’s far more exciting to talk about maximizing tax benefits when trying to secure your retirement. And that’s what this entire blog post is about: saving money by bunching your charitable contributions.?

Maximizing Tax Benefits by “Bunching” Charitable Contributions

Taxes are something very few people are excited to talk about. We know that it’s far more exciting to talk about maximizing tax benefits when trying to secure your retirement. And that’s what this entire blog post is about: saving money by bunching your charitable contributions.

Note: We have a podcast on this very topic, which you can find here.

Why Should I Consider Charitable Contribution Bunching?

If you’re charitably inclined, you can save a lot of money by bunching your charitable contributions together. In the current tax code, whether you’re single or married, you receive what is known as a “standard deduction.”

Before this deduction, people would itemize all of their deductions one item at a time. The IRS decided that instead of itemization, people should have a standard deduction that doesn’t require them to list all of their deductions and saves the IRS time, too.

In 2023, the standard deduction is:

  • Single person: $13,850
  • Married: $27,700

When you take this deduction, you cannot itemize. Anyone who is giving money to charity will not be able to deduct their donation unless it is itemized, which really only makes sense if the figure is higher than the two listed above.

Bunching charitable contributions is one way to use deductions to maximize tax benefits.

Examples of Standard Deduction vs Itemizing Your Deductions

Today, the standard deduction has changed so much from 2017. In 2017, a married couple filing jointly would have a standard deduction of $12,500. With the figure being $27,700 in 2023, it becomes much more difficult to reach the amount of itemized deductions to justify not taking a standard deduction.

For example, let’s assume someone is charitably inclined and gives $10,000 in a calendar year.  The person also has $13,000 in other deductions, bringing their total deduction to $23,000. Since this figure is lower than the standard deduction, it doesn’t make sense to itemize.

However, people like getting tax benefits from giving their money away, and this is where bunching comes into play. A donor-advised fund is the perfect way to leverage bunching, and we’ll be talking about this type of fund more in the next few paragraphs.

Let’s assume that every year, you give $10,000 to charity.

In 2022 and 2023, instead of giving $10,000 each year, why not “bunch” it into an account that allows you to deduct $20,000 in 2022? You don’t even need to give all of the money out in 2022.

When you do this, you can deduct:

  • $20,000 in contributions
  • $13,000 in the other deductions that you have

Adding up all of these figures, you can deduct $33,000 in expenses, which is much higher than the standard deduction. You’ll deduct more from your taxes in 2022 using this strategy and can still take the $27,700 deduction in 2023.

  • How can you bunch all of your charitable contributions into a single year?
  • Do you need to give the full $20,000 in a single year?

For many people giving money to charity, they make a commitment to give a certain amount of money each year. Your church may need $10,000 a year and a lump sum of $20,000 may not be beneficial for them.

Donor-advised Funds and Bunching Charitable Contributions

Donor-advised funds allow you to do a few things:

  • Group deductions in one year
  • Give the funds to the account and not the church (like in the example above)

Charles Schwab, Vanguard and similar custodians will have a donor-advised fund. You will write a check to one of these funds for $20,000 and it will sit in these accounts. If you don’t want to write a check, you can also put stock in the account. Any money in the account can also be invested, which is a nice way to give even more money to charity.

When you put money into the fund, it’s an irrevocable gift to the charitable fund, but you’re in complete control over how to use this fund.

If you want, you can gift $10,000 a year to your church as long as it’s an approved charitable organization. You can log into your fund and request a check sent to the church from your fund.

However, you can bunch your charitable donations every few years by putting the funds into an account that you can control.

You can even decide to:

  • Reduce contributions
  • Give money to other charities

You don’t need to decide who gets the money when you create the fund. Once the money is in the account, you can direct the money as you see fit. Perhaps you want to let the $20,000 sit in the account for a few years and then give $2,000 of it away for 10 years. You have this option.

The only thing that you cannot do is give the funds back to yourself. After all, you’ve been given a tax break and the IRS won’t allow you to take the funds back.

Bunching can be done for two, three or more years. There are strategies around bunching that can save you more money. Typically, two to three years of bunching is what we see with our clients because it helps with maximizing tax benefits.

When you use bunching, you:

  • Save money on taxes
  • Still maintain full control over who gets the money

Donor-advised funds are available from most custodians. We work with Schwab, and they allow us to create one of these funds right online for our clients. Different custodians may have different setup requirements, but they all make it rather easy to set up your donor-advised fund. The process of setting up a donor-advised fund is as easy as opening a checking account.

 You can transfer money or stock into the account, too.

Our clients who are focused on retirement planning save a few thousand dollars by bunching their charitable contributions. If you are committed to donating a certain amount to charity each year, it makes sense to give bunching a try for yourself.

Do you want to learn more about bunching and donor-advised funds?

Click here to schedule a call with us to discuss charitable bunching with a member of our team.

April 24, 2023 Weekly Update

We do love it when someone refers a family member or friend to us.  Sometimes the question is, “How can we introduce them to you?”   Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage.

Here are this week’s items:

Portfolio Update:  Murs and I have recorded our portfolio update for April 24, 2023

This Week’s Podcast -2023 1st Quarter Economic Update

Learn why you shouldn’t worry about the US debt ceiling and its impact from a market standpoint. You will also learn why inflation might last longer and cause a recession if the federal reserve doesn’t prioritize the inflation fight.

 

This Week’s Blog – 2023 1st Quarter Economic Update

Andrew Opdyke was our special guest on this past week’s podcast. If you’ve read through our blog or listened to our podcast before, you know that Andrew is who we rely on to gain insight into the economy. In December 2022, we asked him how is the economy doing right now?

2023 1st Quarter Economic Update

Andrew Opdyke was our special guest on this past week’s podcast. If you’ve read through our blog or listened to our podcast before, you know that Andrew is who we rely on to gain insight into the economy. In December 2022, we asked him how is the economy doing right now?

And now, at the end of Q1 2023, we’re asking him the same question. A lot has changed in the last quarter that everyone in the middle of retirement planning or in retirement must keep up to date on. P.S. You can also listen to this episode of the podcast here.

Major Points of Interest in Q1 2023

The first quarter of the year started off with a lot of unknowns. Fear of a recession and inflation were hot topics, and now, we have some clarity going into Q2. The year started with high inflation and questions about the Fed raising rates. 

  • How much will the Fed raise interest rates?
  • How long will rates stay elevated?

Finally, we’re seeing some break in inflation. Jobs also came in strong, although the numbers are starting to slow, and we still have a little time before GDP figures are released. We are noticing a divergence in the goods and services of the market.

If you remember, during COVID, the focus seemed to turn to goods.

The goods side is moderated at the moment and may even be in recession territory. However, the services side of the economy is picking up the slack and performing very well. The question on the Fed’s mind is why hasn’t inflation come down yet? And when it does, will economic growth be prioritized or inflation?

No one knows for sure.

On the market side, things are looking up. Many of the companies that struggled at the end of 2022 are leading the way in 2023. The question is whether the market can sustain itself.

Bank Situation in 2023

A lot of people reading this remember the financial crisis, but the new banking issues center around the US Treasury. The Treasury has been known to be one of the safest investments that you can make, but banks got hit from holding assets in an environment with rising interest rates.

Even banks like Silicon Valley Bank, which no one really heard of because the average person didn’t bank with them, have been hit. That’s because Silicon Valley Bank offered loans to many companies that thrived during COVID and sort of fizzled out or was less attractive after COVID.

Small and regional banks started to tighten up lending activity, leaving many small- and medium-sized businesses with less funding after the debacle with Silicon Valley Bank. Tightening in these banks led to a sort of “additional Fed hike” for non-public or large companies.

Larger entities work with major lenders, which are less impacted by the banking situation.

  • Hire
  • Invest
  • Expand

Andrew doesn’t believe that the banking side of things will be long-lasting. We will see the effects of these issues over the next 3 – 6 months as the banks pull back. The result? That’s what we’re unsure about. Growth may slow due to these banking issues. 

US Dollar and Losing Its Place as the Reserve Currency

For 200 years, the US dollar has been the world’s most important currency. International transactions needed the US dollar when trading. The world’s most stable currency becomes the reserve currency status.

The US benefits from being the reserve currency in a few ways:

  • Keeps interest rates lower
  • Higher demand for debt
  • Easier ability to trade on international markets

Every few years, we hear that the USD will fall out of being the reserve currency. This time around, China and Brazil made a deal, and China asked for the payment to be made in the Renminbi. Another deal in the Middle East requested the same, and this has led to speculation that the Renminbi will overtake the US dollar as the reserve currency.

If this happens, it will lead to:

  • Higher interest rates
  • Consumer impacts

Every few years, we hear this same story of the USD losing its reserve status. Even with these changes, over 60% of international reserve balances are held in USD. Between 60% to 80% of international transactions are in the US dollar.

China accounts for around 2% of transactions, primarily because businesses do not trust communism for their reserve currency.

Debt Ceiling Concerns

The US has printed a lot of money in recent years, leading to major concerns about being able to service the debt. While the US has a lot of debt, the numbers do not show the full picture without looking at both sides of the balance sheet.

On both the corporate and consumer sides, we’re at or near all-time debt levels.

We’re also at all-time asset levels, too. However, how much GDP percentage does it take to service the debt? Roughly around 1.9% of the GDP is necessary to pay these debts. In the 80s and 90s, we paid about 3% of GDP.

The balance sheet is in a better position now than in the past. 

However, we should raise our debt ceiling and pay our debtors. A US default is unlikely this year, and these talks will swirl again in a year or two because it’s very interesting and sells a lot of advertising to media viewership. 

What is Andrew Worried About in 2023?

A major concern is the Fed and if they will remain hesitant in the inflation fight. If the Fed remains slow to ease inflation, Andrew expects a recession in Q3 or Q4 of 2023. He does point out that not all recessions are created equal, and he thinks it will be like the 1990 – 1991 recession.

What is Andrew Optimistic About in 2023?

Progress is taking place in the market. He expects earnings to remain around the highest levels in history. Production and output growth are expected to pick up once the Fed gets inflation under control.

The service side of things is expected to keep the economy running.

In the second half of 2023, the economy is very likely to slow, but it will strengthen the economy going forward.

Andrew does believe that market volatility will occur towards the end of the year and in 2024, rate cuts will begin. The net effect is a short recession, and the market will be roughly flat by the end of 2023.

If Andrew is right, the US economy will slow down and then pick up steam in 2024. Overall, he is confident that next year will look a lot better in terms of production and growth.

Click here to join our free course: 3 Keys to Secure Your Retirement.

April 17, 2023 Weekly Update

We do love it when someone refers a family member or friend to us.  Sometimes the question is, “How can we introduce them to you?”   Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage.

Here are this week’s items:

Portfolio Update:  Murs and I have recorded our portfolio update for April 17, 2023

This Week’s Podcast -Retirement Withdrawal Strategy

Learn how to determine your spending during retirement and which accounts the money will come from. You will also learn the importance of being flexible to make changes to your strategy as things and priorities shift over time.

 

This Week’s Blog – Retirement Withdrawal Strategy

If you’re like most people, you’ve worked a lot, put money into retirement and relied on your paycheck to pay the bills. A lot of time goes into retirement planning, and then there’s this cosmic shift where you’ll find yourself spending your retirement money.

You have all of these accounts that have grown as you tried to secure your retirement, and you may be wondering: Which accounts do I take money from? 

Retirement Withdrawal Strategy

If you’re like most people, you’ve worked a lot, put money into retirement and relied on your paycheck to pay the bills. A lot of time goes into retirement planning, and then there’s this cosmic shift where you’ll find yourself spending your retirement money.

You have all of these accounts that have grown as you tried to secure your retirement, and you may be wondering: Which accounts do I take money from? 

The steps below can help you create a retirement withdrawal strategy that works well for you:

5-step Retirement Withdrawal Strategy

1. Determine Your Retirement Needs

We work and save for so long that when retirement comes, most of us don’t know our needs. You’ve built up a nest egg, and now it’s time to understand your needs:

  • Essential income: What do you need to stay relatively happy? You’re not having all of the fun yet, but you need to pay your mortgage, eat and enjoy life a little bit, such as going out to dinner. Calculate this expense, which may be $3,000 to $4,000 or less and maybe even more, depending on your lifestyle.
  • Wants in retirement: Do you want to travel, play golf, or spoil your grandkids? What will make retirement fun for you? It’s important to come up with your own bucket list and then put a dollar figure on each item.

Social Security is unlikely to cover all of your needs, and this is where the coming steps will help you create a withdrawal strategy.

2. Understand the Different Types of Retirement Accounts

Many people know a lot about their 401(k) accounts because they’ve paid into them for so long. Their employers may have contributed to these accounts, and it is where many people have the bulk of their wealth.

However, you may be involved with:

  • Traditional or Roth IRA
  • Traditional or Roth 401(k)

If you have a traditional IRA or 401(k), there is a rule that you have to take what is known as a required minimum distribution. Currently, at age 72, you need to begin taking withdrawals from these accounts every year. This age is set to increase to over the years, but right now, it’s 72.

We have a few clients who didn’t realize that they needed to take this distribution and don’t need the money. However, since these accounts are traditional, you’ll need to take your withdrawals and pay taxes on this money, creating a lot of interesting scenarios.

For example, you may have to deal with:

  • Health benefit changes that are based on income
  • Paying into a higher tax bracket because your income is now higher

Roth accounts do not require you to take a required minimum distribution. In many cases, we’ll discuss doing things early, such as in your 50s and early 60s, when you still have time to convert the traditional account earlier to avoid potential drawbacks in the future.

Everyone with a traditional or Roth IRA must sit down and figure out the rules of each account type that they have.

3. Figure Out Your Priorities

Year by year, your retirement withdrawal strategy can change. Nothing is set in stone, but we find a yearly strategy provides our clients peace of mind. With that said, you do need to determine your priorities.

For example, you may want to prioritize:

  • Roth conversions to get into a tax-free scenario
  • Tax strategies to lower future taxes

Roth conversions will trigger taxes and can impact you in the future. 

We have one client who is trying to leverage a very low tax year, live on cash in the bank and do a Roth conversion. He plans to live on the cash he has saved so that the Roth conversion can happen at a rate of just 12%.

Since he is converting into a Roth account, he benefits from:

  • Allowing the money in the account to grow
  • Not having to take withdrawals

He is making it a priority to get his money into accounts that can grow tax-free and not have to worry about future withdrawals.

Another priority that we have seen in recent years is staying under IRMAA. IRMAA is a Medicare surcharge, and if you go over a certain threshold, you’ll need to pay higher premiums as a result.

Don’t know what IRMAA is or why it matters? Read through our guide: IRMAA Medicare Surcharges and 

If you never want to go above the IRMAA threshold, this can be a priority and achieved by creating the right withdrawal strategy.

4. Manage Investment Risk

Investment risks can be complicated, but we like to keep it simple with a three-bucket strategy. The strategy includes:

  1. Cash in the bank that you can use as emergency money any time you need it.
  2. Investment bucket, which is the money that you want to grow. Some risk is involved here.
  3. Income or safety bucket. Let’s assume that we have an income or safety bucket, this will cover your expenses and allow your investment bucket to rise and fall without worrying about market downturns.

You can read more about our retirement bucket strategy here.

5. Be Willing the Adjust

The final step in a retirement withdrawal strategy is that you should be able to adjust the strategy at any time. Unfortunately, there is no one-size-fits-all approach or rule of thumb to follow with your withdrawal strategy.

Retirement-focused financial plans are “living and breathing.”

We want to have the ability and flexibility to adjust your plan when it benefits you the most or when priorities change. For our clients, we recommend going through their plans at least once a year.

A quick review helps you understand if you have everything to cover your life for 30+ years in retirement. If you get caught in autopilot, you may miss important changes that need to occur.

If you prioritize your withdrawal strategy, you’ll find that it’s a lot less complex than it is if you scramble to create a strategy too late.

Do you want help with your retirement planning?

Click here to schedule a call with us about your retirement withdrawal strategy.