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.
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.
Retirement planning is a long process. When you first start trying to secure your retirement, your life may be entirely different than it is today. One topic that we’re passionate about is the need to review beneficiary designations annually.
Backtracking a little bit, we decided to discuss this topic in-depth with you after reading an article on MarketWatch.
The story begins with a man who has a market account worth around $80,000. Suddenly, this man passes away, and the beneficiary of his account is his prior wife. However, his prior wife was deceased.
What Happens if the Beneficiary of an Account is Deceased?
In the scenario above, the man’s prior wife is deceased already. When he passes on, the account then goes to his estate. His account must then go through probate and into the estate, too.
However, in this man’s case, he had a daughter who was meant to inherit the account. Her stepmother even sent the daughter a text message stating that her father wanted her to have the money in the account.
Fast forward a bit, the stepmother becomes the executor of the estate after the account goes through probate and says, “She thinks the girl’s father changed his mind and that the money is meant to go to her, the stepmother.”
The daughter feels like the stepmother betrayed her father.
Unfortunately, a text message isn’t enough legal grounds for the daughter to fight back against her stepmom.
This is an example of someone who didn’t review beneficiary designations annually. Instead of the father’s wishes being upheld, someone else decided what they thought was best for the funds in the account.
Key Takeaways from this Example
Beneficiary designations are very important. We don’t know what the father wanted to happen to the funds in his account, nor do we know what may have been written in his estate plan. What we do know is that the daughter does have a message from her stepmother stating that the funds were meant for her, but something changed along the way.
We can speculate that perhaps the stepmom found estate documents mentioning that she received the estate, or maybe she fell on hard times financially and wanted to keep the funds.
In all cases, this could have been avoided by:
Reviewing beneficiaries annually
Updating beneficiaries when major life changes occur
Many accounts that you have often allow you to add beneficiaries, even if you don’t know that you can. For example, you can add beneficiaries to IRA, 401(k) and life insurance. You can even add beneficiaries to checking accounts.
We recommend that you:
Gather all of the accounts that have money in them
Inquire with all of these accounts if you can add a beneficiary
Probate and state law can vary from state to state dramatically. The daughter in the case above wanted to know if she could use the text message as evidence and file a lawsuit.
Contesting Probate 101
We don’t know the logistics of the case the daughter has or if a text message will mean anything in her scenario. Likely, the text will not hold up in court. What we are certain of is that contesting probate is:
Lengthy and can be very difficult to do
Costly
Avoiding any probate contestation is always in your best interest. The father in the example above may have been able to add a contingent beneficiary to his account. What this does is say, “If the first person is no longer living, the next beneficiary should be this person.”
Contingent designations would have helped this family avoid probate court and animosity between the daughter and stepmom.
7 Steps to Manage Your Beneficiaries Throughout Your Life
1. Review Your Beneficiaries Annually
For our clients, we do a beneficiary review each year. We show them who is listed on their accounts as a beneficiary, including:
Beneficiary name
Percentage to each beneficiary
Contingents
Etc.
If you’re not a client of ours, you can easily do this review on your own. Reach out to all of your account holders and ask them who you have listed on your account as a beneficiary. It is possible that you sent in a form to change a beneficiary and it was never filed.
It’s so important to verify your beneficiaries annually, even if you have a form sitting in front of you naming the beneficiary, because you just want that peace of mind that everything has been filed properly.
2. Consider Tax Implications
When you leave accounts behind, they may have certain tax implications that you need to worry about. For example, an IRA is taxed one way and a Roth IRA is taxed another way. It’s important to know the implication of each account to make it easier to understand who best to leave the account to when you pass.
If you leave an account to a high-income earner, they may take the money out of the account and pay the tax burden. Then, they may decide to give the money to your grandkids.
However, there are ways that you can set up these accounts to avoid this high tax burden and leave the funds to your grandkids directly. You can do what is known as “disclaiming,” which would allow your son or daughter to divide the money how they see fit with fewer potential taxes.
3. Understand the Impact on Your Overall Estate Plan
Let’s assume that you’re leaving $1 million behind with most of it in an IRA or 401(k) and have beneficiaries attached to it. The remaining part will go through the estate plan. In this case, you may be disinheriting a child if:
In one area, you split the funds 50/50
Another area you split the funds 80/20
When going through a beneficiary review, it’s important to look at the dollar amounts that are given to each child. You may decide to leave $500,000 to one child and $1 million to another child.
In this scenario, one child would need to receive the house and an additional $250,000 and the other $750,000 to split the inheritance evenly. Of course, you can divide your estate up however you see fit, even if that means one child receives far less than the other.
4. Consider Beneficiary Needs
Beneficiaries may have different needs. If one beneficiary is a high-income earner and the other is not, the high-income earner may not need as much money. You may even want to allow the high-income earner to disclaim the inheritance to give to their kids without the high tax burden.
If you have a special needs child, you also need to consider how the inheritance may impact their benefits. In this case, you may want to consider a trust account so that the child still receives their benefits and the help they need.
Another common scenario is that:
Your child is not good with money
The child may spend all of their money at once
In this case, a trust and a discussion with an attorney can empower you to leave money behind and dictate how it is used with greater control.
5. Be Specific
For example, your intent is to leave 25% of the money to your grandchildren. It’s better to name the grandkids as primary beneficiaries. The reason for this is that people may forget how you want the money divided, and being very specific in your documentation can help clear any potential confusion.
6. Consult with an Attorney
An attorney is a second set of eyes who will look through all of your beneficiaries and estate plans with you. We know quite a few attorneys who are highly skilled and still hire others to review their documents with them in case they overlook something.
If you need a trust, the attorney can also assist with that.
Legally drafted documents will hold up far better in court than you writing a will on a piece of paper.
7. Consider Contingencies
In our story of the daughter and stepmother above, a contingent would have been immensely helpful. The reason why adding a contingent is so important is that if, for some reason, you get sick and do not check your beneficiaries, you already have a contingency in place.
The father could have listed the mom as the primary and the daughter as a contingent, which would have helped those he left behind avoid arguments and disagreements along the way.
What if the father set the contingent so long ago that both the primary and contingent are no longer living at the time of his death?
He could have left the funds to his grandkids if the institution allowed him to mention “per stirpes,” which means if the primary is not alive, the funds will go down the line to the person’s descendants equally.
Per stirpes is a powerful designation because you don’t even need to know the names of the person(s) to whom you’re leaving the funds.
Annual beneficiary reviews and putting contingencies in place are powerful tools that we firmly believe are worth using. You can help your family avoid grief and any potential arguments if you spend the time going through your accounts and putting all these measures in place.
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 10, 2023
This Week’s Podcast -Why Review Beneficiary Designations Annually?
Listen in to learn the importance of naming contingent beneficiaries after your primary beneficiaries to ensure everything is clear. You will also learn why you need to consider the tax implications of each account, the needs of your beneficiaries, and its impact on your overall estate plan.
This Week’s Blog – Why Review Beneficiary Designations Annually?
Retirement planning is a long process. When you first start trying to secure your retirement, your life may be entirely different than it is today. One topic that we’re passionate about is the need to review beneficiary designations annually.
When people come to us for financial advice, and particularly retirement planning, they have a very important question to ask: how do financial advisors get paid? You’re entrusting an advisor with your money, and you have a right to know how that person’s fees are structured.
A client might like everything we’re talking about, but they almost always ask how we’re getting paid.
We think it’s very important to know how an advisor is paid because it’s your money being invested. There are three traditional ways that financial experts may be paid:
3 Ways a Financial Advisor Can Be Paid
1. Commission
Commission-based payments have been around the longest, and there’s always some controversy here. Let’s say that an advisor recommends purchasing 100 stocks in Microsoft. He or she may be paid a commission on this purchase.
When someone handles your money, they may be paid commissions, which some clients aren’t happy about.
There are a lot of people that assume commission-based is bad because the advisor:
Is incentivized to sell you a product
Puts their interest first
Etc.
But this isn’t always the case. There are a lot of good products that are commissionable. In some cases, products are always commissionable. Life insurance, for example, is commissionable, and the insurer pays an advisor commission because they recommend the product.
There are times when an advisor can’t get away from the commission, but this doesn’t mean that the product is bad by any means.
An annuity, which pays out money in disbursements, is one that needs servicing. Since the advisor is servicing the annuity, the insurer will pay them a commission because servicing can last 10 years or more.
An advisor may receive a commission:
Once per buy-in and/or
Once per year, etc.
Mutual funds are another product where there are three different types:
A Shares
B Shares
C Shares
A shares are commissionable and provide an advisor with a certain percentage upfront. B shares don’t have upfront costs, but when you sell the shares, a charge is made and goes to the advisor.
There are also some mutual funds that pay a small commission to the advisor annually.
Real estate investment trusts (REITs) also have commission attached to them. An advisor may be paid with an REIT in many ways:
Commission, which is most common. The advisor is paid by the REIT, but you’ll be required to keep the money in the trust for a specified period of time.
There are some REITs that don’t pay commission in the same way, which we’ll be talking about in the next sections.
It’s best to ask your advisor if they receive commission. Advisors may also have the option to waive a commission. For example, an A share commission can be waived.
Note: In the financial industry, the commissions are highly regulated. The financial advisor working on your retirement planning can’t do much in terms of changing the commission due to the strict regulation on these products.
2. Fee-only
Fee-only advisors can help you with retirement planning, and this classification means that the advisor cannot help you with a product that gives commission. For example, let’s assume that an advisor is looking through your retirement plan and thinks life insurance would be an amazing option for you.
As an advisor that offers fee-only services, it is required that refer you to someone else for this product because they cannot receive a commission on it.
This is a very restrictive space.
Fees can be:
Hourly fees
Flat rate
Asset-based (percentage of the funds or estate managed)
Asset-based fees are often preferred because as your estate or portfolio grows, the advisor is paid more. This type of fee structure makes sense for a lot of people because it’s in the best interest of the advisor to maximize your returns so that they’re paid more.
3. Fee-based
A fee-based advisor allows the individual to offer both commission and fee-only services, which offers the financial planner the most flexibility. If one of these financial professionals thinks that you may need life insurance, they can offer you this without needing to refer you to someone else.
In the broad spectrum, fee-based makes sense because the advisor can do everything for you.
But we recommend working with someone who is a fiduciary.
A fiduciary is held to the highest standard. As a fiduciary ourselves, this means that we must take care of the client first. As a client, this provides you with the most protection.
When speaking to a financial planner who is fee-only or fee-based, any time that there’s a conflict of interest, such as a commission being paid for a product recommendation, it must be disclosed.
We work on a fee-based arrangement, and when we make a recommendation that has a commission, we have to disclose everything to the client.
Ultimately, commissions are built into rates, so there’s always some payment coming from the client. We believe as long as the advisor is upfront and you know all of the fees and/or commissions upfront, commissions are perfectly fine.
If you want more information about preparing your finances for the future or retirement, check out our complimentary Master Class, ‘3 Steps to Secure Your Retirement’.
In this class, we teach you the steps you need to take to secure your dream retirement. Get the complimentary Master Class here.
There’s a lot to consider when thinking about paying off your mortgage. Your home is likely one of the most significant financial investments you’ll make in your lifetime, but it’s also an emotional one. As you near retirement, you may start to wonder if you’ll be better off without the burden of a mortgage – but that’s not always the case.
You can watch the video on this topic above, or to listen to the podcast episode, hit play below.
Read on to discover why you need to think about cash flow, alternative resources to cash savings, and if it’s a good choice for you to pay off your mortgage.
Why would you pay off your mortgage?
Before you make a decision about paying off your home, we want you to consider why you’d like to do this.
Perhaps it’s a life goal of yours to pay off your mortgage. Many of our clients dream of living mortgage-free, and it’s our job to help them think through this.
But there’s another school of thought that takes a more strategic approach to mortgage payments. This is where you focus less on paying it off in full and more on paying it off in a way that benefits you financially. For example, if you have a low-interest rate on your mortgage, your savings may be able to offset the interest if they’re invested well, e.g., in the stock market or even a CD.
How would you pay off your mortgage?
In order to pay off your mortgage, you have to have the funds. Think about where these are and where it makes sense to pull the money from.
If you have savings sitting in your bank account, it’s a good idea to use these to pay off your mortgage. Cash in the bank won’t be performing very well as interest rates are currently low – almost zero. There are also very few tax issues with this type of account, making it a simple choice.
However, if your savings are in an IRA, and you’d prefer to use this to pay off your mortgage, then you will have to think about the tax impact. IRA money is fully taxable. So, if you want to take $100,000 out of your IRA to pay off your mortgage, you’ll also have to factor tax onto that. You could end up paying an extra $20,000-$25,000 in taxes alone.
As you head into retirement, you want to make sure you have as much money as possible. So, spending thousands of dollars in tax probably isn’t the best decision. While you may feel emotionally inclined to pay off your mortgage, it’s vital to look at how it’ll impact your finances as a whole.
Understanding your cash flow
Say you owe $100,000 on your low-interest rate mortgage. You have enough in your savings to pay this off, but is this the right decision? You want to know if you should use your savings to pay off your mortgage or if you should invest it.
If you choose to invest it, you could get a rate of return anywhere between 6-10%. If your mortgage interest rate is only 2-3%, then you may be tempted to invest your savings instead. But this decision isn’t suitable for everyone.
One of the things we look at is your principal and interest payment on your remaining mortgage balance. Your monthly payments will have been calculated on a much larger sum, so one option is refinancing. However, it’s worth noting that this comes with a cost.
Let’s go back to the example. If you owe $100,000, you may be paying roughly $1,250 per month or $15,000 a year off your balance. This is 15%, which is an incredibly high rate. It would be extremely unlikely for you to earn 15% on any other account. In this case, you’ll have an instant positive cash flow of $15,000 per year by paying off your mortgage.
We understand that this can be hard to visualize for your specific situation. So, if you’d like to see a cash flow analysis on your current mortgage, we’d be happy to calculate this for you. Get in touch with us or book a complimentary call.
Should you use all of your savings to pay off your mortgage?
In a scenario where you have just enough saved to pay off your mortgage (and it makes financial sense to do so), you may feel uncomfortable about having little to no savings left. It can be a lot to stomach watching your account drop from $105,000 to $5,000!
A home equity line of credit can be a suitable solution here. This works in a similar way to a credit card, but the interest rate is typically very, very low. It also gives you access to cash that you can draw on, if you need. So, while you may only have $5,000 in your savings, a home equity line of credit allows you to access much larger sums.
If you do end up needing to use, say, $10,000, for a roof repair or to buy a new car, then we can work with you to find out the best way to pay it down.
Oftentimes people don’t consider a home equity line of credit when thinking about paying off their mortgage. However, it can be a great option. They’re very cheap right now with low interest rates and hardly any carrying costs and or annual fees. It’s also a far quicker and simpler solution compared to something like refinancing.
Should you pay off your mortgage before retirement?
One of the most powerful tools you can have in your retirement planning arsenal is a written income plan. This gives you a clear picture of your finances in retirement, including the possibilities if you do or don’t choose to pay off your mortgage.
If you’d like to see what your financial future looks like in retirement, we can help.We offer a completely free 15-minute phone call to anyone who has questions about retirement planning. So, if you want to know more about whether you should pay your mortgage off, book your call today.
Moving your money from a traditional IRA or 401k and into a Roth IRA can be a smart choice for your future finances. But, while the mechanics of a Roth conversion are simple, it’s important to get the full picture to find out if it will benefit you in the long term.
In this post, we share everything you need to know about doing a Roth conversion, including what a Roth conversion is, why you may choose to do one, and the process of moving your money between these two different types of accounts.
You can watch the video on this topic above. To listen to the podcast episode, hit play below, or read on for more…
The differences between a traditional IRA and a Roth IRA
A traditional IRA or 401k is considered pre-tax money. It gives you an immediate tax benefit. So, for example, you may be using salary deferrals to contribute to a 401k which automatically comes off your income for the year. When you withdraw from a traditional IRA, then the money becomes taxable, similar to a paycheck.
A Roth IRA contains after-tax dollars, but it grows tax-free, and you won’t be taxed when you withdraw it. Say you contribute $50,000 to a Roth IRA that’s invested in the market, and it grows to $100,000 or even $200,000. You can withdraw this without being taxed.
So, these are the two key differences:
Traditional IRAs and 401ks are pre-tax (but you’ll pay tax on withdrawal)
Roth IRAs use after-tax money (but you get a tax benefit later)
One thing that is the same between the two accounts is how you invest. You can invest both a traditional IRA and Roth IRA exactly the same.
How much of a traditional IRA can you convert to a Roth IRA?
Broadly speaking, you can convert 100% of your traditional IRA or 401k into a Roth IRA. There are no conversion limits. So, if you have $1 million in your traditional IRA, you can convert the entire $1 million into a Roth IRA.
But don’t get conversion and contributions mixed up. There are contribution limitations. However, these depend on your age and income.
How to convert your traditional IRA into a Roth IRA
Converting your traditional IRA into a Roth IRA is a simple process, similar to switching any account. The easiest way to do a Roth conversion is when both IRAs are held at the same institution.
For example, if you had a traditional IRA at Charles Schwab and wanted to do a Roth conversion, the easiest option is to open a Roth IRA also at Charles Schwab. Then it’s a straightforward transfer to move your money from your traditional account into your Roth account. You just have to know how much you want to convert, then sign the document and the custodian (in this case Charles Schwab) will take care of the rest.
If your traditional IRA and Roth IRA accounts aren’t held at the same institution, the process is almost the same, but with a few extra steps. It’s best to check with your traditional IRA or 401k account holder to find out what their exact process is, and they’ll help you through it.
Taxes: what to look out for when converting
When you do a Roth conversion, you have to pay taxes as you’re moving money out of a pre-tax account and into an account for after-tax dollars only.
You might consider holding back some money to cover these taxes. However, we believe this isn’t the best option. You may not be able to make contributions to your Roth IRA, so a conversion is the only way to put as much money as you can in this tax-free account. So, we advise converting 100% of your traditional IRA into a Roth IRA and paying the taxes from another account, such as savings or a brokerage account.
Say you want to convert $30,000 from your traditional IRA into a Roth IRA. First, you should make sure you have enough money outside of your traditional IRA to cover the taxes. On $30,000, these taxes may equate to around $6,000. If you decide to take that $6,000 from your IRA money, you’re putting yourself at a long-term disadvantage. The tax-free growth of a Roth IRA means you should put as much money in as possible to reap the future benefits.
Depending on your tax situation, you may need to think strategically about how much you can convert. You don’t want to end up in a higher tax bracket because you converted too many extra dollars. If you’re unsure about how much you can convert without changing your tax bracket, speak to your financial planner or advisor who can help you play with the numbers.
Why you need to consider future tax
The number one reason to do a Roth conversion is to protect against higher tax rates in future. The idea is to pay lower tax rates now and avoid rising ones later down the line. So, if you believe that your taxes will be lower in future, a Roth IRA will not make sense for you.
If you currently have a high-income rate, say $250,000, but are expecting this to drop to $60,000 in 15-20 years, then you could be paying less tax in future. However, if tax rates rise, you may pay a higher percentage, even though you’re earning a lower amount. So, the question is, would you still convert?
In this situation, one solution is to do smaller conversions and split your money into both pre-tax and after-tax assets. Ultimately, we don’t know what might happen in the future, so you will need to think carefully about whether a conversion is really right for you and put a strategy in place.
How to avoid required minimum distributions with a Roth conversion
Any pre-tax account, including traditional IRAs, 401ks, and 403bs, are subject to required minimum distributions (RMDs). These are to make sure that you do eventually pay tax on this money. At age 72, you’ll be required to take withdrawals from your pre-tax account based on your life expectancy.
Another reason many people choose to do a Roth conversion is to avoid these RMDs. You may prefer to pay your taxes now rather than on RMDs at age 72. If you’re already at this age, it becomes more challenging to do a Roth conversion as the IRS requires you to take the RMDs every year.
Say you have $1 million in a traditional IRA and your RMD for that year is $50,000. If you want to do a Roth conversion, you have to take the $50,000, put it in your bank, pay the taxes on it, and only then can you proceed with the Roth conversion. So, if you wanted to convert $20,000 from your traditional IRA into a Roth IRA, you could do this after you’ve taken and paid tax on your RMD. It’s important to note that this means you’ll have to pay tax on both amounts, so $70,000 in total that’s been added to your income for the year.
Our advice is, if you’re planning to do a Roth conversion, don’t wait until you’re RMD age.
It’s important to look at the whole picture when deciding whether to do a Roth conversion. Tax numbers can be confusing, so it’s best to find out what solution suits your specific situation. If you want to get more insight on converting your traditional IRA into a Roth IRA, you can book a complimentary 15-minute call with us and we’ll discuss what option is right for you.
Buy and sell investments were all the rage just a few years ago. People would invest in a new, hot tech stock, hold on to it and reap the benefit of their shares rising drastically. Warren Buffett was a major supporter of buying and holding, and the strategy led him to being one of the richest men in the world.
We’re here to tell you that the buy and hold is dead for the individual investor thanks to risk management.
Buy and Hold’s Main Flaw for Asset Allocation and Investing
Buy and hold is ideal for institutions that have an infinite lifespan. A business that can be around for a hundred years doesn’t need to concern itself with the prospect of their stock fluctuating up and down and potentially losing 50% of its value.
These institutions can continue holding until the stock recovers, which is something that a person nearing retirement may not be able to do.
A regular individual that is investing and holding is unlikely to withstand a plummeting stock market.
Risk assessment is an option that allows investors to interpret and react to a changing market. For example, the risk assessment for the most recent market crash could have helped a lot of investors keep money in their retirement and investment portfolios.
Between 1999 and 2013, the S&P 500 was below its average until mid-2013.
Tens of millions of investors needed their money during this time. For example, a person in 1999 at 55 might have needed just average returns over the next decade to retire comfortably. But the market dipped by as much as 50%, causing the investor to put his life on hold.
Massive fluctuations in the market, even over a 10-year period, can be devastating for an investor or someone that has been growing an investment portfolio for retirement because 10 years is a long time.
Risk Management is Not Timing the Market
Risk management is about the ebb and flow of the market. When the market starts to become too risky, a risk management approach will take immediate measurements in the market to reallocate investments to help avoid massive losses.
And there are a lot of approaches that we take to determine risk, including:
Supply and demand balances to better understand how an investment may pan out in the short-, mid- and long-term.
The inner workings of a market. This helps us determine what the lows and highs are for a certain industry’s stock to pinpoint potential risks that an average investor may not realize is happening in the market.
Risk management also includes another important aspect: when to get back into the market. For example, when the market began to tank in 2006, a lot of investors sold off their stock and never really got back into the market because they didn’t have the data to properly calculate their risks.
Proper risk management can alert an investor when the market is good to enter again and when, even if it’s difficult, it’s time to offload an investment.
Risk Off and How a Risk Manager Determines When It’s Time to Reduce Risk
Risk is all based on a timeframe. In most circumstances, there’s a short and long timeframe that may indicate that it’s time to offload certain stocks. A long-term timeframe may be based on supply and demand measurements, especially internally in markets where these factors aren’t witnessed by the average investor.
Oftentimes, when markets are seeing a sway in supply and demand, it’s months after these internal factors are being recorded.
Rebalancing a portfolio to remove assets that may suffer from these factors is a good idea, and you may stay out of these markets for the long-term, which can be five, six or even ten years. Short-term factors also play a role in risk management.
A short-term indicator can help a portfolio withstand short-term fluctuations, such as those seen with COVID. Stocks fell in the first-quarter of the year but rebounded, which allowed someone considering their risk to reenter the market at the right time and reap the growth seen just a quarter or two after.
Multiple timeframes can be followed, which are tailored to a specific client and based on:
Declining internals
Supply and demand
Improving fundamentals
Buy and hold is a good strategy for some, but as you age, risk management needs to takeover. The risks that you can face when you’re younger shouldn’t be a part of your portfolio later on in life when you have proper risk management in place.
Risk management models can help predict a market’s direction, allowing investors to capture a market’s upside while not capturing a lot of downside.
While you’ll always capture a little upside and downside, the right data and management strategy will allow you to capture more of the upside in the market, reducing risk and generating more gains in the long-term.
If you want more information about preparing your finances for the future or retirement, check out our complimentary Master Class, ‘3 Steps to Secure Your Retirement’.
In this class, we teach you the steps you need to take to secure your dream retirement. Get the complimentary Master Class here.
Are you concerned about how inflation is going to affect your retirement savings?
There’s a lot of talk right now about inflation and how it’s going to change in the future. When you’re planning for retirement, this can feel like a curveball.
However, it’s no secret that inflation does impact your spending over time, especially when you’re no longer earning a monthly income. What can help is knowing how much it will impact your spending and what you can do about it.
In this post, we share everything you need to know about inflation in retirement. We illustrate how varying inflation rates can affect your savings over time and why you need to carefully consider your spending plan.
You can watch the video on this topic above. To listen to the podcast episode, hit play below, or read on for more…
How inflation has changed in recent years
Inflation can have a very real impact on your retirement funds, which is why we include it as part of your written retirement plan. But it’s important that we base the inflation rate on realistic, yet conservative figures.
To do this, we look at the average rate over the last 10 and 100 years. So, over the last century, the average inflation rate is just over 3%, which is why, when we build a retirement income plan, we set it at 3%. However, if you look at the average over the last ten years, it’s 1.7%. Therefore, we consider 3% a conservative rate as we expect inflation to be closer to the 1.7 mark.
Inflation and retirement planning
In this example, we’re going to talk about fictional retiree Cindy. Cindy is 67 years old, and she’s decided to retire now. She’s saved $1.5 million and receives $3,000 a month in Social Security.
Typically, there is a cost-of-living adjustment (COLA) with Social Security, which is somewhat tied to inflation. However, in this example, we are not going to include this adjustment or any other raise to Cindy’s Social Security benefits.
The key player when thinking about inflation in retirement is spending. Cindy plans to spend $7,000 a month in her early years of retirement. This is more than she plans to spend long-term because she wants to travel and do lots of activities while she’s able to. So, her initial spending in retirement will be higher than in her later years.
At age 67, Cindy will have to combine her $3,000 from Social Security with a $4,000 draw from her savings to provide her with $7,000 each month. It’s important to note here that we are factoring in a conservative 5% rate of return on Cindy’s savings.
How inflation affects spending
By adding 3% of inflation every year to her monthly spending after retirement, it’s going to require Cindy to gradually withdraw more and more from her assets. So, what does this look like year on year? Here’s how a 3% rate is projected to affect Cindy’s planned $7,000 spending each month.
Year one: $7,000
Year two: $7,300
Year three: $7,500
At age 80: $10,000
At age 90: $14,000
If Cindy wants to continue the lifestyle she has at age 67 through into her 80s and 90s, she’s going to have to withdraw increasingly more from her savings each year. Here, you can clearly see how inflation puts significant pressure on your savings.
In this scenario, at age 90, Cindy’s savings of $1.5 million have now dwindled down to just $56,000. With a monthly spend of $14,000, this is too uncomfortably low for us. But what if inflation isn’t as high as 3%?
How much difference 1% makes
If inflation was particularly high (around 3%) Cindy would know that she has to cut back on her spending in order to be more financially secure at age 90. However, if inflation was more in line with the most recent 10-year average (1.7%), what difference would that make?
If Cindy plans to spend $7,000 a month with a 2% inflation rise, she’ll have $765,000 left in her savings at age 90. This tiny tweak leaves her with a far more comfortable figure.
Now, we can’t choose inflation rates, but it’s important to see how much a 1% difference can impact your retirement savings. For Cindy, a higher inflation rate means she has to be more conservative with her spending, or she risks running out of her savings. But she also knows that if inflation holds steady, she can spend more comfortably for longer.
Changing your spending plan as you age
A key part of our roles as retirement planners is to help people like Cindy think through their spending. In Cindy’s case, she wants to spend more in her initial retirement years. She could live comfortably off $5,000 a month – the $2,000 is just extra.
Now let’s see what happens if we change Cindy’s spending based on this plan. In this example, we’ll add 3% inflation to her monthly spending of $5,000 and allow her 10 years of “fun money” – an extra $2,000 a month, with 0% inflation.
With this spending approach, Cindy would have $1.1 million left in her savings at age 90. Compared to the two other scenarios, this spending plan is more likely to give her peace of mind that her finances are secure for longer.
Navigating inflation in your retirement plan
This type of scenario is very common for our clients. People often plan to make the most of their first 5-10 years in retirement and then consider cutting back. We illustrate how spending and inflation affect our clients’ financial situations so that they can make informed decisions about their retirement plan.
Inflation is a factor you need to take into account when planning your finances for retirement. However, it’s often not an issue to stress over. If you’re concerned about how it will impact your retirement, do reach out to your financial advisor or get in touch with us.
We offer a 15 minute complimentary call and can help put your mind at ease about inflation, saving for retirement, or any other questions you may have about preparing for retirement. Book your call with one of our advisors here.
When searching for a financial advisor, you may have come across the term “fiduciary.” But what does it mean? And is it something you should check for before agreeing to work with a particular company or individual?
Choosing a financial advisor can be tricky. You want someone who will work hard for you, sourcing the right products and offering advice that you can rely on.
A fiduciary could be that person. They’re legally bound to put your interests first, regardless of how much they’ll make in return.
But that isn’t the complete picture. Not all financial businesses are fiduciaries, and that doesn’t mean you shouldn’t trust their advice.
In this post, we’re taking a detailed look at fiduciaries, including what they are, how they work, and why they could be the best option for your retirement plan.
You can watch the video on this topic above, or to listen to the podcast episode, hit play below. Or you can read on for more…
What is a fiduciary?
A fiduciary is a person or company that has a legal and ethical relationship of trust with another person. It’s a legal standard that holds financial advisors to account in their interactions with clients and customers.
The most important thing to remember about fiduciaries is that they must always act in their client’s interests. That means finding the best options based on the client’s requirements, regardless of the rate of commission they’ll receive for selling a certain product.
Fiduciaries are held to these standards through licensing and certification, including CFP (Certified Financial Planner) designation. So, when you see a financial advisor with these letters, you know they’re held to fiduciary standards and would lose their accreditation if they breached them.
By now you may be thinking, why aren’t all financial advisors fiduciaries? Shouldn’t they all act in the best interests of their clients?
Well, unfortunately, it’s not that simple. Fiduciary standards don’t work for every type of financial business, for reasons we’ll set out below.
What is suitability?
Suitability is the alternative to fiduciary. Think of it as a diluted version, wherein financial businesses aren’t held to the same strict standards.
Where fiduciaries always act in the best interests of their clients, suitability places more control in the hands of financial businesses. They don’t need to give the best advice and can recommend products based on commission, even if they’re not the best for the client.
That’s not to say financial advisors working within the suitability criteria are unethical. They still take into account a client’s requirements, and the products they recommend must align with their client’s financial goals.
But what kind of businesses and individuals would choose to work within the suitability criteria? And why do they choose not to adhere to fiduciary standards?
Typically, commission-based financial businesses are most likely to work to suitability standards. That’s because they need to make a certain rate of return, and so recommend products that are of more benefit to them than their clients.
This might sound questionable, but suitability is necessary to keep some businesses afloat. It’s also worth remembering that those working within the suitability criteria must consider their customer’s requirements; they can’t recommend poor products and bad deals.
For this reason, many suitability advisors take the stance of: “I’m not bound by the fiduciary law, but I treat my clients like I am.” This is a common practice but something you should take with a pinch of salt. After all, there’s a high likelihood that they’re benefiting from a sale as much as you are.
How do fiduciary and suitability compare?
To help you understand how fiduciary and suitability differ, here’s a helpful analogy showing how each model works in practice.
Let’s say you want to buy a new car for your family. The first dealership you visit recommends large saloons, station wagons, and SUVs, all at different price points. There’s no pressure to buy from the dealer, and you make a choice based on the information they’ve given.
Then, you visit another car lot. Here, the dealer recommends a car that, though suitable for a family, is slightly over your budget. However, they convince you that it’s the right car and you buy it even if it’s not the deal you were looking for.
Can you guess which was the fiduciary dealer and which was the suitability dealer?
That’s right, dealer one was a fiduciary. They offered lots of options that were suitable for families and didn’t recommend any cars that were over your budget to make more commission.
Dealer two was the suitability model. They had one or two suitable cars and used salesmanship to convince you to spend more, making more commission for themselves in the process.
Again, this might sound questionable, but it comes down to how a business is set up and the type of industry they work in.
A final word on fiduciaries and suitability
After reading this guide, you might be thinking that suitability advisors are all bad and fiduciaries are the only way to go – but don’t. Sure, you should be cautious about taking suitability advice at face value, but it doesn’t mean you’ll get a bad deal that doesn’t work for you.
At Peace of Mind Wealth Management, we choose to stay within the fiduciary arena because we believe it’s the best fit for our practice and our clients. Both Radon and Murs are accredited CFPs and are licensed investment advisors, meaning they’re legally bound by fiduciary standards.
If you’re looking for wealth management advice with the assurance of fiduciary accreditation, we can help. Putting your needs at the heart of everything we do, our financial services can help you on your retirement journey.
We hope this guide on fiduciaries helps you think differently about your financial decision-making. Remember, if you need any advice or expertise, our financial specialists are here to help. Book a complimentary 15-minute call with a member of our team to discuss your retirement goals today.
If you’re getting ready for retirement, one of the most important questions you’ll want answering is: when should I take Social Security?
This is the most frequently asked question by all of our pre-retiree clients. There’s lots of information out there that dives into when the right time to take Social Security is, and, usually, people already have an idea of when might suit them. However, what this information fails to take into account is your own personal situation.
In this post, we illustrate the long-term impact taking Social Security at different times can have on your assets. So, if you’re considering taking it early, at full retirement age (FRA), or waiting until you’re 70, it’s important to know the long-term effects it can have.
You can watch the video on this topic above. To listen to the podcast episode, hit play below, or read on for more…
When can you take Social Security?
The earliest age you can take Social Security from is 62. The latest is age 70. That’s an eight-year window where you can choose to start taking Social Security.
Each year that you wait, the amount of Social Security you’ll get increases. So, if you take it earlier, you’ll receive less, but if you wait until the upper age limit, you’ll get the maximum amount possible. This is why a lot of the information says you should wait and take your Social Security as late as you can. However, we don’t believe this is the best option for everyone.
Many people choose to take Social Security at full retirement age. The IRS and Social Security define when this is, and currently, it’s contingent on the year you were born, making you either 66 or 67 at full retirement age.
Now, if you reach full retirement age and decide not to take Social Security right away, that’s going to draw on your assets. Those who retire at 66, and wait to take Social Security when they’ll get the most bang for their buck, have to face 4 years of withdrawals on their assets first. In this case, you have to live for a long time to truly reap the benefits!
Our approach to taking Social Security is to evaluate what works best for your individual retirement plan. Perhaps waiting until you’re 70 doesn’t make sense for you. In which case, taking it earlier could preserve your assets in the long run.
On the other hand, if you take Social Security after age 62 but before full retirement age, you need to be aware of some limitations.
Social Security penalties
If you’re still working between age 62 and full retirement age and choose to take Social Security, there’s a limit to the amount you can earn, otherwise, you will face a penalty.
In 2021, the maximum that a person age 62 can make and still take Social Security penalty-free is $18,960 a year. If you earn less than this, your Social Security will not be penalized. But what if you earn more?
As an example, say you’re planning on consulting and making $35,000-$40,000 a year at age 62. The math quickly tells us it does not make sense for you to take Social Security yet. If your Social Security benefit is $10,000 a year and you earn $10,000 more than the $18,960 limit, you’ll be penalized 50% of your Social Security. That means you’ll lose $1 for every $2 you earn over that limit. Now, instead of receiving $10,000 a year in Social Security, you’ll only get $5,000.
So, if you’re earning above this limit, then it’s highly unlikely that taking Social Security makes financial sense for you. To avoid these penalties, be clear with your financial advisor about how much you’re expecting to make at age 62. If you want to work part-time, or in a low-paid position, it could still be possible to take Social Security penalty-free. But you need to be aware of the numbers.
But what if you’re not planning on working at age 62? If you’re hoping to retire at this age, is taking Social Security a good option for you?
When is the right time to take Social Security?
We’re going to use a fictional person to demonstrate the differences between taking Social Security at various ages. In three example scenarios, we have Mary. She is 60 and planning to retire at age 62. We’re going to use our system to work out when would be the best age for Mary to start taking Social Security.
Before we dive into this example, it’s important to note that Social Security typically rises every year with a cost-of-living adjustment. To keep this example as straightforward as possible, the Social Security amount will not include any increases.
At age 60, Mary has an IRA with $1.2 million in retirement savings, that’s making a rate of return of around 6%. With two more years of work ahead of her, and the interest rates’ growth, Mary can expect to have around $1.4 million at age 62. This is when she hopes to retire.
One thing that Mary needs to know going into retirement is how much money she’s spending each month. Let’s say her expenses are $5,000 a month, with an additional 3% inflation rate.
Scenario 1: Taking Social Security at full retirement age
So, what happens if Mary chooses not to start taking Social Security until full retirement age (67)? For the first five years of her retirement, she will need to draw $5,000 each month on her own assets to cover all of her expenses. When Mary reaches full retirement age, she will start receiving $3,500 of Social Security a month. This now reduces the draw on her assets down to $1,500 each month.
If we look forward to Mary’s assets at age 90, we have some significant changes. Due to inflation, her expenses have increased to $12,000 a month. But thanks to a good rate of return, Mary’s assets have grown to $1.6 million. This is a good outcome for Mary, she can comfortably maintain her lifestyle well into retirement and has more money leftover than she initially retired with.
Scenario 2: Taking Social Security at age 62
But what if Mary took her Social Security when she retires at age 62? We know that she would receive less in Social Security each month because she’s taking it early. So, in this scenario, Mary receives $2,450 instead of $3,500. This means that while she won’t receive as much Social Security each month, she won’t need to draw as much on her assets as she’ll have support throughout her retirement.
In this instance, at age 90, Mary has $1.75 million left over. That’s over $100,000 more than if she waits until full retirement age.
So, you can see that while it might be tempting to hold off taking Social Security early to get more each month, that might not be the best decision. In Mary’s case, it’s more beneficial to take the lower payments long-term.
Scenario 3: Taking Social Security at age 70
Finally, let’s take a look at what happens if Mary waits until age 70 to take Social Security. Because she’s waited until the upper limit, Mary will now receive $4,340 a month. This may instantly look more appealing than taking it early at the lower rate of $2,450, or even in comparison to full retirement age at $3,500.
However, Mary will now have to draw on her assets from age 62 until she’s 70 to cover her expenses. This is a long and sizeable draw. If we look forward to age 90, Mary now has around $1.5 million left over in her nest egg.
So, even though she’s receiving more money on a monthly basis, that initial period of withdrawal has had a big knock-on effect. Looking solely at Mary’s assets at age 90, Mary’s best option will be to take Social Security at the earliest possible age, 62.
What does this mean for you?
This example isn’t reflective of everyone’s situation. If Mary wanted to continue working, had other sources of income, or there was a spouse involved, it may change the outcome. So do not take this example as individualized advice.
What we want you to take away from this article is, if you’re researching when to take Social Security, it’s likely that you’ll get a mass answer that won’t translate to your own situation.
If you want to find out more about when you should take Social Security and how your retirement decisions affect this, reach out to us. We offer a completely free, no-obligation 15-minute phone consultation, where we can run through your numbers and give you an idea of when is right for you to take Social Security. Book your call now.
When working with a financial planner or advisor, it’s important that you’re aligned on how you want your money invested. There are many different investment strategies and what you might be comfortable with may not be your advisor’s preference. So, how can you ensure that your money will be managed how you like?
The first step is to have a basic understanding of investment strategies. This way, you’ll know what’s more suited to your personality and how you want your investments taken care of.
In this post, we’re explaining the differences between two investment strategies, asset allocation and strongest assets. We share the fundamentals of each, why people choose them, and how to figure out if they’re appropriate for your money management style.
You can watch the video on this topic at the top of this post, to listen to the podcast episode, hit play below, or read on for more…
What is asset allocation?
Asset allocation is the most common way of investing. It’s a preferred method for two reasons.
Asset allocation is relatively easy to do
There’s very little maintenance, unlike other investment strategies
If you’re familiar with the buy and hold strategy or buying a well-diversified portfolio, then you’ll already have an idea of how asset allocation works.
For example, if you have money to invest, and decide to put it in the stock market, you might distribute it to more than one area. You may want to put a portion of your money in stocks, such as large cap stocks, like Apple, Amazon, Google, or mid cap or small cap stocks. There are also sectors that you might want to get involved in. Financials, healthcare, technology, and energy are all popular sectors that many people invest in. Finally, you could decide to buy up some bonds and fixed-income investments.
When you add all of these investments together, you get an investment pie. You can use this to visualize where all of your slivers are in the market, as they may all be in different areas. Essentially, this investment method is asset allocation.
Why asset allocation is a long-term strategy
With asset allocation, you’re advised to hold these investments for the long term. The idea is, if you hold these investments for 5, 10, 15+ years, then the market will go up, and so will all your different pieces of the pie.
Now, let’s look at how this method performed in a tumultuous year, such as 2020. Overall, large cap stocks did well, but mid and small cap stocks were greatly affected. So, if you held a mixture of large, mid, and small cap stocks, the increase in large cap stocks may make it look like your portfolio performed adequately. If you hold a diversified portfolio, you’re always going to have slivers that outperform others. The aim of this strategy is to wait long enough that, eventually, the pie as a whole increases over time.
Many of us first encounter this kind of strategy when we get our first job and 401(k). Often, people pick different investments in this scenario. A popular choice is target-date funds, which create an asset allocation based on how much longer you have to work. This will then adjust according to your age.
In terms of maintaining an asset allocation, it requires very little attention. Your advisor may rebalance the account quarterly or even once a year. This strategy is an easy way to “set it and forget it.”
Understanding your investment risk tolerance
It’s important to note that you can still lose money with an asset allocation strategy – even if you have a very conservative portfolio. The idea is that if you stick with it and stay invested, then you will make your money back. The question is, can you stomach the negative?
This is where understanding your risk tolerance comes into play. Knowing what downside number you’re comfortable with can help you figure out what investment strategy is right for you. We demonstrate this by using real figures. For example, instead of theoretically asking you if you’re happy with a 20% loss, we’d ask if you’re happy to lose 20% of $1million, so, $200,000. This puts your loss into perspective.
Remember that if you’re using an asset allocation strategy, you do not sell when the market is crashing. You have to be able to withstand the financial impact of a pandemic, a financial crisis, or anything else that might be thrown at you. If you sell when the market goes down, you defeat the purpose of this strategy. Your advisor will tell you to hang in there.
What is the strongest asset strategy?
A strongest asset strategy differs from asset allocation because it allows you to sell whenever those assets are no longer strong.
When you’re thinking about investing using this strategy, you need to picture the entire stock market world. This includes equities, stocks, companies, bonds, fixed income, cash options and then you’ve got some alternatives. Once you’re looking at them altogether, you can start to see who’s winning the race.
Now, usually equities win the race because they have growth. Bonds are stable and make a good rate of return, but they may not always be the strongest option. Cash, on the other hand, hardly moves. However, if there’s a scenario where the market is crashing and equities and bonds are pulling back, cash could be the front runner because it’s not moving backward.
You then use this analysis to see where the strongest area is to invest. You could invest 100% of your portfolio in equities, but it doesn’t mean you have to stay there. You could move that 100% from equities to bonds, and again from bonds to cash, depending on market performance.
Strongest asset: a more active approach
If you decide to invest 100% of your portfolio in equities, you can take the same approach again. This time looking at the top performers in the equity world. In 2020, for example, large cap technologies were winning the race. This sector thrived during the pandemic, with mid and small caps struggling. So, we shifted all of our portfolios to accommodate this. In January 2021, mid and small caps started to come back, so we shifted again.
A strongest asset strategy does require more maintenance than asset allocation. You need to be actively managing your portfolio and prepared to make changes. We want to make a good rate of return for our clients, so we watch the market every day. If the market starts to change, then we make decisions, such as selling, to protect our clients’ investments from a downturn.
Which strategy suits your personality?
So, if you’re building out an investment portfolio or considering your investment options, think about which strategy suits your personality more. Do you prefer the idea of buy and hold (asset allocation), or do you want to keep a closer eye on your money and how it’s performing (strongest asset)?
When you decide which option is for you, the next step is to find a financial advisor who can help you manage your money this way.
To learn more about preparing your finances for the future, check out our complimentary masterclass, 3 Keys To Secure Your Retirement. The free interactive webinar gives you more information on how to build a retirement income plan and shares valuable money management tips and advice. Get it here.
You understand what an annuity is, how it works, and what the advantages are, but do you know how to implement it into your portfolio?
In this eighth and final installment of our “Annuities – Why Ever Use Them” series, we’re sharing how to use an annuity as part of your retirement portfolio.
You can watch the video on this topic above. To listen to the podcast episode, hit play below, or read on for more…
A quick summary
Before we dive into how you can incorporate an annuity into your portfolio, there are some things to be aware of. We’ve already covered these points in detail in other articles within this series, so do visit our blog to find more information about anything covered below.
We prefer fixed index annuities over variable annuities because you can lose money in a variable annuity.
Fixed index annuities protect your principal, so your investment is guarded against market volatility.
Fixed index annuities are linked to an index, such as the S&P 500 – they earn interest depending on how the index performs.
You can choose from a range of strategies for how you want to receive interest, for example a cap or a participation rate strategy.
If you use a cap strategy set at 5%, for example, and your index earns 10% over an annual point-to-point reset, your annuity will earn a maximum of 5% interest.
If you use a participation strategy set at 50% and your index earns 10% over the reset period, you’ll earn 50% of the index’s 10% growth (5% interest on your annuity).
There are liquidity restrictions, so we recommend using an annuity as part of a more diverse portfolio.
Most annuities allow you penalty-free access to 7-10% of your money in any given year.
Annuities often have a surrender charge that applies for a set number of years.
Why choose a fixed index annuity?
Most people use an annuity as part of their retirement portfolio for two reasons. First, a fixed index annuity gives you complete safety and still grows your investment at a good rate of return. A fixed index annuity is not affected by market downturns and is protected against risk. So, if your main concern is safety, an annuity would be a good option for your portfolio.
The second reason is income planning. There are a few ways to get guaranteed income in retirement, including taking a pension and Social Security. A fixed index annuity is a straightforward addition you can make to your guaranteed income sources that lasts for the rest of your lifetime.
Implementing an annuity in your portfolio
We’re going to use an example to demonstrate how to build an annuity into your retirement portfolio. In this example, we’re going to be using hypothetical figures and a fictional retiree, Mary. Please bear in mind that while these figures are representative of fixed index annuities, these are not accurate rates.
Mary is 60 years old and has $1 million of IRA/401k savings. She wants to retire in 7 years time, at the traditional retirement age of 67. She’s calculated how much she spends on her essential needs, wants, and legacy money each month, and discovered that she needs $4,000 of guaranteed income a month to cover her essential needs alone.
Social Security will give Mary $3,000 a month. She doesn’t have any other forms of guaranteed income, so Mary is looking for a way to get an extra $1,000 a month.
What is your risk tolerance?
One thing we talk to all of our clients about is risk. Knowing what your risk tolerance is can help you make decisions about your portfolio that you’re comfortable with. So, before we can advise Mary about finding that additional $1,000 per month, we need to understand how much risk she’s willing to take.
There are a few different ways that you can make a return and manage risk. Banks, for example, have essentially no risk, but the rate of return is very low. Money markets in general are well below 1% currently. So, while there is no risk, there is also hardly any return.
However, if you look at the stock market, this is the complete opposite. There is potential for incredible returns, but also huge losses. Annuities, on the other hand, give a good rate of return, but there are liquidity issues. Your total investment won’t be easily accessible to you. This is something to be aware of in case liquidity is a concern for you.
Let’s go back to Mary. To find out Mary’s risk tolerance, we’d have a conversation with her about how much she’s prepared to lose. Take her $1 million, for example. If we’re talking in percentages, a 10% gain or loss might be something Mary is willing to accept. But if we convert that into dollars, a $100,000 loss may be too much for Mary. In this case, we would keep discussing figures until we land on a percentage that Mary is comfortable with.
Once you understand how much risk you’re prepared to take, then you can decide how to build a portfolio that suits you.
How to construct your portfolio
Mary’s risk tolerance helps her decide that she wants to invest 50% of her $1 million in the stock market and 50% in a fixed index annuity. This gives her roughly $550,000 of liquidity. Mary still needs that extra $1,000 of guaranteed income a month, so she puts $150,000 into an income-based annuity. At age 67, this will start providing her with a lifetime monthly payout of $1,000. Now, she has complete peace of mind that her essential income needs will be covered when she reaches retirement age.
In terms of Mary’s portfolio, she still has $850,000 left. So, to achieve that 50/50 split, Mary could invest $350,000 into another fixed index annuity. She’s got the guaranteed income coming from her first annuity, the second one will be to give her that risk-free growth that she wants. The remaining $500,000 will go towards the stock market as she wishes.
So, where will Mary’s portfolio get her by the time she retires? If the $350,000 in her annuity earns 4%, it will grow to around $480,000. Meanwhile, if the $500,000 that she invested in stock market earns 7%, it will have grown to over $1 million.
The final piece to this portfolio is her remaining annuity, which will start generating $1,000 a month of guaranteed income to add to the Social Security payments of $3,000.
However, one thing that we need to consider is inflation. Mary’s expenses are now $6,500 a month. So that original $4,000 of guaranteed income no longer completely covers her essential income needs. But, thanks to Mary’s growing investment portfolio, she can afford to withdraw from her accounts to cover that extra cost.
Inflation and other costs can drastically impact your retirement plan, but we can use our system to adjust numbers and show you exactly how your funds could play out in different scenarios. We can illustrate what happens to your money if you want to withdraw more at the beginning of your retirement than you do later on, or if you want to purchase a second home, for example.
Overall, Mary’s retirement plan shows that her funds last throughout her retirement, and well into her 90s. Constructing a portfolio that’s safe, liquid, and has income, can give you this same security and peace of mind that you don’t need to worry about your retirement finances. But, please remember, this is based on an illustration only.
If you want to learn more about using an annuity as part of your portfolio, please do reach out to us by booking a complimentary 15-minute call. We can give you individualized advice about annuities and constructing a portfolio that’s right for you.
Your retirement years are considered the golden years of your life, giving you the chance to relax and spend time with your loved ones. However, in order to maximize your experiences, you need to start preparing for retirement today.
If you are in your 60s, developing a thorough plan for your retirement is essential. That is why we have put together our top five tips to help you prepare.
Identify your retirement starting point
The first thing that you need to do is to identify your starting point. To do this, you need to collect as much information as possible such as bank accounts, income, and outgoings. With this information, you can then break this down into three key categories:
Essential Needs (such as rent, food, etc.)
Wants (such as those dream trips with your family)
Legacy (the money you want to leave behind or donate)
By breaking this information down into these categories, you will be able to have a clear idea of the amount required for your retirement. When developing this information, you should also take into consideration your social security, the age you would be looking to retire, and when you want to start taking your pension.
Know your destination
Once you have your starting point, you should then think about the destination and everything you want to achieve during your retirement. Think about the goals that you want to achieve and how you want to live. Do you want a new car every few years? Do you want to become a member of a golf club? An annual holiday with the family, perhaps?
Whatever it might be, make sure you know what you want to ensure you can fulfill this golden period of your life.
Build a retirement roadmap
With your start point and destination created, you now need to build your retirement roadmap. This is the plan that you will follow as you save towards, and live through, your retirement.
When building your retirement roadmap, it is really important that you know your income and outgoings. One thing that many people forget to do when building their roadmap is to factor in taxes and the rate of inflation. Without doing this, you can quickly find your savings erode faster than you were expecting.
Plan for retirement roadblocks
Even the best-laid roadmap can experience a roadblock, so it is crucial that you factor unexpected costs and issues into your plan. For example, another market crash such as that experienced in 2008 or a sudden deterioration in your health can see your savings depleted.
That is why it is vital that you constantly monitor your roadmap, making those small adjustments to keep you on track. When it comes to healthcare, you should also consider carefully whether you will be able to self-insure or whether you will need an insurance policy in place.
Retirement cruise control
While for the most part, careful planning and preparation can mean your retirement can effectively run on cruise control. However, just like you would in real-life when driving a car, you still need to be ready to take over as the road ahead changes.
From a potentially volatile market and inflation to economic and political impacts, keep your eyes on the road ahead and adjust accordingly.
Are you ready to prepare for retirement?
If you are thinking about your retirement and want to start taking steps today to ensure you are in the best possible position, then we are here to help you. Our ‘4 Steps to Secure Your Retirement’ mini-series has been designed to take you through the preparation stages step-by-step, ensuring you are able to be in the best possible place.
Retirement accounts are a great way of saving for the future, but they’re not preferable for everyone. If you want to move your money out of your 401k, 403b, 457, or IRA, the best way is to do a rollover.
If done correctly, rollovers are tax-free and a straightforward solution to moving money between retirement accounts. But there can be rules, limitations, and risks involved. In this post, we explain the process of doing a 401k or IRA rollover, when you’ll be eligible, and the reasons why you should consider one.
[You can watch the video on this topic above or, to listen to the podcast episode, hit play below, or read on for more…]
How to rollover your IRA and 401k
A rollover is a term meaning the action of moving money from one account into another account.
You’ve likely accumulated money in several retirement vehicles throughout your career. You might have 401ks, 403bs, 457s, IRAs. If you decide to move your money from where it is currently to a new institution, this is a rollover.
You can do a rollover between any employer plan, even if they’re the same. For example, you can move your money from one 401k into another 401k, or you can go from a 401k to an IRA account.
There are two main types of rollover. One is a direct rollover, which is a straightforward, trustee-to-trustee transfer. The other is a 60-day rollover, which can be riskier.
How to rollover your IRA and 401k using a trustee-to-trustee transfer
A trustee-to-trustee transfer moves your money from one institution directly to another institution. To do this, your existing account holder has to make out a check to your new account holder, with your name listed as “FBO” (for the benefit of).
Let’s use an example. If you have a 401k or an IRA held with Fidelity, but you want to move it to Charles Schwab, Fidelity has to write a check addressed to Charles Schwab followed by FBO and your name.
Key things to know about a trustee-to-trustee transfer:
The check is not made out to you, so you cannot put it into your account
The government have not put a limit on how many trustee-to-trustee transfers you can do so you can do this as many times as you like
This is a simple, straightforward, and risk-free way to do a rollover
If you are moving money into an IRA, you should set this up before you instruct your institution – you do not have to put money into an IRA to open one
How to do a 60-rollover for your IRA and 401k
With a 60-day rollover, your institution writes the check directly out to your name. From this date, you have just 60 days to put it into an IRA, otherwise, it will be taxable. If you’re under the age of 59 and a half and you go over the 60-day limit, you’ll owe a 10% penalty as well as tax.
For 401ks, there is one additional caveat. 401ks are required by law to withhold 20% of your money, even if you get them to write a check out to you. This can be an issue.
If you have $100,000 in your 401k, for example, and the institution withholds $20,000 in taxes, you only have $80,000. You will get that $20,000 back, but only when you next file your taxes. To complete the rollover in the meantime, you’ll need to find an additional $20,000 to roll over the full amount.
Key things to know about a 60-day rollover:
You have to complete your rollover within 60 days, or you will be taxed
If you’re under the age requirement, you will also face a penalty
You can only do one 60-day rollover in a calendar year
We prefer using a trustee-to-trustee transfer. This way, you do not run the risk of having to pay income tax on your money, and it’s a more straightforward solution.
Why you shouldn’t use a 60-day rollover as a personal loan
Some people choose to use a 60-day rollover as a personal loan, but we advise against it. You may do this to loan yourself money in an interest-free way.
This is a high-risk strategy as you’re bound by the 60-day rule to get your money back into that account. This is a fixed rule and if you miss your 60-day deadline for any reason, whether you didn’t manage your time well, or you didn’t have enough money to put it back in to your account in time, then you’re faced with an irreversible problem, and bigger tax bill, and potentially a penalty too.
It’s a very risky strategy and not one that the IRS likes, so we urge you to be cautious if this is something you’ve heard or read about.
What makes you eligibleto rollover your IRA and 401k
If you’re under age 59 and a half and you try to take money out of any retirement account, such as 401ks and IRAs, you will be penalized for it.
However, if you’re over age 59 and a half, the government now considers you eligible to use that money. Most 401k, 403b, and 457 plans allow you to do rollovers whenever you want. So, if you meet the age requirement, you can do a rollover without any penalties or tax concerns, providing you do it correctly.
One other way you become eligible for a 401k rollover is following a separation of service. This is when you leave your company for one of the following reasons:
Transitioning into a new company
If you get laid off
If you retire before 59 and a half
If you’re leaving your company, you may want to consider doing a rollover as you may not be eligible again for some time.
Whyshould you rollover your IRA and 401k
Your company might match your 401k contributions and offer you investment choices, so why would you choose to rollover your 401k into an IRA?
Firstly, 401ks have lots of hidden fees. You may not be aware of just how much you’re losing in fees for your 401k. Sometimes your employer will pay these, but they can also be passed along to you, the participant, without you knowing.
With an IRA, there’s a far higher level of transparency. You own every aspect of your IRA, so you can know each fee that gets charged to your account – if any. There are no admin fees with an IRA, so the only possible charges will be mutual fund or ETF fees if you use your IRA to buy those.
Secondly, it’s a myth that you get better rates if you have a 401k with a big company. It is not true that you get better rates based on what company you’re with. It’s also worth noting that your investment options are very limited in a 401k. An IRA has far more investment opportunities available.
Thirdly, 401k plans limit how much activity your account can have within a given year. Some plans may only allow you to make a change once every quarter or biannually. If you like to manage your money actively, then an IRA might be more suited to you.
It’s also challenging to manage your funds in a 401k. If you want a financial planner to help you handle your 401k, there’s very little that they can do. With an IRA, a financial planner can manage and monitor your money much more closely.
Finally, if you have multiple retirement accounts, you may want to make them easier to manage by consolidating them all into a singular, traditional IRA.
So, those are the reasons why you might want to rollover your 401k into an IRA. But why might you not want to?
There’s one time when you might not want to do a rollover, and that’s if you’re aged between 55 and 59 and a half and you’re no longer employed with the company your 401k is with. The IRS allows people above the age of 55 to take distributions of their 401k without penalties. If it’s in an IRA, you have to be 59 and a half to avoid the penalty. If you’re within this window and want access to your 401k money, we advise you to take distributions instead of doing a rollover.
How to execute a rollover
To do a trustee-to-trustee transfer or 60-day rollover, call your institution directly. They will have specialists available to help you do a transfer, but they are not there to give you advice, so make sure you’ve researched your options beforehand.
If you’re continuing to work at your company, this is called an in-service rollover. In this case, you stay in-service at your company, keep the 401k account, but roll out the balance into a traditional or Roth IRA account. Your 401k will stay the same, you will still make contributions and get the match, but your previous balance will now be in an IRA.
When you speak to your institution, they’ll ask you to verify your identity and address and then ask where you’re sending the money. Make sure you already have your IRA in place so that you can send the money over smoothly.
Your institution will then write the check out to the new institution if it’s a trustee-to-trustee transfer or directly to you if it’s a 60-day rollover.
You will rarely need to do any paperwork, and if you do, your institution can walk you through any documents that they need. Your institution may also ask you to review a tax notice, which explains the tax-risk of a 60-day rollover, much like we have in this post.
Ultimately, a rollover should be a simple, smooth process, resulting in putting your money in an account that you’re happy with.
If you’re considering doing a rollover or have any questions about IRAs, 401ks, 403bs, or 457s, our team can answer them. We work with these accounts every day and can offer you tailored advice and information based on your situation. Do consider booking a complimentary 15-minute call with us to find out how we can help you.
