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 March 27, 2023
This Week’s Podcast – Implementing Your Retirement Plan
In this Episode of the Secure Your Retirement Podcast, Nick and Taylor return to talk about the retirement plan implementation after the initial process. When you decide to be our client, we ask for all the information needed to open your account with our custodian Charles Schwab.
This Week’s Blog – Implementing Your Retirement Plan
At this point, a lot of work has been done on both sides of the table: you provide a wealth of information, and we give you a recommendation and insight into your retirement. Now, you have to decide whether or not you want to work with us as a client.
If you love everything and want to work with us to secure your retirement, we will move forward through a new process…
At this point, a lot of work has been done on both sides of the table: you provide a wealth of information, and we give you a recommendation and insight into your retirement. Now, you have to decide whether or not you want to work with us as a client.
If you love everything and want to work with us to secure your retirement, we will move forward through a new process.
Meeting and Figuring Out Any Additional Information We Need
We’ve gathered a lot of information from you up until this point, but there are still some documents we’ll need to open up accounts. For example, we’ll need:
Dates of birth
We’ll spend time filling in documentation with all of your information to open up a Charles Schwab account in your name. Once all of this paperwork is signed, we’ll submit it to Schwab. In most cases, it will take 1 – 3 business days to open the account, depending on the type of account in question.
This is when:
Transfers take place
Nick reaches out to you about the account being opened
Verify that everyone can access the new account (including you)
If you’re already a customer of Charles Schwab, we only need to provide a single form to access the account.
Understanding Our Relationship with Charles Schwab
It’s crucial for you to understand that we don’t work for Charles Schwab. In fact, we’re not connected with the company in any way other than using them as a custodian. Custodians can be:
TD Ameritrade (not for much longer as Schwab acquired them)
Any place where you have your accounts
Charles Schwab doesn’t have a financial relationship with us.
When we transfer your accounts from your existing custodian to Schwab, something called an “in kind” occurs. This is a simple term, meaning that all of your assets are moved from one account to another and remain unchanged.
We don’t have to sell and repurchase anything when transferring your accounts to Schwab.
Until we come up with a strategy around the investments, nothing changes in your accounts during the transfer. The transfer doesn’t cause tax liability or anything like that.
What Happens If I Transfer My Monthly Distribution from One Custodian to Another?
If you have a custodian account with, say, Fidelity and you’re taking a $1,000 monthly distribution, what happens when you transfer to Schwab? We’ll need to fill out one additional form on your behalf and make sure the same exact thing happens at Schwab for you.
In essence, we’re just changing bank accounts when moving to Schwab, and we replicate everything for you effortlessly.
What Happens with a Company Plan, Such as a 401(k), 403(b), 457, etc.?
If you have what is called a “company plan,” the transfer happens a little differently. We require one less form to file and we’ll need to contact the company, such as the 401(k) company.
When we contact the company, we’ll request that the company send a check for the balance of your account. The check will be made out to Charles Schwab for the benefit of you. The check can be sent to you or to Charles Schwab directly.
The process varies and depends on how fast the company cuts the check.
Note: When we work together, we do a trustee-to-trustee turnover so that you don’t trigger a taxable event.
Tax Planning Over the Next Few Months
During the first few months of working with us, we’ll dive into tax planning. If you want to secure your retirement, you must not pay a dime more in taxes than is necessary. First, we’ll need your most recent tax return.
We’ll analyze these returns to learn where you can save money.
For example, perhaps you can benefit from a Roth conversion, so we’ll have a conversation around this to see if it’s something you’re interested in doing.
Of course, we may be able to leverage:
Qualified charitable distributions
Any opportunity to lower your taxable income
We want to lower your current taxable income and future taxes, too.
Clients Over the Age of 65
If you’re over the age of 65, you may be concerned about selling something with a gain or a Roth conversion. Clients who are paying Medicare premiums, or will be shortly, need to worry about something called IRMAA.
Don’t know what IRMAA is? Read our guide on it here.
Essentially, once your adjusted gross income reaches over a certain level, there’s a possibility that your Medicare premiums may start increasing. The goal is to keep your premiums at a level where whatever we do on our end, such as a Roth conversion, isn’t negated.
Our clients who work with us, we will:
Introduce you to a CPA we work with
Help you gather all of your tax forms
Ensure that your return is filed on time
Taxes have a lot of moving parts, and we do our best to ensure that we take as much of the burden off of you as we can.
Communication With Clients
On our end, there’s so much going on quickly that it can feel overwhelming and confusing. We communicate as much as we can with our clients so that you’re never left wondering: what’s going on with my accounts?
We provide updates, often via email or a phone call, to tell you about accounts opening, ensure that you have access to each account, transfer estimates and then when the transfer is complete.
We also keep in close contact with you during this time to ensure that if you have any questions, they’re all answered in a timely manner.
If we’re transferring a 401(k), we often do not have an estimated date for this completion. However, we do see when the check is sent to Charles Schwab and when it is deposited into the account.
When the check goes to you, we’ll be in frequent contact with you to ensure everything goes smoothly.
At this point, we’ve done a lot of the process needed for our “45-day meeting.”
In most cases, the 45-day mark is when we have everything in-house, and all of your assets have been properly transferred. We’ll be getting together to:
Ask you questions about logging into your account, statements and ensuring that you’re comfortable with the setup in place
Finalize anything that is left to talk about for the investment strategy
Deliver anything left in the investment strategy to you
We provide you with a one-page document on how everything is laid out for your multiple buckets. These buckets include your cash, safety, and growth accounts. During the visit, you’ll have time to ask us any questions about the way we devised these buckets.
Next, we’ll move on to the important part of estate planning, which will include a few things, such as:
We have a relationship with a partner firm, and we take care of this expense for our clients. The estate plan ensures that your retirement planning accounts for those times when you’re incapacitated or no longer living.
Since so much is going on during the first year of working with us, we will plan on meeting with you quite a bit so that we can get everything in place. You’ll also be able to see all of the work that we’ve done up until each meeting so that you can have peace of mind that your retirement is in good hands.
Do you want to learn more about our approach to retirement planning? Contact us 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.
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.
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.
As you start to think about retirement planning, you might quickly feel overwhelmed or unsure about what to plan for. Retirement is made up of many different elements, and you’re going to have to make decisions about all of them – but where do you start?
We realized that many people approaching retirement don’t know what they should be thinking about or what questions they should be asking. So, we’ve put together a checklist of the nine most important things you need to consider before retirement.
You can watch the video on this topic above. To listen to the podcast episode, hit play below, or read on for more…
In this post, we walk you through each of these nine elements and help you better understand some key retirement planning aspects. You can make notes on these yourself, use them to talk to your financial advisor, or even see them as retirement planning conversation starters between you and your family. Let’s dive in.
List your retirement goals
You only retire once, so make sure you’re prepared for it! You might have lots of big plans and ideas about what you want to do in retirement. This might include going on a trip, spending more time with grandkids, or anything that you’re initially very excited to do. But often, people don’t plan beyond their first year of retirement. We call this the “retirement honeymoon phase.”
You need to think about what you want to be doing in retirement long-term. We’re talking for 10-20 years! After that first year or “honeymoon phase,” what would you like to be doing regularly, or what would you like to accomplish? Take a pen and paper and write some ideas down in a list or create a retirement journal. Here are a few questions to get you thinking.
Do you want to work part-time or volunteer? Are there any organizations that you’d like to work with?
Where do you want to live? Perhaps you want to downsize, move into your retirement transition home, or look into other retirement accommodation.
Do you want to travel? If so, will it be one long trip, annual vacations, or frequent getaways to places nearby?
Having a list of all the things you want to do in retirement is a great way to get excited about your future. It can also help you make the right choices so that you get to live your dream retirement.
Know your numbers
You may have opened many different bank accounts throughout your life. Perhaps you have multiple 401ks or have various assets. One of the first steps to preparing for retirement is gathering up all of this financial information.
When you’ve consolidated these accounts, you’ll be able to see how much you’ve got, and start building your financial retirement plan. From here, you can find out how much guaranteed income you can expect to receive when you retire.
Your incomings are one thing to know, but you should also be aware of your spending. If you’re working, you may be less worried about how much you’re spending month-to-month, but after you’ve retired, you’ll no longer have money coming in the door. It’s important to know what your fixed expenses will be so you can budget accordingly.
Ideally, your guaranteed income (e.g., your Social Security and pension) will cover all of your fixed expenses. But remember, the unexpected can happen. Sudden healthcare costs or inflation, for example, can affect your retirement plan. So, while we can make illustrations and help get your finances in a good place, we can’t predict the future.
Social security: look at the big picture
People usually want to know how they can get the most money from Social Security. While this is completely understandable, we want to urge you to look at the big picture.
If you wait and start taking Social Security at age 70, then you will receive more money in total – if you live into your 90s. However, if you’re withdrawing more on your assets because you’re not taking Social Security yet, this could have a massive impact on your finances 10-15 years down the road.
It can be easy to fall into the trap of wanting more from Social Security, but we strongly advise you to look at what waiting will do to your assets in the long-term. A comprehensive, written retirement plan can show you and help you understand how something like this will affect your overall finances.
Take an interest in your investing
You don’t need to be a stock-guru, but we recommend that you find out what strategy best suits your money goals and risk tolerance. There are many different ways to invest, but we break these down into two main categories: passive and active.
The passive, or buy-and-hold strategy, is more suited to those who want to invest their money and leave it. This is typically a long-term strategy, where you’ll invest over many years and (hopefully) your money will accumulate. However, when the stock market is volatile, you need to have a high-risk tolerance to weather the storm.
For those approaching retirement, we advocate a more active strategy. This is where you make adjustments depending on market shifts. It’s more suitable for those with a lower risk tolerance, as it attempts to protect against any downturns or crashes that may have a big impact on your retirement savings.
If you’re not sure where to start, consider what your risk tolerance is. If you lost 5% of your invested money today, for example, how would that make you feel? What percentage would you be comfortable with losing?
Understand your Medicare options
You will start receiving Medicare at age 65. However, there will be many, many options to consider. We suggest that you don’t wait until the last minute.
A year before you’re due to receive Medicare (around age 64), start finding out what options will be available to you and get an idea of what to expect. This way, you won’t be as overwhelmed when the time comes. We also recommend speaking to an expert, if you can.
On the Secure Your Retirement podcast, we spoke to Medicare specialist Lorraine Bowen about navigating its complexity. To hear Lorraine answer some of our questions, please listen to the podcast episode “Navigating Medicare in Retirement.”
Get your legal documents in order
It’s imperative to update all of the legal documents you may have before you retire. There can be complications if your documents don’t match up or if there is conflicting information in them, so make it a priority to get these in order.
Check that your power of attorney, will, and account beneficiaries are all correct. If these are not aligned with each other, one may usurp the other in case of an event. For example, a beneficiary form can be more powerful than a will – so it’s necessary to make sure that these are all in line with your wishes.
If you have trust documents or think you may need a trust, you should also start having a conversation about if this is a good option for you.
Plan your long-term care options
You may already know that you need long-term care insurance, but, again, there are many options, and it can be complicated.
You could opt to self-insure, or you could purchase traditional long-term care insurance or hybrid insurance. Traditional long-term care insurance has previously presented problems with sharp rate increases making it less affordable for many. Meanwhile, hybrid insurance premiums do not increase, but the insurance model itself can be a combination of many things. It could be part annuity, part life insurance, and part long-term care.
Taxes will always be a part of your finances, so you need to plan for them. When you’re consolidating your accounts, it’s a good idea to note how each one will be taxed.
Many account types are taxed differently. For example, if you take withdrawals from a pre-tax IRA, that will be considered taxable income, so you’ll need to plan for this. If you have a Roth IRA, this will grow tax-free and can be a big tax advantage in the future. Annuities and brokerage accounts are taxed differently again – it’s up to you to find out the implications of each on your retirement plan.
Get your retirement income plan in writing
Finally, we strongly recommend putting your retirement income plan in writing. This can give you peace of mind about your financial freedom in retirement. It can show you an estimated projection of multiple scenarios and help you decide how you’re going to approach your future.
We often have clients approach us who feel uncertain about what’s possible for them in retirement. After seeing their “what ifs” played out and how we take different parts of your finances into consideration, they leave feeling far less stressed and optimistic about their future.
So, those are the nine key things you should think about when planning your retirement. We hope that this checklist comes in useful and helps you on the road to retirement.
If you want to learn more about preparing for retirement, consider getting our complimentary online masterclass, 3 Keys to Secure Your Retirement. You’ll learn how to create your own Lifetime Retirement Income Plan and start your journey to a confident financial future.
Annuities can be a safe way to grow your money – but they’re not without their limitations.
In our “Annuities – Why Ever Use Them” series, we’ve talked a lot about the advantages of using a fixed index annuity. However, there are always drawbacks. So, what do you need to be aware of?
If you’re thinking about purchasing an annuity, there are two main limitations to consider. The first is how liquid your annuity is, and the second is surrender charges. In this post, we’re going to explain how both of these limitations work, how to avoid them, and what you can do to balance your portfolio.
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…
Annuities: the need-to-knows
Here’s a quick review of what we’ve covered about annuities in our series so far:
There are two different types of annuities, deferred and immediate. Immediate annuities can provide you with income from the moment you set them up, whereas deferred puts your money aside to grow. In this series, we’re talking exclusively about deferred annuities.
Deferred annuities can be either variable (where you invest in mutual funds, so there is risk involved) or fixed (principal guaranteed with no risk). Our focus is on fixed annuities.
You can get a traditional fixed annuity, similar to a CD, where the insurance company gives you a fixed rate for a set number of years.
Or you can get a fixed index annuity. Here, your interest is linked to the performance of an index, such as the S&P 500.
A fixed index annuity earns interest through a cap or a participation rate.
If you use a cap, and set it at 5%, for example, then if your index increases to 10% over an annual point-to-point reset, your annuity will increase by your cap amount of 5%.
If you use a participation strategy and set it at 50%, then, if your index increases by 20% over the reset period, your annuity will increase by 50% of the index’s 20% growth (so, 10%).
There are three reasons why people choose a fixed index annuity: safe accumulation, guaranteed income, and death benefit.
When an annuity is part of your portfolio, you need to know how accessible your money is. An annuity should never be the be-all and end-all of your portfolio. It should be one part that’s helping your money grow safely and securely, while other parts give you access to your money if you need it.
Annuities are not entirely restrictive. Most annuities allow you a penalty-free withdrawal. For the majority of annuities we recommend, this is usually between 7-10%, but it can vary. So, if you have $100,000 in an annuity, up to 10% of that ($10,000) is easily accessible to you.
But if 10% of your annuity isn’t enough to cover you in an emergency or you need frequent access to more liquid funds, what are your options?
We never suggest that you put all of your savings into an annuity because of their limited liquidity. Having unrestricted access to a fair amount of funds is paramount in retirement, so instead, we suggest splitting your money as part of a wider strategy. You could put 50% of your savings into an annuity, and the other 50% into stocks, bonds, ETFs, mutual funds, or another completely liquid asset.
So, if you have $1 million of savings and split it equally between an annuity and a fully liquid asset, you could have $550,000 of easily accessible cash. This equates to your $500,000 as a liquid investment and 10% available from your annuity.
How surrender charges affect your annuity
If you need more money than your penalty-free withdrawal amount allows, you may be subjected to a surrender charge. This is a period where you will have to pay a penalty to withdraw more than your limit. Let’s use an example to demonstrate.
Say you have $100,000 in your annuity, with a free withdrawal amount of 10% (so, $10,000), but you need access to $11,000. The 10% that you withdraw will be penalty-free, but that extra $1,000 will be subject to the surrender charge.
Insurance companies use surrender charges because they’re giving your investment guaranteed protection against market volatility. This comes at a cost to them as, to do this, they have to make long-term investments of their own. If you need to withdraw more money than they’ve prepared for, they will incur penalties. In essence, a surrender charge is a way of passing this penalty to you.
Most annuities that we work with have a surrender charge schedule lasting anywhere between seven and twelve years. Typically, these charges decline over time until they no longer apply, but this means they will be much higher in the initial years. So, if your annuity has a 10-year surrender charge schedule, you might face a surrender charge of 12% in the first year, 8% in the seventh year, and 0% in the eleventh year – as you’ll be out of surrender.
Your overall portfolio must ensure you have enough liquid assets so that you don’t have to worry about accessing cash or these surrender charges impacting your finances. There are pros and cons to every investment and limitations to how they work. So, how can you build a balanced portfolio?
The three elements to investing
There are three main elements to any investment strategy, safety, liquidity, and growth. No investment can suitably provide you with all three, but most investments give you two. So, how can different investments satisfy each element?
If you’re concerned about safety and liquidity, then a money market might be the right investment for you. Bear in mind that it will not give you substantial growth.
If you want liquidity and growth, the stock market could be a suitable solution. It has lots of growth potential but isn’t going to give you safety because there’s also the chance that you could lose money.
If you prefer growth and safety, we recommend fixed index annuities. As we’ve seen in this post, they have limited liquidity, so it would be wise to use an annuity alongside another type of investment in order to give you a better amount of liquidity.
Remember that every investment has its limitations. But by thinking about these three elements, you can decide what is most important to you. You should keep these elements in mind when picking your own investments or work with a financial advisor to build a portfolio that covers all three bases.
If you want more information about preparing your finances for the future or retirement, check out our complimentary video series, “4 Steps to Secure Your Retirement.” In just four short videos, we teach you the steps you need to take to secure your dream retirement. Get the free series here.
How can an annuity income rider give you more peace of mind in retirement.
A core part of planning for retirement is ensuring that you have as few worries as possible. That’s why we make it a priority to ensure that all of our clients’ essential income needs are covered by their guaranteed income.
There are three main ways to guarantee income in retirement. The first is a pension, the second is Social Security, and the third is adding an income rider to an annuity. This third option creates, in essence, a personal pension paid directly to you every month for the rest of your life.
You can watch the video on this topic further down the post. To listen to the podcast episode, hit play below, or read on for more…
In part five of our “Annuities – Why Ever Use Them” series, we discussed attaching an income rider to an annuity to produce guaranteed income. We encourage you to read part five before reading this post as we go into further detail about why we recommend adding an income rider to an annuity and explain how their rates of return work.
Our annuities series breaks down this product in short, easy-to-understand episodes to help you discover how this product works and why it’s a beneficial income source in retirement.
Many people opt for an income rider for the same reasons they’d take a pension or Social Security. It can give you more than just guaranteed income – it can provide you with peace of mind that your essential income needs will be covered in the future.
When you’re planning for retirement, you’ll work out how much income you need every year to cover your essential costs. This is where an income rider can be very useful. We often use them to plan for our clients, considering what income they’ll need 5-10 years down the road.
Understanding annuity income riders
In most cases, income riders come with a fee. This is usually around 1%. However, if the income rider is built into the annuity and doesn’t come with a fee, the rider may not have the highest possible rate of return.
Generally, built-in riders will not generate as much guaranteed income because the insurance company won’t be making enough money to pass it on to you.
If an agent states that their annuity has a 6% or 7% rate of return, it’s important to note that this is only for the income rider. This rate is not going to grow your principal at 6% or 7%. To get this maximum value from this income rider, you need to take income.
Let’s use a hypothetical example. If you add $100,000 into a fixed index annuity, it may earn 3%, depending on the index’s performance. Your income rider base, however, will grow separately at 7%. In 10 years, your original account value could be about $130,000, but your income rider may be worth around $200,000 in value.
A good way to think about these numbers is to consider what money you can access. If you were to pass away, the insurance company would only give your annuity’s account value (in this example, $130,000) to your beneficiaries. This is also what you would be able to walk away with if you decided to close your annuity.
But if you want to take income, this will be based on the income rider’s growth (in this example, $200,000). The insurance company will pay out a percentage of this figure to you as income.
Say this pays out at 6%, then you’ll get $1,000 a month, or $12,000 a year, guaranteed, for the rest of your life. This does not come out of or affect your account value.
If you did not have an income rider but wanted to take this same amount out of your account, you’d reduce your principal by a massive 10% in one hit. Over time, your annuity would empty, as you’d be withdrawing money faster than it could grow.
Why we recommend annuity income riders
What’s great about an income rider is, even if your account value drops down to zero, you are still guaranteed that income for the rest of your life. It’s a type of longevity insurance that can’t be beaten.
It’s best to think of an annuity and income riders as two separate entities. One is death benefit and walkaway money (your account value, the money you put into the account), and the other is like a pension that you cannot outlive. When the time comes to pay out your guaranteed income, these two sides do not affect each other.
So, if you’re concerned about covering your essential income needs, then adding an income rider to an annuity is a good option. This way, you’ll know you have a guaranteed $1,000 (or however much is possible in your situation). It won’t fluctuate and will be delivered to you every month for the rest of your life, from when you decide to take income.
To learn more about how an income rider could fit in with your personal retirement plan, get in touch with us. We offer a complimentary 15-minute phone consultation to discuss your specific needs and how you can put our advice into action. Book your free call with our expert advisors today.
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.
Are you beginning to think about retirement planning? Finishing work and entering retirement is your chance to enjoy your golden years and unwind from the hustle and bustle of life. However, one of the most common questions we are asked is ‘how much do I need to retire?’ so, to help you, we have put together seven retirement planning tips to help secure your retirement.
Understand your spending
When it comes to retirement planning, the first thing you need to understand is spending. This doesn’t mean your current salary, but what you bring home each month after you have taken out your savings and bills. You should exclude any bills, such as your mortgage, which might have been paid off by the time you retire.
By understanding exactly what you need to spend each month, you will be able to begin creating a much clearer plan for retirement.
Break down your expenses
You should break down your expenses into three core areas, your essential needs, your wants, and then your giveaway money. Your essentials will cover things such as your and your grocery shop, everything you need to stay alive and happy. Your wants will then be those things to help you maximize your retirement fun, from holidays and golf members to spending time with your family and treating the grandkids. Finally, the giveaway money is the amount you want to donate to charity or leave behind.
List your guaranteed income
Your guaranteed income refers to the money that you will still be receiving after retirement. This can be from things such as your pensions, annuity, or social security. This money should help you cover those essential expenses you listed earlier.
Don’t rely on the 4% rule
The 4% rule for retirement is the idea that you live off 4% of your assets each year. While in theory, this can be an effective strategy for retirement planning; in reality, we believe it is a flawed method as it does not take into account the volatility of the market.
We recommend a different approach for you to secure your retirement by creating a clear plan that allows you to weather whatever the future might have in store.
List your accounts by type
Another important retirement planning tip is to make a list of all of your accounts by type. This means things such as your 401K, a traditional IRA, brokerage account, and savings account. Each of these will be taxed differently, so this list will help you work out what you need.
Consider your investments
When it comes to investing for retirement, many of us opt for a more aggressive strategy when we are younger. This high-risk option can yield more significant results, but you should start to reconsider the level of risk exposure you are willing to face as you get older. It is important you understand your risk tolerance and what you could potentially lose.
Don’t worry if you have ‘enough’
Don’t worry about if you have enough for retirement. We work with clients with vastly different levels of savings, but what is most important is your retirement plan. If you end up spending more money each month than your savings can afford, then no matter how big your initial amount is, it will soon diminish.
You should focus on generating a spending plan that matches your lifestyle, not how much you have saved.
Looking to take your retirement planning to the next level?
Are you looking to cement your future? When it comes to retirement planning, there are a lot of moving parts that can make things seem complex, but our ‘4 Steps to Secure Your Retirement’ mini-series will take you through the process to a brighter retirement. Want to find out more? Get started today.
If your Social Security benefit or pension won’t provide you with enough guaranteed monthly income to keep you comfortable in retirement, an annuity can help.
You can watch the video on this topic further down, to listen to the podcast episode, hit play below, or read on for more…
There are often limited resources for securing guaranteed income in retirement, but if you have or are considering opening an annuity, you may be able to access an “income rider”. An income rider is an additional annuity feature designed to guarantee income for the rest of your life.
In this post, we continue our “Annuities – Why Ever Use Them” series by diving into how a fixed index annuity provides guaranteed income using the income rider.
Our annuities series is a comprehensive guide to this complex product. If you want to learn more about annuities, we encourage you to read the posts on our blog, listen to the episodes on the Secure Your Retirement podcast, or follow the links below to watch them on our YouTube channel:
We believe there are three reasons why you would want to add a fixed index annuity to your portfolio. The first is good accumulation. Fixed index annuities accumulate similar to a bond, but with the added benefit of no downside risk. The second is the death benefit, and the third is guaranteed income.
Before we discuss how to get guaranteed income from your annuity, here is some high-level information to help you understand how annuities work, the different types, and why we recommend a fixed index annuity.
Deferred annuities are either fixed or variable.
Variable annuities are linked to market investment through buying mutual funds. The rates are often high for variable annuities, and they come with risk. To make a decent return on your variable annuity, you have to overcome these fees and more.
Fixed annuities have guaranteed principals, meaning you cannot make a loss, which is why we prefer them.
There are two types of fixed annuity, traditional and indexed – both guarantee your principal.
The traditional annuity is similar to a CD (certificate of deposit). You give your principal to an insurance company, and they provide a return based on a fixed rate for a number of years.
With an indexed annuity, your return is linked to an index such as the S&P 500 or the NASDAQ. Even though indexes can fall, your principal is guaranteed, so the worst a fixed index annuity can earn in a year is zero.
The crediting methods for fixed annuities are based on a point-to-point annual reset. For example, if you open an annuity on January 1st, 2021, you’ll earn your interest on January 1st, 2022.
Our “Annuities – Why Ever Use Them” series covers many of these points in much greater depth, so if you have any questions about how annuities work, please visit the other articles on our blog.
A fixed index annuity is our recommended option, especially for retirees who need access to a higher guaranteed income.
Why guaranteed income is important in retirement
When planning for your retirement, you want to ensure that you have enough guaranteed income to cover all of your essential income needs. Your income needs fall into one of three categories:
Essential: anything you need to pay for, e.g., your water bill
Wants: anything that isn’t necessary but gives you a better quality of life, e.g., vacations
Giveawaymoney: for gifting to your children or a charity
We believe that at least your essential outgoings should be covered by your guaranteed income.
Most retirees have two guaranteed income sources, their pension and Social Security. Beyond this, there are limited options to secure guaranteed income. One option is to add an income rider to your fixed index annuity.
The cost of a fixed index annuity income rider
Adding an income rider to your annuity gives you a lifetime income benefit. This is a powerful tool to help you take care of your essential income needs and grant you continued access to your principal. But, if you’re aiming for your highest guaranteed income, you’re going to have a fee.
There can be two different types of fees with an income rider. The first is a clear-cut fee, where the insurance company will charge you a percentage of your principal. This is usually around 1%. The second is a built-in fee, where you won’t be charged directly, but you will see a reduction in return.
How a fixed index annuity income rider works
A fixed income annuity already accumulates money for a death benefit. The income rider income generation is separate from this. Bear in mind that this income value is not lump sum money. If an insurance agent tells you that their annuity can give you 6% growth, this rate is for income purposes and isn’t available as a lump sum.
Let’s use an example to demonstrate. If you have $100,000 in a fixed index annuity with an income benefit growing at 6%, in roughly ten years, your annuity will be worth around $200,000. You cannot take this as a lump sum – this figure is a calculation based on how much income the annuity generated. That 6% growth-rate of $200,000 equates to $12,000 a year of guaranteed income. That’s $1,000 a month guaranteed income for the rest of your life, generated by the fixed index annuity income rider alone.
Suppose you’ve calculated your essential income needs at $4,000 per month, but your Social Security will only give you $3,000. In that case, we can work out how much you should put in a fixed index annuity with an income rider to guarantee that extra $1,000.
The income rider creates, in essence, a pension that you cannot outlive. Even if your annuity account’s value decreased to zero, you would continue to receive payments through the income rider.
Why an income rider could suit your future
If you’re married, you may want the guaranteed income to last for the entirety of both yours and your partner’s lives. You can choose to have survivorship, but this will decrease your monthly income, similar to a pension.
You do not have to decide whether your annuity income rider is dual or single life until you start taking income. This is a plus point for annuity income riders as it offers flexibility for the future. If you set up an income rider today but won’t need your income for the next five or ten years, you won’t have to choose dual or single income until you’re ready to take it.
In most cases, you can start taking income from your annuity after a year. But, just like a Social Security benefit or pension, the longer you wait, the higher your income will be.
How could an income rider increase your guaranteed income?
We understand that annuities are a complex and often confusing product and visualizing how they suit your situation can be difficult. If you’d like to see how an annuity could benefit your specific retirement plan, we can help.
Our advisors can show you how an income rider could impact your guaranteed income when you book a complimentary 15-minute phone consultation. On the call, we can discuss how an annuity would work for you and how it could help you meet your essential income needs. If you want to speak to a team member, book your call today.
Which long-term care insurance plan is right for you?
If you want to protect against the financial strain of future healthcare challenges, you might be considering buying a long-term care insurance plan.
There are many different types of long-term care insurance policies. They vary from how much your premium is, to the benefit they provide, so it’s important to understand which plan best suits your financial situation.
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…
In this post, we share a high-level overview of traditional long-term care insurance, the differences between the traditional and hybrid models, and how you can adjust the options to fit your needs.
What is long-term care?
Long-term care is when you need continuing assistance in your daily life. This includes help with getting around, bathing, and other requirements within your home or assisted living facility. It also covers full-time medical care, such as a nursing home.
If you’re paying for long-term care insurance, both traditional and hybrid models have the same qualifier. A doctor would need to verify that you need help with two out of the six Activities of Daily Living for your insurance policy to start paying out. The six activities are bathing, dressing, eating, transferring, toileting, and continence.
Regular health insurance and Medicare don’t cover long-term care, so insurance could be a good idea if you want to protect your assets.
Buying long-term care insurance
Insurance for long-term care is similar to any other insurance. It’s a personal decision to transfer risk from yourself to an insurance company so that they can cover any unexpected costs.
Think about your car insurance, home insurance, or life insurance. You buy it to protect yourself in case something happens – but you may never use it. Long-term care insurance works in the same way.
There are two different types of long-term care insurance plans: traditional and hybrid. They both transfer risk from yourself to an insurance company and have the same qualifiers but have very different costs and benefits.
Understanding traditional long-term care insurance
Traditional long-term care insurance is a standalone policy, and it includes customizable options to better suit your needs.
Like any other insurance, you can pay monthly or annually to keep your insurance plan in force (active). You’ll also have to make decisions on the following items to ensure that your long-term care plan is right for you.
1. Your benefit
If you need long-term care, you can decide whether to take your benefit on a monthly or daily basis. Typically, your benefit can range from around $3,000 to $12,000 a month. Depending on how much benefit you want, your premium will change. If you want less benefit, your premium will be lower, and it will be higher if you want more.
2. Your benefit period
Your benefit period is how long your insurance will cover your long-term care needs. You can choose to have your policy cover your bills for a set number of years or cover you for the rest of your life.
3. Your inflation rate
It’s vital to keep up with the rising cost of care, so inflation is crucial to bear in mind when choosing a long-term care insurance policy. Many traditional policies have inflation protection built-in, and you can choose from a 3, 4, or 5% compound inflation rate.
If you qualify for a policy that covers $3,000 a month, for example, but you don’t need long-term care for another 10, 20, or 30 years, your policy may no longer cover your needs without inflation protection.
However, if you have inflation protection at a 5% compound rate and need long-term care next year, the insurance company will cover around $3,150, versus the original $3,000 you signed up for.
4. Your waiting period
If you need long-term care and have been approved to receive your insurance money, you’ll need to cover your expenses for a certain period. This is called the ‘waiting period’ and is typically 30, 60, or 90 days.
This is very similar to the deductible on your car insurance. For example, you may have to pay the first $500 for any damages to your car, and then your car insurance will pay for anything above that. The waiting period is when you have to use your own assets to cover a set amount of time before your insurance company will pay.
It’s important to consider how much risk you want to cover, as costs can mount quickly in your waiting period.
The pros and cons of a traditional long-term care insurance policy
One of the main positives of a traditional long-term care insurance policy is that you can manipulate each of these four factors to build the policy you want. However, they all affect your premium.
But a drawback to the traditional plan is that there is no cash value. Like car insurance, you pay to stay in force, but you don’t build up any cash reserves. So, if you start your policy in your early 50s and never need long-term care, you could pay thousands of dollars for peace of mind alone.
Some insurance companies will allow you to pay part of the premiums upfront, but the majority are paid on an annual basis and continue for as long as you’re using the policy. Once you’ve been approved for a policy, companies can’t reject or turn-off your insurance, so long as you continue to pay your premiums.
However, premiums can rise. In the past, they’ve risen every 3-5 years, and this may eventually put a strain on your cash flow. If this happens, and you want to adjust your premium, you can reduce your service based on the four factors above. Otherwise, you can cancel your policy and cover any long-term care costs that may arise using your own assets.
Understanding hybrid long-term care insurance
Hybrid long-term care insurance is designed for those who feel unsure about paying for insurance premiums when they may never need long-term care. These policies allow you access to your money and provide other benefits alongside covering long-term care.
In this post, we’ll detail two of the hybrid long-term care insurance models.
Long-term care annuity hybrid
The long-term care annuity hybrid combines an annuity and long-term care benefit. With this hybrid, your cash grows in an annuity with the added benefit of long-term care insurance. You also have an interest rate, and you can access those funds whenever you need to.
Let’s use an example. If you put $100,000 into your long-term care annuity hybrid, that $100,000 is still your money and accessible to you. You can earn interest on this money and grow your cash as if it’s in a regular annuity.
Depending on your age and your situation, the long-term care side will determine how much of your annuity can be used for long-term care. For example, you might be able to use three times the amount you put into the annuity. In this example, that’s $300,000 of long-term care benefit.
If you don’t need long-term care, then your $100,000 will continue to grow through the interest rate. You can also add it to your estate plan and distribute it to your beneficiaries at the end of your life.
With the annuity hybrid, you won’t have to worry about rate increases on long-term care insurance, and your money always stays accessible to you.
Triple hybrid – long-term care, cash value, and life insurance
If you’re unsure about what cover you might need in the future but want to keep your cash flow options open, then a triple hybrid insurance policy provides comprehensive cover and has a cash value.
The triple hybrid is similar to the long-term care annuity hybrid but offers life insurance as an extra.
Let’s use another example. If you put $100,000 into a triple hybrid insurance plan, you could have:
$300,000 for long-term care
$250,000 instantly of death benefit which can go to your heirs tax-free
Cash value close to $100,000, accessible to you
An advantage of both hybrid policies is that your beneficiaries can receive their benefits if you don’t need long-term care. Also, you won’t need to worry about rate increases as insurance premiums on hybrid policies are fixed.
Hybrid long-term care insurance is often favored over the traditional plan, but there’s lots to think about before deciding which plan is right for you. You may opt not to buy an insurance plan at all and instead finance any long-term care using your own assets.
If you want to talk to an expert about which long-term care insurance plan is right for you, our team can help. Book a complimentary 15-minute call with us, and we can explore what insurance solutions suit your unique situation and answer your questions about long-term care.