Should I Consider an Annuity In My Financial Plan?

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Are you considering an annuity? Does an annuity fit into your financial plan? These are the questions that we’re going to answer today so that you can secure your retirement in the best way possible for you.

Our clients ask us a lot about annuities, so we want to help you determine whether an annuity fits into your retirement plan.

Understanding That an Annuity is an Insurance Product

An annuity is an insurance product that you’re buying into. You’re purchasing the annuity from an insurance company, so it’s crucial to evaluate the insurance company. For us, we always look at the company’s financial security so that we know whether the company can withstand market fluctuations or dips in revenue.

You can find rating systems for each company.

Rating systems can help you understand how well-rated a company is and whether a company is a good choice for you.

There’s also protection through a legal reserve, which is similar to having the FDIC insure money that you have in the bank.

Breaking Down What a Legal Reserve System Offers

Legal reserve systems have been around for a long time. The IRS wanted insurance companies to have a guarantee in place to protect consumers. Insurers work together to operate in the United States.

For example, if one insurance company goes bankrupt, other insurance companies often:

  • Purchase parts of or the entire business
  • Keep contracts the same

In essence, the reserve part adds safety elements by having significant reserves in place to cover payouts and other expenses. Legal reserves cannot be leveraged. Instead, the insurer must have reserves to back any guarantees they offer.

Due to the multiple systems in place, if a reserve gets low, they’ll be barred from offering more insurance until the reserves are restored.

In short, the legal reserve is a safeguard against an insurer going bankrupt and the consumer losing all of their insurance in the process.

Tax Benefits of an Annuity

Annuities offer tax benefits, but the benefits depend on what type of money is placed in the annuity. Basically, you have:

  • Qualified money. Your retirement plan money. These are financial vehicles that have not been taxed yet.
  • Non-qualified money. Money that has been taxed already, such as capital gains.

You should understand your balance of money, based on these two classifications, before getting into an annuity. 

Once you understand the multiple financial buckets that you have, you can better understand the benefits of an annuity in your situation.

For example, if you have non-qualified money from a brokerage account, it’s often a good thing to put it into an annuity because it will grow tax deferred. So, if you put $100,000 in the account that you’ve paid taxes on, growth is tax-deferred.

Annuities make taxes easier and won’t require you to have to work through complex taxes every year.

However, let’s say that you have a lot of qualified money in an IRA. You can roll the IRA funds into an IRA annuity. When you go into an IRA annuity, you’re putting pre-tax money into your account.

Retirees don’t want to heavily withdraw from an IRA because of the tax consequences.

Due to these complex situations, it’s crucial to understand how an annuity works and the tax benefits they offer you.

Why Should You Use an Annuity Retirement?

Retirement planning must be strategic. An annuity can be beneficial in numerous ways, and we like to break annuities down into three main scenarios where they make sense:

  1. Income Planning
  2. Safety Alternative
  3. Tax Deferment

Income Planning

When you structure an annuity, you can do so in a way that offers a guaranteed income that you’ll never outlive. The income will always be there.

If the annuity is an IRA, you’ll be taxed on it.

When we work with clients that only need to withdraw 2% to 3% of their retirement per year, it often doesn’t make sense to have an annuity. 

Why?

You’ll either have a fee or a lower rate of return.

Safety Alternative

Safety, or bond, alternatives are a good reason to have an annuity. Let’s assume that you have a low threshold for market fluctuations. Bonds go up and down, so investing in an annuity can offer a guarantee that bonds cannot offer and help you better manage risk.

Risk conversations are huge in retirement planning because it ensures that you have money for tomorrow.

Tax Deferment

Annuities allow you to invest in the market at 100% tax deferment and with negligible fees. For tax deferment, you have the option of liquidity and tax deferment with an annuity.

How an Income Rider Works

As an income rider, the overall annuity has two sides:

  • Account value
  • Income account value

Account values grow at the annuity interest rate. However, on the income account value, you have a little step up that you can leverage. For example, maybe your income increases by 5% or 7%. Since these accounts are designed to outlive you, the income account value will always rise more than the actual account value.

When you sign up for an income rider, you’re asking the insurer to guarantee an income for the rest of your life.

However, you cannot withdraw the money from the account in its entirety.

An income rider can be added to an annuity, acts independent from your contract, and allows for peace of mind that you can make a certain minimum withdrawal from the account every month.

A rider may or may not make sense for you, but it’s something you’ll want to consider.

Initially, you’ll have a period of 5 or 10 years where you won’t receive an income. This time period really allows the account to grow and build up the value you need to retire with guaranteed income coming in every month.

Annuities may or may not fit into your overall retirement plan, but they’re certainly something to consider for everyone nearing retirement.

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The Market Is High. Should I Sell?

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When you invest money in the stock market, there’s an emotional attachment that people have. You’ve saved diligently to build up your retirement and invest, and no one wants to lose money.

Unfortunately, markets have ebbs and flows where you can see your portfolio rise and fall.

Since March 2020, the markets have really rebounded. Investors are nervous about the right time to sell. When you dig into the news, you’ll see the market hitting record highs and many people think that now is just a good time to sell.

The market has to come down eventually, right?

Well, not necessarily.

The Market is High: Should I Get Out?

Markets are rising daily, and the media’s job is to promote this all of the time. When people hear “new highs,” they get concerned that the market will burst. However, you make money on new highs.

Ideally, the market will continue to rise and make your portfolio grow.

Sadly, there’s no way to predict whether now is a good time to sell based on a market high. Guessing what the market may do is almost impossible. For example, due to politics, many investors assume that a new president will cause the market to tank, and it won’t.

What we do is:

  • Analyze the data
  • Make informed decisions

In our business, we try to keep stress low by using the data we have to make smarter decisions.

For example, many people will follow the “buy and hold” philosophy of investing. Essentially, a person will invest in a stock, or many, and hold on to the stock for the long-term. If the stock falls, the person holds.

If the market crashes, the person holds.

Unfortunately, if you’re close to or in retirement, it can be very stressful to find yourself in this situation. When your portfolio takes a dive and you’re not working anymore, it can be very troubling to see the value of your portfolio fall 40% or 50%.

Instead, we look at bonds, stock and cash as if they were in a race.

Stocks only lose the race if they’re falling. In a good market, stocks will build higher value than bonds, CDs and other investment vehicles. When our indicators show that stocks are slowing, we like to reallocate investments into bonds or cash, depending on how the market is for each.

You won’t keep your money in cash for a year or two – it’s a short-term process.

The 2020 market dip is a prime example of how we reallocate your investments to save you money.

What Happened in 2020?

Due to global uncertainty, stocks started to fall. Our indicators predicted this, so we adjusted the portfolios for our clients to take their money out of stocks and put them into bonds. Unfortunately, the bond market also started to fall, so we went to the next best thing: cash.

In our most aggressive portfolio, we stopped losses at 9%.

Cash didn’t lose or gain value, so it remained steady while the stock market fell 34% during the same period.

We sat on the sidelines with cash for about 40 days before we felt investing in the market was the right choice. The numbers told us that the market was rising, and by the end of the year, the market rose 17%.

Due to these key changes, our growth portfolio rose 19% rather than taking a massive loss as other portfolios saw.

Emotional Toll on Retirees

Our clients are either nearing retirement or in retirement already. When you’ve worked hard your entire life, you don’t want to stress about losing all or part of your retirement fund overnight.

Our active approach uses numbers rather than emotion to invest.

Using numbers is an analytical approach, and it eases the toll on retirees because it empowers these individuals to make smart money moves. Our data showed that in 2020, small businesses were really struggling and that large companies, like Amazon and Zoom, were propping up the market.

Technology stocks also kept the market afloat because everyone was working from home.

Fast-forward to 2021, and the data showed that the market shifted to small- and medium-cap stocks. Again, the data helped us adjust our clients’ portfolios to continue growing their retirement with as little stress and worry as possible.

So, Should You Sell in a High Market?

Not necessarily. Guessing is too risky because you can guess correctly or incorrectly. Instead, we recommend looking at the data. For example, you may remember the news was doom and gloom, but the market rose.

Do not listen to the media when it comes to the market.

The media is driven by emotion. If you do listen to the news to make your investment choices, we almost recommend investing in the opposite direction that the media outlets are reporting.

Click here to learn more about our latest book: Secure Your Retirement.

IRAs – Required Minimum Distributions

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Many of our readers are planning to retire, and they want to know about required minimum distributions (RMDs). If you have a tax-deferred vehicle, RMDs are something that you should learn more about.

Tax-deferred vehicles are:

  • 401(k)
  • 403(b)
  • 457
  • IRAs (traditional)

When you’ve deferred taxes, you’re making an agreement with the IRS that you’re not going to pay taxes on this money now. But in the future, when you’re able to access the funds, the IRS will come knocking on your door because they want their cut of the money.

Under today’s requirements, you must start taking your required minimum distributions at age 72 – it was 70 and a half not too long ago.

RMDs are not a bad thing, and these are retirement accounts that you’ve been paying into for 30 or 40 years. However, since you’ll have to pay taxes on the distributions, some people get concerned.

Don’t be. This is money you saved and will be using for your retirement.

Understanding When You Must Take RMDs

RMDs are part of your retirement planning, and while you start taking them at age 72, this definition is a bit misleading. According to the IRS, you must begin taking distributions in the year you turn 72.

If you don’t turn 72 until December 31, guess what? You can take distributions from January 1st (you’re still 71) since it’s in the year that you turn 72, or you can wait until December. So, you can strategize to some degree on when is best for you to take your RMDs.

You must take the distribution by the calendar year end (with one exception listed below).

How RMDs are Calculated

The IRS will try and estimate your life expectancy, based on several factors, and then calculate your RMD. The required distribution can vary from year to year, so the RMD isn’t a fixed rate.

For example, let’s say that you have $500,000 in all of your IRA accounts.

If you have this much in your account on December 31st of the previous year, you would divide this amount by a factor that the IRS has created. The factor, at the time of writing this, is 25.6 for someone that is age 72.

The IRS figures that at age 72, you still have 25.6 years left to live. Your health isn’t personally calculated as these factors are across the board for everyone. So, you’ll be required to take the following RMD:

  • $19,531.25 ($500,000 / 25.6)

You can take a larger distribution if you want. However, you must take the minimum amount and it’s added to your income for the year.

In your first year, you can defer the distribution until April. You may want to defer the distribution to avoid taxes, but you’ll still need to take the distribution the second year.

In fact, if you defer the first distribution, you’ll be required to take the first and second distribution in the second year, adding significantly to your yearly income.

What to Do If You Have Multiple Tax-deferred Accounts

If you have 5 different tax-deferred accounts that require RMDs, you can take money from one or all of them. The IRS doesn’t care which accounts the distribution comes from. However, they do care that you’re taking the RMD (based on the combined value of all accounts) and paying tax on it.

What Happens If You Miss an RMD?

You’re penalized. You can be penalized by as much as 50% for missing your RMD.

3 RMD Strategies If You Need to Take RMDs in the Near Future

For anyone that is not retired yet but will be in the near future and has these tax-deferred accounts, there are a few strategies that can help you:

1. Roth Conversions

If you have an RMD, you cannot convert it into a Roth account. However, what you can do is a Roth conversion before you hit age 72. If you convert today, there are no RMDs, but you do pay taxes today.

You’re still paying taxes, but you know today’s taxes and not what your tax burden may be in 10 years.

When you use this strategy, you’re controlling your tax burden because you decide to convert the account at a time of your choosing and at a favorable tax bracket. For example, if your Roth account grows at 7.2% per year, you’ll double your money in 10 years and won’t have to pay taxes on your RMDs.

Of course, this doesn’t make sense for everyone.

We run simulations to see if this is a good strategy for our clients.

2. RMDs are Required, But You Don’t Have to Spend the Money

Many times, we’ll advise people to take money out of the IRA and then put it in another investment account. You don’t have to spend the money that you take out of your account, but you do need to pay your taxes on it.

3. Qualified Charitable Distribution

We have many people who don’t need the entirety of their RMD, so they’ll leverage what is known as a qualified charitable distribution, or QCD for short. A QCD allows those who want to donate to charity to do so with tax benefits.

Let’s assume that you have a $20,000 RMD and want to donate $5,000, you can.

When you do this, you’ll pay taxes on $15,000 instead of $20,000. You will need to go through your IRA to make this distribution, but you need to ensure that the distribution is in the charity’s name, address, and Tax ID.

You want the custodian to do the transfer for you so that the money never enters your account.

If you’re planning on giving to charity any way, the option of making a qualified charitable distribution makes a lot of sense for anyone that has an RMD that they must take.

The earlier you plan to reduce your RMD tax burden, the better. But, even if you plan on using our last strategy to lower your taxes, you want to start as early as possible to make sure it gets done in time for tax season.

Click here to join our course: 4 Steps to Secure Your Retirement.

Inflation and Your Retirement

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Inflation is a hot topic today. In fact, inflation is leading to the highest Social Security cost of living adjustment ever in 2022. For over 70 million Americans, they’ll have their benefits increased by 5.9% [1].

However, when it comes to retirement planning, there’s a lot of concern with inflation because many people didn’t account for inflation when coming up with their overall strategy to secure their retirement.

We’re going to be covering inflation and what it means for your retirement.

What is Inflation?

Inflation is a word that many people know, but they don’t really understand what it means in the whole spectrum of things. The term “inflation” relates to the increase in prices in an economy over time.

You’ve probably noticed the costs of the following items have risen:

  • Groceries
  • Automobiles
  • Gas 
  • Airplane tickets

In 2020, when the pandemic was running wild, the government pumped billions of dollars into the economy to keep everything running. Supply was a major issue at this time, so people couldn’t even purchase toilet paper.

However, manufacturers increased prices because the demand still existed.

Essentially, inflation makes your dollar worth less. For example, if you purchased a food item for $1 a year ago and it now costs $1.10, your dollar is worth less because you get less for your money.

Deflation also exists, but it’s far less common.

When deflation occurs, your purchasing power increases. 

Inflation is often portrayed as a bad thing, but it means that innovation is ongoing and that wages, hopefully, go up, too. However, with inflation rising rapidly like it is now, many people panic, especially in retirement or when employers aren’t offering salary increases to cover the cost-of-living increase.

Overview of the Inflation Over the Long-Term

When we work with clients, we like to go off of the 100-year average for inflation. Over 100 years, you’ll see a lot of periods of inflation and deflation, but the average inflation rate is just over 3%.

However, when you look at the last ten years, inflation has been at about 1.5%.

Since inflation rates over the past decade have been mild, it’s difficult to adjust to rising levels. If you think about the toilet paper crisis, high demand and low supply led to rising prices.

Thankfully, supply issues are easing, so we can expect supply and demand to equal out.

Another example of this is the housing industry. We’ve seen a lot of people’s homes going into bidding wars, with a lot of houses selling for more than they’re worth. However, this trend is expected to slow as inventory increases.

For people in the workforce, rising wages should help combat the rise in inflation.

Anyone who is already in retirement or planning to retire shortly will want to take additional steps to prepare for potential inflation.

5 Crucial Things to Consider When Preparing for Inflation in Your Retirement Plan

1. Long-term Fixed Income Investments

If you have long-term investments, such as government or corporate bonds (where the maturity date is 10, 15 or even 30 years), the long-term rates may not be as attractive as when you first purchased it.

Be sure to check your fixed-income investments, especially with high inflation, because they may no longer provide the returns necessary to cover inflation.

This doesn’t mean that you shouldn’t have any long-term investments like those mentioned, but you may need to readjust.

2. Risk Management for Your Portfolio

You need to have good risk management for your portfolio. It’s crucial to protect your portfolio so that if you lose 30% of it, you’re not struggling to make it back. A good analogy that we like to use is that if your portfolio drops 50%, you need to make a 100% return to recuperate your losses.

Let’s look at this with real-world figures.

If you have $100,000 in the market and lose 50%, you’re down to $50,000. However, if you gain 50% in the coming years, your portfolio is only up to $75,000.

It’s always better to protect your portfolio than try rebuilding it.

Good risk management protects against these losses so that they are minimal.

3. Think About Your Guaranteed Income

Guaranteed income is vital to your retirement, and this includes things such as:

  • Social Security
  • Pension
  • Etc.

If you know your needs and wants, you should have as much of your needs covered by guaranteed income. You should try and cover most of your expenses with guaranteed income so that you’re less impacted by inflation.

Growth buckets can help cover the increase in inflation.

4. Maintain a Good Spending Plan

Many people retire without any type of spending plan. Unfortunately, without a plan, you’re putting your retirement at risk. You should plan based on:

  • How you’re spending money
  • Essential needs (food, utilities, housing)
  • Wants (cars, vacations, etc.)
  • Legacy (charities, kids, etc.)

When you have a general idea of what you spend monthly, you can devise a spending plan. A good way to find out what you’re spending is to use Mint (it’s free), which will categorize your expenditures so that you can see and understand where your money is going.

5. Sit Down with a Financial Professional

If you have a financial planner that you work with, sit down with them and begin the difficult discussion of inflation and your retirement. When we sit down with clients, we do a few things:

  • Flush out a retirement plan before they become clients
  • Run plans and stress them out based on low rates of returns
  • Run plans at a 3% inflation plan
  • See how the retirement plan works through these tests

When we run tests for a person’s retirement, we can use the worst-case scenario and make adjustments based on this. For example, we may find that the person needs to work a few years longer or work part-time to retire.

Through tests and the help of a financial advisor, it’s possible to learn whether you have enough money for retirement and to stave off inflation.

Inflation will remain a consistent concern through retirement. Still, if you plan ahead and consider some of the points we’ve outlined above, we’re confident that you’ll be able to retire with peace of mind that you’re protected against inflation.

Do you want to follow an easy, four-step course that can help you secure your retirement?

Click here to access our FREE course, titled: 4 Steps to Secure Your Retirement.

Resources

  1. https://www.ssa.gov/cola/

4 Questions to Help Your Income Plan

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When you’ve worked hard, saved for retirement and the time has finally arrived for you to retire, then what? Retirement planning also requires you to come up with an income plan that will help you confidently spend money that has taken a lifetime to build.

You’ve successfully secured your retirement and hit the retirement summit.

Once you hit that summit, you need to come back down safely, and the way back down is with your income plan. We’re going to walk through four questions that we know will help you with your spending through retirement.

4 Questions to Build Your Retirement Income Plan

1. How Long Should I Expect to Live?

If that’s difficult for you to read, you’re not alone. You work for retirement, and there’s no blueprint that states how long you’ll live. The average 65-year-old male, in today’s world, can expect to live to 84.

Females tend to live slightly longer, with the average female living until 86.5 years old.

Of course, this is the average. You might live until 105, or you might live until 67. There’s really no guarantee that a person will live until a certain age. When we develop plans for our clients, we never have a concrete plan that ends at, for example, 85.

We’re also finding that 1-in-3 people aged 65 now, live past 90, and 1-in-7 live past 95.

Medicine is improving, and people are living so much longer today, so you should have enough money in your account to live until 90 – 95.

If you live this long, you’ve planned for it. However, if you have a long-term care situation, planning for longer retirement can truly help. It’s best to be conservative with your life expectance.

You should never estimate your lifespan based on your parents or family members.

We know this first-hand. Many people we work with state: well, my parents lived until 62, and they are in their 80s. Medical advancements have helped improve the average lifespan dramatically, so it’s better to overshoot your life expectancy than to underestimate it.

2. How Much Will the Cost of Living Increase During My Lifetime?

Again, this is a difficult question because there’s no concrete answer on exactly how much the average cost of living will increase. However, we can plan the increase in the cost of living based on historical data.

For example:

  • Inflation over the past 100 years has been just over 3%
  • Inflation over the past 10 years has been 1.5%

When you look at the inflation records, you’ll even see times where deflation occurred. For example, in 2008, you’ll find that prices fell due to the financial crisis. But, in general, if you plan for a cost-of-living increase of 3% per year, this is a conservative estimate.

We use special software that estimates inflation for our clients.

For example, if we have someone who is 60 years old and expects to retire at 65, their needs can increase by as much as $1,000 in that five-year period at an inflation rate of 3% per year.

By the time this same person is 80, they may need an extra $2,500 a month to live the same quality of life that they have now. So, there’s so much to consider when thinking of your income plan.

Keep in mind that you don’t need to increase inflation on your mortgage or items where there are fixed costs.

3. When Should I Retire?

When it comes to retirement planning, you need to consider when you can retire. A few people love their jobs and can be confident that they want to remain in their positions until they’re 70. Retiring at 70 is the best option because you’ll get more in Social Security and also gain healthcare at 65.

However, many people don’t envision themselves working until 70, and that’s perfectly fine, too.

Sometimes, the most advantageous time to retire is later. The impact of retiring before 60 is:

  • No healthcare
  • No Social Security
  • Losing ability to grow assets
  • Etc.

There are also times when a person retires and there’s a bear market. Obviously, retiring in a tumbling market is scary. People that retired right before the pandemic saw their retirement fall over 30% in a few months.

Hopefully, these struggles can be overcome with the right investment strategy.

4. Where Should I Place My Assets?

You need two different types of money:

  1. Income-producing
  2. Growth and income

We always ask to break down needs, wants and money to give away. Needs money, such as the money to pay your mortgage and bills, should come from income-producing assets. For example, a pension and Social Security can both produce income and allow you to pay off your needs.

Paying for your essentials every month is vital for your retirement.

However, you’ll often have an income gap that isn’t covered by just Social Security and your pension. In this case, your needs analysis will help you find ways to cover these needs. A few ways include bonds, CDs, and fixed annuities.

These financial vehicles offer you guaranteed income, although bonds and CDs have low interest rates.

Fixed index annuities are a good option, too. We have a few articles on annuities that can help you:

You’ll also need to have some cash in the market with a decent rate of return. Of course, your risks in retirement should be much smaller. You may give up some upside but protecting against significant loss is so important while in retirement.

So, there’s a lot to think about when trying to strategize your retirement income plan. We hope that the questions above helped you really understand what it means to come down the summit and finally start enjoying your retirement.

Want to learn more about retirement? We share our insights in our podcast twice a week. If you haven’t done so already, please join us at: https://pomwealth.net/podcast/. 

4 Steps to a Healthy, Financially Secure Retirement

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Everyone wants a healthy, financially secure retirement, and today, we’re going to cover the four steps you need to take to reach this goal. If you haven’t already, we highly recommend reading the two blog posts that we’ve written before getting started:

  1. 4 Costly Misconceptions About Retirement Planning
  2. Avoid 4 Retirement Investment and Planning Rip-Offs

Ready? Let’s dive right in with the first step.

Step 1: Make a Commitment to Yourself to Get Your Checkup Done

How long has it been since you’ve had a physical or full checkup? Chances are, you’ve pushed off a lot of medical checkups because you feel great or don’t want to spend the day in the doctor’s office.

The same scenario happens all the time with people’s retirement checkups.

People often push off their financial checkups because:

  • They plan to do it closer to retirement
  • The markets are doing good
  • They’re busy

We encourage you to set a goal – it could be 30, 60 or 90 days from now – where you get your retirement plan checkup done. Then, sit down with your advisor, get a checkup down and see where your retirement stands.

This is a great time to gather all your account information and documents, too.

Step 2: List Your Objectives

These aren’t the normal objectives, such as wanting $1 million in retirement accounts. Instead, the goals we’re talking about have to do with your advisor. First, you should figure out your objectives, such as:

  • How will the advisor help you? What do you want your advisor to do?
  • Do you want your advisor to take complete control of your retirement, or do you want brief monthly advice?
  • What type of advisor do you want to work with? Do you want a product-based advisor, holistic advisor, or robo advisor?
  • Do you want to work with a fiduciary? Hopefully, you do.
  • What credentials do you want your advisor to have?
  • What type of fee structure would you prefer your advisor to have?

Create a list of objectives that you can take with you to an advisor to ensure that your objectives are all met. You need to know exactly what you want from an advisor so that you can find one you trust.

Step 3: Ask Questions

Imagine that you’re researching or already working with a financial advisor. You should have questions that you want to ask them. In fact, we’re going to help you get started with eight questions that we think are an absolute necessity to ask:

  1. Do you work as a fiduciary? If an advisor says, I work as a fiduciary for all my clients, that’s simply not enough. You need to know if the advisor is fiduciary bound by law. Fiduciaries must put your interest above their own.
  2. Are you registered by our state’s securities regulator? This is important because if the person isn’t registered with the state, they’re not following the rules and may be running a scam.
  3. How long have you been an advisor? If a person is just starting out, it’s best if they work alongside an experienced advisor that can assist them when working on your retirement.
  4. What are your credentials? Credentials matter because some credentials have much higher standards than others. A certified financial planner, for example, can provide a well-rounded approach to financial planning that a non-certified individual may miss.
  5. What are your fees? Fees are important. How are fees taken out? Are you paying fees hourly, quarterly or on a service-by-service basis? You need to know what you’re paying in fees, when and how the advisor is paid.
  6. What is your investment philosophy? If the advisor cannot answer this question or doesn’t answer it properly, think twice about retaining their services. You must be confident in the philosophy the advisor follows.
  7. Do you make money from trading mutual funds or stocks? Will the advisor earn a commission on these trades? A commission may be a conflict of interest, and while this is far less of a concern than it was in the past, some advisors are still paid for mutual funds.
  8. How often do you communicate with clients? The leading reason clients leave advisors is a lack of communication. Ask how the advisor will communicate with you and stress the medium of contact you prefer. For example, you may find that email is best for you when looking over your retirement accounts rather than a phone call.

Of course, add in your own questions to really get a feel for the advisor that you’ll be working with.

Step 4: Meet with the Advisor and Get Everything in Writing

Meet face-to-face with an advisor and get to know them on a deeper level. You can start using email or virtual meetings when you know the person and trust them. There’s something different about sitting in a room with the advisor, talking to them and truly getting to know them.

You can do many things virtually, such as buying a car, but you really need to build a long-term relationship with an advisor.

Additionally, get everything in writing, including:

  • Contracts
  • Fees you’ll pay
  • Risk assessment and tolerance documents

You need to have all these documents because they are proof of what you’ve agreed to and what needs to be done in your plan.

Bonus Step: Credential Certification vs. Title

We’ve dabbled on certifications briefly in one of the past sections, but it’s essential to know the difference between a certification and a title for financial advisors. Anyone can call themselves a financial advisor, planner, consultant or something else professional and fancy.

However, certifications may require a rigorous education and continuing education.

A certified financial planner is one certification that is in-depth and is one of the more difficult certifications in the industry. Chartered financial consultants or chartered life underwriters are two additional certifications that are intense.

If your advisor is a certified financial planner (CFP), you can be confident that they have an excellent education backing the services they offer.

Following the steps above will help you get started or continue with your retirement plan properly.

Click here to find out more about our latest book: Secure Your Retirement.

8 Mistakes to Avoid When Choosing an Advisor

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Choosing an advisor is a major decision, and you can make many mistakes along the way when making your choice. Unfortunately, unless you’re involved in the financial world every day, you won’t have the experience to know how to choose the right financial advisor.

We’ve already covered a lot of great advice, from how to change financial advisors to what to do when you break up with your advisor, but today we’re going to cover mistakes you need to avoid when choosing an advisor.

And there are a lot of them.

8 Mistakes to Avoid When Choosing an Advisor

1. Working with an Advisor Without a Written Contract

You should have a written contract with a scope of service that outlines everything you can expect from the service. Your contract doesn’t need to be a legally binding, yearly service contract.

Traditionally, the advisor is bound to the contract, but the client can leave the service at any time.

The contract should include:

  • Scope of service
  • Fees involved
  • Potential conflicts of interest

When you have a written contract, it outlines exactly what you can expect from the service. Both parties can use contracts to understand what to expect from the business relationship.

2. Working with an Advisor That Doesn’t Have a Permanent Office

Working with a financial advisor who doesn’t have a permanent office is a quick way to be a victim of embezzlement. Most embezzlement reports are from advisors who will only go to your house to give advice but don’t have a physical office to go to if you need assistance.

A permanent office is an indication that the advisor is stable and trying to stay in business.

If an advisor uses a co-working space or won’t meet at a permanent location, they may be a fly-by-night scam artist.

3. Working with an Insurance-Only Advisor

An insurance-only advisor is licensed to sell you insurance products. Insurance products only pay a commission, so you must question whether the product is right for you or only recommended because of the advisor’s commission.

Plus, an insurance-only advisor won’t be able to help you with stocks or other investment products.

4. Working with a Stock Market-Only Advisor

Just like we don’t recommend that you work with someone that can only offer insurance products, we also don’t recommend someone that can only help with stocks. A stock market advisor can’t help you create a well-rounded retirement plan.

You may need stocks, insurance and a variety of other retirement options.

Ideally, you’ll work with an advisor that can offer both insurance and stock market advice. Both products work together to provide you with a higher level of retirement security.

5. Working with an Advisor That Tries to Sell You on the First Appointment

Advisors are offering a service, and they need to make a living, but they shouldn’t try and sell you on the first appointment. Instead, an advisor should:

  • Educate
  • Get to know your goals
  • Run simulations for retirement

Once an advisor knows you, then they can begin to make accurate recommendations to you. It takes us multiple appointments to truly learn enough about a client before we recommend anything to them.

6. Believing the “Too Good to Be True” Stories

If an advisor’s story is too good to be true, it probably is. An excellent example of this would be the stock market advisor saying, “I’ve never lost money.” Market fluctuations occur all the time, and it would be impossible for someone never to have a down day if they’ve been in the market long enough.

Insurance advisors who create illustrations that show 8% – 10% improvements each year, are a red flag. You need to question if the product is too good to be true or if you’re only being shown part of the illustration.

You can certainly make 8% – 10% returns per year, but you also need to know the downside. Often, earning this high of a rate of return simply isn’t feasible.

7. Doing It All Yourself

You can do it all yourself, but you need to know the commitment that you need to accumulate your wealth. When you do everything on your own, you’re going to learn information every day. You’ll need to dedicate an immense amount of time to your investments, while also managing your job and family.

When you hire a professional that works on retirement planning daily, it will help alleviate this burden.

8. Choosing an Advisor Based on Only Their Fee

You’ve heard the statement “you get what you pay for,” right? Unfortunately, the same is true when choosing an advisor. Sure, you can select a ROBO advisor with low fees, but you’re missing out on the personalization and management that can really help you build wealth.

If the market starts to tumble, the ROBO advisor will not engage in active management the same way we would.

Fees will always be a concern when choosing an advisor, but you need to consider what you’re getting for these fees. Sit down and ask each advisor what you’re getting for your money.

Low fees may mean:

  • Higher fees for additional help
  • Higher fees or commissions on certain products
  • No assistance when planning for life insurance, social security and so on

A low fee advisor may not provide active management, which likely led to massive losses in 2008 for their clients. However, the advisor with the higher fee may have actively managed their clients’ portfolios so that they didn’t lose money in 2008.

If you want to secure your retirement, you need to work with an advisor that you can trust. The mistakes above are common mistakes anyone can make, but you should avoid them as best you can.

Want to hear more, great advice from us?

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Fees, Commissions, and Being a Fiduciary

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When shifting from one financial advisor to another, there are many questions that you should be asking. However, there are two main questions, which we’ll be covering today in great detail:

  1. What are your fees and commissions?
  2. Are you a fiduciary?

Fees and commissions are going to be tied into the advisor’s offering in some way, so you must know how your advisor is being paid. Choosing the right financial advisor is a process, and you need to really have a firm understanding of fees, commissions and being a fiduciary to safeguard your retirement.

What are Your Fees and Commissions?

Fees have been a central focus point of big brokerage companies like Charles Schwab and TD Ameritrade. The entire industry has been in a “fee” war where they’ve tried to compete in the fee department with each other, and fees fell.

For you, lower fees are always a good thing.

Transaction costs have also practically disappeared due to the increased focus on lowering fees and costs for investors.

When working with a financial advisor, you want to know many things, but today, we’re focusing on fees. You need to understand how your advisor is being paid. Many people come into our office and explain that they don’t know all of the fees and commissions that their advisor uses.

It’s essential to:

  • Ask your advisor about their fee structure and commission
  • Dive deeper into the advisor’s fees and commission if your questions make them uncomfortable or they seem to want to dodge your questions

Since you’re hiring an advisor to work on your retirement plan, it’s your right to know how they’re being paid. We would advise against working with an advisor who doesn’t want to divulge their fee structure and commission.

There are a few ways that your advisor can be paid:

Commissions

Commissions are a form of payment that has been around for probably the longest. Commissions are made when products are sold and also in the investment world. Originally, brokers needed to be contacted to make trades and would earn commission on these trades. 

You can buy stocks without commissions in today’s investment world. 

Mutual funds often have fees and commissions on the front-end or back-end, meaning your broker makes a commission at the start or end of the investment. 

You have every right to ask your advisor whether they’re receiving a commission on your investments in any way.

Fees

Advisors can charge fees in a variety of ways:

  • Hourly: An hourly fee may be applied when the advisor works on your portfolio or completes certain tasks.
  • Flat-fee: A flat fee may be assessed for things such as helping transfer your accounts or setting up your investment portfolio.
  • Percentage of assets under management: Finally, a percentage fee may be assessed based on your portfolio’s value. For example, a 1% fee may be charged on your $100,000 investment account, or $1,000.

Advisors may also charge a combination of the fees above. 

For the most part, advisors that charge fees will not make a commission. However, if insurance products are included, a commission may be assessed.

As someone looking from the outside, it’s common to think that the lowest fees are the best. But that’s not always the case. You need to look at the services that are wrapped into the fees to really understand the value in a service.

You might pay a 1% commission for a very hands-off advisor or 1.25% for an advisor who also assists with tax planning and other aspects of financial planning. It’s vital that you ask your advisor what their fees are and what’s included in their fees to know exactly which services you’re receiving.

Are You a Fiduciary?

A fiduciary is very important to understand when working with any financial advisor. You should be asking if the advisor is a fiduciary, but before you do that, it’s important to know what being a fiduciary really means.

What is a Fiduciary?

A fiduciary has to make decisions that are in your best interest. Therefore, certified financial planners must uphold a fiduciary standard. For example, let’s assume that the advisor makes a 10% commission on a specific type of insurance and a 5% commission on the other.

Someone who does not abide by a fiduciary standard would enrich themselves by recommending the product that gives them the most commission, even if that’s not the best product for you.

However, when an advisor is a fiduciary, they need to consider your best interests, even if that means lower commissions for them.

We run as a fiduciary, and our business is founded on:

  • Learning about a client
  • Understanding the client’s goals
  • Recommending the best options for the client to reach their goals

Not only does a fiduciary have to work in your best interest, but they need to be able to prove this in the future. If a client questions why we recommended a specific financial product, we must explain why and show proof that this product was the best based on our knowledge and their goals.

Legal vs. Assumed Fiduciary

Some advisors work on legal and assumed fiduciary duties. Suitability is one way that the advisor may work, and this means that they need to offer a suitable recommendation. In the world of suitability, the advisor can recommend a higher commission product if it suits your needs.

Assumed fiduciary is also an option, and this means that the advisor will do their best to work in your interests, but they’re not legally bound to do so.

Finally, there are legally bound fiduciaries, which we believe offers the best option. There are two times when a financial advisor must be a fiduciary:

  • Certified financial planners are obligated to be a legal fiduciary to hold their CFP designation.
  • Licensing is another time when an advisor may be a legal fiduciary. For example, if an advisor is Series 65 licensed, under FINRA, they’re bound by law to hold a fiduciary standard.

You should be asking your financial advisor about their fiduciary standards and whether they uphold them. You should also ask about licensing so that you have peace of mind that if they’re Series 65 licensed, they’ll work in your best interest.

Fiduciaries Must Disclose Things That May Be a Conflict of Interest

For example, let’s assume that I have a partnership with an attorney where I make money or some form of compensation from the attorney. A fiduciary must disclose this information and allow you to decide on your own.

We’re seeing many clients who are moving to independent financial advisors because of the fiduciary standards they uphold. So, let’s assume that you work with someone at Nationwide. The agent will recommend products that the company offers.

Independent financial advisors aren’t required to recommend specific products.

The Nationwide representative would recommend their own products, even if it’s not necessarily the best option available. Independent financial advisors, like ourselves, can recommend a wealth of products, whether that means the product is from Nationwide or someone else.

Did you enjoy this article? Then, we recommend signing up for our podcast, where we discuss topics just like this twice a week.

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What Should You Consider If Your Spouse Passes Away?

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No one wants to think about what would happen if their spouse passed away. Death is a difficult topic to discuss, but it is an inevitable reality for all couples. It’s important that you and your spouse have peace of mind that if either of you dies, the other has a plan in place that allows them to live the best life possible.

We’re going to help you think through the ideas and questions that will be helpful if your spouse dies.

If or when your spouse dies, your mind will be in a million places at once. Grief, fear and anxiety will overwhelm you. Having a general idea or checklist that can help you through this challenging time can really make it easier for you to overcome a spouse’s death.

You can’t be 100% prepared for death no matter how hard you try, but a checklist and guidelines can certainly help make the impact a little less intense.

A few of the things to consider are:

6 Things to Consider If Your Spouse Passes Away

1. Cash Flow: From Two Incomes to One

Income is a primary concern for most people, even if you’re both retired. We see many cases where one person is still working and passes away, and even times when both spouses are retired and one dies.

The main issue is cash flow because:

  • Maybe the deceased was collecting a pension with no survivorship attached.
  • Perhaps one spouse was still working and generating income and passes away.
  • You’ll lose one source of Social Security income if you’re both collecting. Instead, an adjustment is made where you’ll receive the higher person’s benefits.

Your standard of living can drastically change if your spouse dies and you lose some of these sources of income.

2. Expenses: The Key to Life Without a Spouse

When couples think of retirement planning, they think of retiring together. Most people will plan for:

  • Two sources of income
  • Two sources of expenses

However, even if you’re losing one or more sources of income, expenses will also be less. It’s vital for you to fully understand your expenses when retirement planning as a married individual and a couple.

For example, when your spouse passes on, you may no longer need to pay for:

  • Country club fees
  • Two vehicle payments/insurance
  • Certain medical bills
  • Etc.

Once you know your cash flow and expenses, it will be a lot easier to breathe if the worst happens.

It’s crucial for you to also know where all of the bills are coming from. You have to continue living, and it’s vital to keep these bills current.

3. Estate Settlement Issues

You’ll need to do a few things to your estate if your spouse dies. One thing that comes to mind is an IRA in your spouse’s name. The IRA will need to be retitled when your spouse passes. You may be able to:

  • Become an inherited IRA
  • Be taken over if you’re a spouse

When you take over a spouse’s IRA, you’re effectively rolling your spouse’s IRA into your own. You have to go through the steps to:

  • Change joint accounts to single accounts
  • Take certain accounts and change them to your name

Many accounts may need to be properly transferred to a surviving spouse.

In terms of estate tax, there are fewer issues today than in the past, but with larger estates, it can be challenging to keep track of all property. You might need to:

  • Look through credit card statements
  • Identify certain accounts
  • Locate assets

Because your spouse passed away, you’ll also need to look through your estate plan. Perhaps you wanted certain assets to pass to your spouse, but now that they’re gone, you’ll need to consider what happens to these assets.

4. Insurance Accounts and Benefits

Insurance is a major concern because your spouse and you can have a variety of accounts. You need to be able to:

  • Name accounts
  • Know where accounts are
  • Know how much is in these accounts
  • Etc.

You need to identify and know where all of these accounts are when your spouse passes. It’s essential to keep a running list of these accounts and how to access them. Ideally, when your spouse is alive, you should begin making a list of these accounts so that the surviving spouse can access them.

Insurance and death benefits may come from:

  • Employers that offer group life insurance if they’re a larger company.
  • Veteran benefits for death and burial.
  • Pension survival benefits with certain clauses.
  • If you have a dependent or child under the age of 18 at the time of your spouse’s death, Social Security may have certain benefits available to them.
  • Life insurance policies that may be open.

Insurance is a significant asset when retirement planning because it allows you to have an influx of cash that your spouse will need upon your demise.

5. Taxes

The IRS wants their money no matter the circumstances that you’re personally facing. You may have filed your taxes a certain way when your spouse was alive, but this can abruptly change when they die.

Your house may generate a gain if you sell it.

Provisions need to be thought through thoroughly. This is a major consideration, and we recommend going to a CPA. A CPA will cost a few hundred dollars, but they’ll help you understand your tax obligations and how your tax situation might have changed.

6. Assets and Investments

When you secure your retirement, you’ll notice that you’ve acquired a lot of assets and made numerous investments throughout your marriage. These investments need to transition to you as a survivor.

There may be tax concerns with these assets being transferred to you, so a CPA can help here, too.

A few of the accounts and investments that people may have questions about are:

  • IRAs: If they’re set up properly, the IRA can often be transferred to the surviving spouse without an issue.
  • Stocks: A step up in basis may be leveraged to save you money in taxes.
  • Businesses: Will you continue the business, or is there a succession plan in place? How about the sale of the company and the tax implications that follow?

You may have annuities and other investments that need to be considered. We recommend speaking to a financial adviser or planner to discuss your risk tolerance without your spouse.

Often, your retirement plan will have more risk with two spouses, but now that one spouse is gone, it may be time to reduce these risks.

Thinking of life without your spouse is something no one wants to do, and we’ve made a checklist to help you walk through these things to consider.

The checklist is completely free, but we need to know how to send it to you.

We can send the list either through email or regular mail – it’s up to you.

Call us today to request your own checklist to help you understand what to do when your spouse dies.

4 Costly Misconceptions About Retirement Planning

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We work with many clients who come to us for their retirement planning, and many of them have misconceptions about the process and how it works. So, we’re going to outline a few of the most common misconceptions that many people – maybe yourself – have about retirement planning.

4 Retirement Planning Misconceptions That Need to be Put to Rest

1. “Financial Planners” or “Financial Advisors” Must Be Qualified

Many people have the words “financial planner” or “advisor” next to their name, but that doesn’t mean that these individuals are particularly qualified to do their job. 

Why?

Anyone can say that they’re a financial planner or advisor, and even though they’re not “supposed to,” that doesn’t mean that they don’t lure in clients this way. For example, insurance agents can call themselves:

  • Financial advisors
  • Financial planners
  • Retirement planners

But all that these individuals have access to are insurance products. Insurance products are a good option to secure your retirement, but they’re not enough for a well-rounded retirement portfolio.

Yes, these individuals can call themselves financial advisors, but they won’t provide the intensive products you need to retire comfortably. Retirement demands a robust portfolio that includes insurance products, stocks, bonds and so much more.

2. The Lowest Fees are the Best Solution

Are you focusing only on the lowest fees? If so, this may be a mistake. There are many justifiable fees and cutting these fees down may do you more harm than good. For example, the lowest fees may lead to:

  • Less hands-on recommendations
  • Autopilot portfolios with no active management
  • Etc.

Robo advisors, for example, are low-cost opportunities to invest, but you miss out on the true portfolio customization and altering that a human advisor offers.

Low-cost advisors may not:

  • Help you grow your money
  • Have the expertise for retirement planning

In the insurance world, fees are often not seen, so they’re promoted as having “no fees.” However, the fees are really built into these products, and the advisor is being paid a commission on these products.

When we work on your portfolio, we have a risk management portfolio in place that fights back against market fluctuations. For example, we didn’t see our clients lose 38% in 2008 when the market crashed.

We actively update portfolios to mitigate these potential losses.

Would you rather pay a fee to reach your goals, or have no fees and sacrifice risk mitigation? It’s something to think about.

A good option is to:

  • Learn what your goals are
  • Discuss your goals with a potential advisor
  • Then decide if the fees are worth it or not

If you go directly to the lowest fee option, you’re likely putting your retirement more at risk for small savings.

3. All Credentials or Certifications are the Same

Advisors like to list their credentials and certifications next to their names. These credentials help boost their authenticity and stand out when talking to prospective clients. The issue is that unless you’re familiar with the credentials or certifications, you may not know the value behind them.

For example, you won’t know whether the certification requires just a fee and open book quiz, or if it took a lot of time to receive a credential.

One credential that we believe is very valuable is a certified financial planner. You cannot claim to be certified if you’re not. This certification (and for full disclosure, we do hold this credential ourselves) is very valuable.

For someone to be considered a certified financial planner, they must:

  • Take courses at a college for about two years
  • Pass an extensive six-hour exam (50% pass)
  • Three years of full-time experience in financial planning in some way

Once certified, you must also live by the code of ethics and go to continuous education annually to maintain the certification.

We believe the certified financial planner certification is the gold standard for financial planners.

4. An Advisor Works at a Big Firm, So They Must Be Good

Working under a big brand-named company, such as Morgan Stanley, is often the only credential potential clients consider when choosing an advisor. The client assumes that since the expert is working at a major company, they must be the best of the best.

This isn’t necessarily true.

In the investment banking world, these companies have a lot of brand recognition. But working for one of these companies doesn’t mean that the individual is qualified. These companies often have training programs, and the person you initially work with is still learning the ropes.

A lot of younger advisors will go to these big companies out of college, leverage their training and go on to open their own financial planning business.

Independent financial planners are free to:

  • Offer you the best products or services
  • Not force products on a client

For example, if they work for Morgan Stanley, they’ll push the company’s products. This isn’t to say that all these advisors are bad. You can definitely find a great advisor at one of these firms, but consider that independent financial planners are in the fastest-growing advisor category.

So, now that we’ve cleared up a few misconceptions, it will be easier to find an advisor to help you meet your financial goals.

This is part 2 of how to choose the right financial advisor for you. If you missed the first part of this series, we encourage you to click here to read part 1: Avoid 4 Retirement Investment and Planning Rip-Offs.

College Planning Using a 529 Plan

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Are you trying to save money for your child’s or grandchild’s college education? College is expensive and offering any type of help to your loved one will be appreciated. We’re going to be covering college planning using a 529 plan.

What is a College 529 Plan?

A 529 college savings account is a savings account that can be used for a child’s college education and supplies. The plan can be used as early as elementary school if you want the child to go to a private school and pay for it.

Why would you want to invest in a 529 plan?

The account’s earnings will grow tax-free with one caveat: funds in the account must go towards qualified expenses. Qualified expenses cover (for the most part):

  • Room
  • Board
  • Tuition
  • College 
  • Education-oriented expenses

You can withdraw funds out of the 529 plan, pay tuition, and enjoy significant tax-free benefits as a result.

Let’s assume that you want to save for a child being born today. You put $1,000 into the account, and by the time the child is eligible for college, this money is likely to double twice.

For example:

  • You deposit $1,000
  • The money doubles to $2,000
  • The money doubles to $4,000

Every 10 years, these accounts will double – in most cases. The growth in this account is tax-free. Plug in another figure, such as $10,000, and you’ll see that the account grows to $40,000 on its own in 20 years, even if you don’t add another penny into it.

The $30,000 growth is tax-free.

Of course, markets fluctuate, so you can earn more or less, depending on the market.

What Impact Does a 529 College Savings Account Have on Financial Aid Eligibility?

In terms of account ownership, the account is owned by the person who opened the 529 account, usually a parent or grandparent. It is the account opener’s money because they’re in complete control of the distributions from the account.

Children do not have control of the account, so they can’t spend the money on random expenses.

In terms of financial aid, a 529 account will have a minimal effect on the aid. The effect is:

  • Any amount past $10,000 (or close to it) lowers student aid packages
  • 5.64% of the asset value above $10,000 is reduced from an aid package

So, let’s assume that you had $100,000 in the account. In this case, $5,640 would be reduced from the financial aid package.

With the high, tax-free growth rate that some of these accounts achieve, it’s a worthwhile method to save for a person’s college tuition.

Which Investment Options Does a 529 Offer?

The person setting up the account, often a relative, will oversee the account’s investments. You can pick the investments yourself or opt into a lifecycle fund, which is a hands-off method where someone else invests for you.

Owners of the account are in total control of the account and any investments made on the account.

Common Myths and Questions Surrounding 529 College Savings Accounts

If I Don’t Use the Money, I Lose the Money

Many people are under the impression that if the funds in the account aren’t depleted due to the child’s education, they’ll lose that money. That’s not the case. You don’t lose the money. Instead, you’ll have to pay tax on the money earned.

Money isn’t put into the account tax-free – you already paid taxes on it.

However, you will pay a 10% non-education penalty if the funds are withdrawn for purposes not relating to education. You may be able to avoid this penalty, too.

You may open an account with a beneficiary and use the money for another child. As a grandparent, you can name several beneficiaries for whom the funds can be used, even if they were born after the account was opened.

I Can Only Use the Money in the State That the Plan is Sponsored In

Plans are state-sponsored and run with regulations surrounding them. Since they’re sponsored, the fees are very low. 

One common misconception is that if you open a plan, for example, in North Carolina, you must use the account for a child going to school in the state of North Carolina. This simply isn’t the case. The funds in the account can be used for any education-related expenses nationwide.

Accounts can be opened anywhere, so you can live in one state and open a 529 in another state.

For the most part, you can open an account anywhere and go to school anywhere. One advantage that some accounts have is that a few states allow accounts to be opened in their state to deduct the contributions from state taxes.

529 Accounts Will Eventually Disappear

Maybe. We really don’t know the future, but we do know that the Pension Protection Act of 2006 states that these plans will be in place indefinitely. Of course, the government can change this at any time, but the forecast doesn’t seem to indicate that they will remove these accounts in the future.

There is a lot of talk about the burden of high student loan payments and college costs that make it unlikely that a 529 plan would disappear in the near future.

You Can’t Change Plans

You aren’t locked into a plan, so you can change plans if you want to in the future.

How to Setup a 529 Plan

Plans are very easy to set up. It’s just a matter of looking for your state plans and filling in information online. Of course, you’ll need the beneficiary’s information, too. Once you’re done, you can start funding the account.

Major brokers have added 529 plans to their accounts, which makes it easy to get started.

When it comes time to take money out of the account, you’ll need to fill out a form explaining what the funds are used for, and that’s it.

While a 529 plan may not be the right choice for everyone, it’s a smart saving tool for a child’s college expenses. The cost of a college education is ever-increasing, and these plans can help make higher education just a little more affordable.

Are you looking for more great advice on retirement? We’ll walk you through how we’ve helped people, just like you, reach their retirement goals.

Read our new book: Secure Your Retirement Achieving Peace of Mind for Your Financial Future.

Avoid 4 Retirement Investment and Planning Rip-Offs

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Retirement planning is one of the topics that should be on everyone’s mind. When you’re trying to secure your retirement, it’s important to consider rip-offs. There are retirement investment and planning rip-offs that everyone should know about.

4 Retirement Investment and Planning Rip-Offs

1. Fees

Some financial advisors say that they have “no fees,” but the reality is that there are always some types of fees. There are, typically, two types of fees that you’ll deal with, which are:

  1. Flat fee: Often a percentage of the assets being managed.
  2. Commission: Fees aren’t visible to you, but the advisor receives a commission from you investing in certain products.

If the advisor states that there are no fees for their services, it should be a red flag for you. The advisor is in the business of making money, so there has to be fees or commissions being paid.

2. Bait and Switch

A bait-and-switch occurs when someone states that they can help you achieve a certain rate of return that’s higher than the average. For example, let’s assume CDs are offering 0.6% returns, but the advisor or banker states that they’re able to secure a 6% return for you.

How?

You must ask questions. If a rate seems too good to be true, something is off. It’s vital to ask how the interest rate being offered is achieved. There are some offers that are “teaser rates,” and what this means is that during the first year, your rates may be 6%.

After year one, the rate falls back down to a normal rate.

If the advisor states that the financial vehicle offers a 6% or 7% guaranteed return for, say, 10 years, you’re likely being put into a fixed annuity with a rider. The growth rate is based on the interest for the income stream.

What does this mean?

Your income stream from the annuity has a 6% or 7% return, but it’s not something that you can decide to take out all at once.

When rates sound too good to be true, ask more questions. The annuity above is a good product, but if you don’t know that the rate is just for income, you might feel duped. Knowing and understanding the following can help:

  • The overall rate
  • How long the rate will last

Oftentimes, these high rates of return are just introductory rates and won’t be in place forever. Think of credit card offers that aim to have people sign up. Lenders are willing to offer 0% interest for six months or a year to get you to apply. It’s a similar concept here with bait and switch.

3. Outrageous Claims

Rates of return are important if you want to reach your dream of retirement. You need steady, consistent returns to retire. When you’re looking at investment vehicles, there is something called “illustrations.”

These illustrations are claims and may say you can earn 6% – 8% returns.

A fixed annuity may offer these returns on occasion, but that doesn’t mean that you’ll achieve these rates. Illustrations often claim that you can earn rates “up to,” or that others have earned “as much as,” but these are often unique cases.

Chances are, these high rates of returns were very specific cases and aren’t repeatable every time.

Even if an advisor states that they’ve had 10% returns for their clients last year or five years ago, it doesn’t mean that they’ll be able to replicate these returns in today’s market.

Instead, we recommend:

  • Asking for historical return data
  • Really reading the fine print

Outrageous claims are a great way to lure you into a contract or financial vehicle, so be on the lookout for claims that just sound too good to be true.

4. Outdated Beliefs

A long time ago, in the 1900s, there were no regulations in the banking system. When markets fell, customers would go to the bank and start withdrawing their money. The government created the FDIC to support the banking system.

The FDIC is a protection offered to you by the federal government that if the bank goes under, you’ll have protection for your money.

Imagine today, if everyone had the belief of the 1900s, and decided to ignore the FDIC. Some advisors fall into these old beliefs. Just 20 years ago, a lot of people didn’t like annuities and were very much against them.

Today, there are still some advisors stuck in their outdated beliefs that savings in retirement products are bad. 

Holding onto old, outdated belief systems is never a good idea.

Why? 

Offerings change, and the market changes, too. An advisor should look into all financial vehicles and the current state of a financial vehicle today. In the past 20 to 25 years, things have changed and at a rapid pace.

We do recommend maintaining a diverse portfolio of products and would never suggest putting all of your investments into one vehicle. However, there is a time and place for most financial vehicles in a person’s investment portfolio.

Wrapping Up

If there is one take away from the points above, it’s that you really need to take control of your retirement planning. Educate yourself on investment options and don’t be afraid to question how a certain financial product is able to offer substantially higher returns than average.

It’s your money, and you have every right to ask questions to safeguard your retirement.

Do you want more expert advice on how to secure your retirement? 

Listen to our podcast where we discuss retirement planning twice a week, every week.

Social Security Strategies

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Some of the most common questions we receive are related to social security strategies. A lot of people rely on social security to help secure their retirement because it is a source of income that can help you pay for your day-to-day expenses.

But it’s still a confusing topic when beginning with retirement planning because you’ll find a lot of different opinions.

If you’re wondering when you should take your retirement, grab a cup of coffee and continue reading.

When Should You Retire and Take Social Security?

One of the first questions we receive from clients is when to take social security. A lot of people try waiting until they’re 70 to retire so that they can receive the maximum benefits social security has to offer.

The problem is that this advice is based purely on the financial aspects of retirement and not your current situation.

You have a lot to consider, especially if you have a spouse, such as:

  • Age disparity between spouses
  • Health
  • Ability to work
  • Sources of income

For a lot of people, over 50% of their income in retirement is going to be social security, so it may make more sense to retire at 70 to maximize those benefits. The problem is that it’s not always that simple.

If one spouse is a lot younger and is still working and plans to continue working, retiring early may be the best option.

What to Think About If You Take Social Security Before Full Retirement

If you’re planning on taking social security before your full retirement, there is quite a bit to think about. You should be thinking about the following:

Is someone still working? 

If the person is still working, there is a limit to how much they can earn while on social security. For example, in 2021, if you make more than $18,960 during the year, the amount over the limit will result in 50% of the overage being deducted from social security.

This can be confusing to understand, but what it’s essentially saying is that:

  • You earn $28,960 ($10,000 over the limit),
  • $5,000 (50% of the overage) will be withheld

When trying to plan for income, it can be difficult because the withheld amount may mean a three-month gap between benefits being paid.

Spouse earnings will not impact you in this situation.

Is there an issue with permanent reduction?

Your benefits will be reduced permanently once you opt into social security early. It’s important to realize that when you hit full retirement age or 70, your benefits will not go up. Your choice to take social security is final.

Taxes

If a spouse is working and you’re taking social security, it’s important to consider taxation. You must plan for taxes because they will be a financial burden that is difficult to overcome. 

Restricted Application and the Potential Benefit It Offers

If you were born before January 1, 1954, you are eligible to use a restricted application. This is a strategy that allows you to file for spousal benefits first and restrict the application to the spousal benefits only.

What this means is that the person isn’t choosing to use their own social security benefits at this time, so they can effectively wait until they are 70 to maximize their benefits.

If you plan to wait until age 70 and meet the birth requirements, this can really be a beneficial option for you. It’s important to note that your spouse will need to already be on social security or plan to retire before your restricted application is filed.

Let’s take a look at an example:

  • One spouse is on social security that is $2,000 a month.
  • You file a restricted application and receive 50% of your spouse’s benefits, or $1,000.

You can continue taking the $1,000 while your own social security will continue to grow. And you can also, in some cases, claim six months of retroactive benefits.

How Spousal Benefits Work

While spousal benefits are 50%, it’s based on the primary person’s insurance amount. Let’s assume that the person is earning $3,000 on social security, this doesn’t mean that the spousal benefit will be $1,500.

The insurance amount may be $2,400, and the spouse would then receive $1,200.

If the dependent spouse, or the one taking spousal benefits, will also factor into how much the person receives. Why? The dependent spouse’s filing age will be the deciding factor in whether they receive the $1,200 or not.

For example, if the dependent filed at 60, the $1,200 may be reduced by 30%.

Reductions can be as high as 35%.

It’s very challenging when trying to secure your retirement because the social security office will not help you. Why? They’re prohibited from providing advice to you. You will need to work with someone who can help you navigate social security.

Note: You need to be married for 10+ years to receive these benefits.

What Happens If the Higher Earning Spouse Passes Away?

When one spouse passes on, the remaining spouse will receive 100% of the highest benefit amount between both spouses. You won’t be able to receive your benefits and survivor benefits.

Instead, let’s assume, using the scenario above, that the one spouse passes away and leaves the dependent spouse behind.

In this scenario, the dependent spouse can claim the $3,000 in benefits. 

But as with everything related to social security, the age at which you start collecting benefits will matter, too.

You will also receive the delayed retirement credits from the deceased spouse.

Note: You can also collect 50% of an ex-spousal benefit if you were to divorce rather than the one spouse passing on. If you remarry, the benefits will stop. But if the person dies and you don’t remarry until 60 or older, you can still take survivor benefits.

When to File for Social Security If You Know What Age You Want to File

You know what age you want to start taking your social security benefits, but now you need to know when to actually file. Filing should be done 3 to 4 months before you want to receive your first benefit check.

The easiest way to do filings is to use the online portal to apply.

When filing online, be sure to reiterate your plan in the remarks section to ensure that errors do not occur. This is especially important when filing for a restricted application to avoid any processing errors on the side of the Social Security Administration.

There’s a lot to think about figuring out social security strategies for your situation. Sit down with someone and really discuss your options because you may be missing out on key benefits that you can claim.Have you heard our latest podcasts? If not, we encourage you to join our podcast today for access to more than 90+ financial and retirement-related talks.

How to Change Financial Advisors

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If you’ve broken up with your advisor (episode 90 of our podcast), you may be wondering what steps to take to move to another advisor. A retirement financial plan changes and evolves over time, and there are times when moving to another advisor is in your best interest.

There are a lot of reasons to make a switch, and there’s always going to be a move where you transition to your new advisor.

It’s difficult to leave an advisor, but the transition process is rather straightforward.

How to Move from One Advisor to Another

A major question our clients have is what the process looks like when moving from one advisor to another. There are a few ways to make the transition, and don’t worry: your money won’t be lost in transit.

There are a few scenarios that can play out here.

Your New Advisor is at the Same Place

If your old advisor is at the same place as your new advisor, the process is simple. By “place,” we mean a major institution like Fidelity, Charles Schwab or any other major institute. In this scenario, everything stays the same.

You don’t have to worry about account numbers or information changing.

Instead, you’ll sign a few papers that authorize the new advisor to take the place of your old advisor.

This is a rare scenario, but it is the best to be in.

Your New Advisor is at a Different Place

A more common scenario that we deal with is that a client’s former advisor is at Fidelity and their new advisor is at Charles Schwab. In this case, all of your money needs to move in the process, which is still an easy process.

Not much changes, even the way that you look at your account. For example:

  • Your IRAs will still be IRAs
  • Joint accounts stay joint accounts
  • Etc.

For the most part, things will remain very similar when changing advisors.

Even if you have stocks that you want to hold onto, you can transfer them “in kind.” You don’t have to sell and then rebuy these stocks during the move.

Paperwork Process Required

The custodian (in this case, Charles Schwab) will require paperwork to understand who you are. An application is required, which includes all of your basic information, such as your name, address and so on.

  • If you’re transferring an IRA, you’ll need to list your beneficiaries.
  • Brokerage accounts will need to be set up, and we recommend adding in a TOD, or transfer on death.

Your advisor will walk you through all of these steps and explain what’s taking place. You’re there to sign off on what’s happening and to finalize the transfer.

  • Transfer document. A transfer document will need to be signed, which gives permission to move assets from one custodian to another. For example, if your assets are in Fidelity and you’re moving to an advisor that uses Charles Schwab, you’ll sign this document to allow the assets to transfer. You’ll need to attach a current statement to the document, too.
  • Advisor agreement. Your advisor will want you to sign documents that outline the services that they’ll render. 
  • Risk tolerance document. You’ll likely have to sign off on paperwork involving risk tolerance so that both you and the advisor know what level of risk you’re willing to take.

Note: In 99% of cases, your accounts will transfer over to an identical account with little more changing than the name of the custodian on your account statements.

It’s important to note that your former advisor doesn’t have to sign off on any of these documents. Since you’re changing advisors, not requiring a signature makes the entire process much easier on you.

The advisor will receive a notification of your money moving and that you’re moving to another advisor.

Process After Document Signing

After you’ve signed all of the paperwork, there’s a small waiting period where your accounts open quickly and sit at $0. The transfer process often takes 7 to 10 business days, so during this time, your assets will begin their transfer.

Once everything is transferred, your advisor will then begin looking through all of your assets and start working on making any changes you’ve discussed to reach your retirement goals.

Common Questions When Moving or Starting Work with an Advisor

What if you want to move from one account type to another?

What if you’re not moving from another advisor but you’re moving from a 401(k) to a traditional IRA? In this case, the process often involves a simple phone call and won’t have any tax ramifications involved.

In this case, the 401(k) will send you a check in the benefit of you to the custodian.

So, the check with all of the funds from the 401(k) is sent to you and written out to your custodian. You pass this check to your advisor, and it will now be rolled over to a traditional IRA account.

What if you handled all of your own investments but now want to work with an advisor?

If you have handled all of your own investments, it’s as simple as creating a new account with a custodian and following a similar path as outlined in the “Your New Advisor is at a Different Place” section above.

Moving to a new advisor may be required to secure your retirement. The process itself is easy, and most advisors will walk you through the process step-by-step to get started.

Want to secure your retirement?

Click here to access our 4 Steps to Secure Your Retirement video course.

How to Choose a Financial Advisor After a “Breakup

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You put a lot of time and effort into choosing a financial advisor. An advisor learns all about your financial situation and your future goals. And when it’s time to move on to a new advisor, it can be really difficult.

We’ve had a lot of clients come to us over the years that want to move on to use our services.

But they have an emotional attachment with their current advisor.

It’s difficult to move on to a new advisor when you know the person’s family members or have relied on them for years, but you also know that it’s the right time to move on. For a lot of people, choosing a new financial advisor is almost like breaking up with someone because of that deep, emotional bond that has formed.

Why Break Up with a Current Financial Advisor?

Retirement planning is a very important part of your life. Once you’ve reached retirement age, you’ve either planned properly or you didn’t. You can’t go back and correct past mistakes when you’ve reached 65, 67, 70 – whenever you choose to retire.

For a lot of people, they often feel that leaving a current advisor requires a deep reasoning.

It doesn’t. 

Your advisor is helping you manage your money. If you’re not satisfied with the person’s services or just want to try another avenue, you have every right to do so. You’re always in control of your financial advisor choice.

The most common reasons why people breakup with their financial advisors are:

  • Communication has broken down, or you really never hear from your advisor.
  • You’re simply not happy with the performance or experience you’re having with your advisor.
  • Life changes that occur, and your objectives and goals change.
  • You need an advisor that offers more services or is setup to handle more of your concerns.
  • Advisors change their overall philosophy, and the change isn’t the right choice for you.
  • Your advisor is retiring soon, so you begin looking for a new financial advisor.
  • Your advisor’s team is changing and you’re no longer working with the advisor that you want.

The truth is that you are investing your money into retirement. Your life goals and objectives are either being met or not met with your advisor, and it’s your right to leave an advisor if you want to.

How to Choose a Financial Advisor

When working with clients who want to secure their retirement, we’ve found that communication is the main factor in them no longer working with an advisor. Because communication is key, it’s often best to start here when choosing a financial advisor.

Ask the advisor about:

  • Types of communication
  • Frequency of communication
  • Types of reports or statements provided to you
  • Etc.

If the advisor shrugs off these questions or seems annoyed by them, you know that they don’t take communication as seriously as you need them to.

But there is a lot more to look for in an advisor than just communication.

You also want to consider the following:

  • Are you nearing retirement? If so, working with a specialist who focuses on near-retirement planning is often in your best interest. These advisors will be able to fill in gaps that past advisors may have missed, and they’ll be able to provide guidance that can solidify your retirement.
  • Do they match your personality? Your personality should mesh with the advisor’s personality. When both personalities mesh well, you’ll have a much better experience working with them. An advisor shouldn’t force you or try pushing you into using their services or to convince you that they’re right.
  • Will your advisor help you with goal alignment? You have goals, and the advisor should help you with goal alignment. If you want to keep your risk low and the advisor is trying to push you into a potentially high-risk investment, such as cryptocurrency, you may want to look elsewhere. The advisor should discuss your options and maybe recommend other strategies, but they shouldn’t try pushing you in one direction or another if you’re uncomfortable with their recommendations.
  • Does the advisor take a holistic approach to retirement planning? A holistic approach, for us, means that we look at the entire plan. There’s more to retirement than investing. Holistic approaches consider taxes, Medicare, long-term care, Social Security, estate planning and your goals. 

How to Break Up with Your Advisor

Breaking up with an advisor can be done in a lot of different ways. A lot of people make this a pressure-filled time with anxiety and stress, but breaking up with an advisor doesn’t need to be this complicated.

Instead, you can send an email, call the person or go see them in person.

We recommend that you keep it simple no matter which method of communication you use to break up with your advisor. If you make it complicated or explain why you’re leaving, it can lead to justification and make the entire process more difficult than it needs to be.

Simply say that you’ve chosen to go in a different direction, thank them for their services and explain that your decision is the best choice for your family.

Technically, you don’t even have to do that. You can also opt to move to another advisor with no explanation needed. Your new advisor should be able to access all of your accounts and help you with the entire moving process.

Click here to access our 3 Keys to Secure Your Retirement Master Class for FREE.