Tax Strategies for Non-IRA Brokerage Accounts

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Tax strategies come into play a lot in retirement planning. Retirees, or future retirees, want to keep as much money in their pockets as possible, and strong tax planning can do just that. When dealing with non-IRA accounts, such as a brokerage account, you’ll even receive a 1099, which takes a lot of people by surprise.

We’re going to walk you through a strategy that will outline taxes on brokerage accounts.

Taxes on Brokerage Accounts or Non-IRA Accounts

An IRA is the ideal way to not have to pay taxes, but these accounts are limited. Most people will have a brokerage account of some form created to leverage other financial investments. Understanding how a brokerage account is taxed is the first step in really understanding how these taxes work.

How Taxes on a Brokerage Account Work

When you have a brokerage account, whether it be Charles Schwab, TD Ameritrade or others, taxes always work the same. Brokerage accounts are often opened when you have money in the bank that really isn’t working for you.

You want to make this money grow, so you open a brokerage account and start investing in stocks, mutual funds and other financial vehicles.

As the money grows, you’ll have gains.

With brokerage accounts, or a non-qualified account, you’ll be paying taxes on the gains in the account. Let’s assume that you put $100,000 into the account and now you have $200,000 in the account, or $100,000 in gains.

There are a few things that can happen here in terms of taxes:

  1. If dividends are paid and then reinvested, you’ll still receive a 1099, which means you’ll have to pay taxes on these dividends even if you simply kept investing the money you were paid out.
  2. If you own stock and then sell it, you’ll generate a taxable gain on the sale of the stock. There are two main ways that these gains will be taxed:
    1. Short-term: If you hold the stock for less than a year, you’ll pay a short-term capital gains tax, which is in your income category.
    2. Long-term: If you hold your stock for a year and a day, or longer, you fall into the long-term capital gains category. This is favorable, right now, because you’ll pay a lower tax rate. You can view the tax rate on the IRS’ website, but as of right now, you would be taxed at a rate of 15%[1] if your taxable income was $100,000.

We have a lot of clients who are trying to secure their retirement, and they may not want to sell off a stock that they held for a long time due to the tax bracket that they would fall into. This is where it can get tricky for a lot of people when trying to figure out the best time to sell.

There are pros and cons to investment management.

Positives and Negatives with Investment Management

Investment management will often turn into managing risks or taxes. For example, let’s assume that you don’t want to pay taxes on your Tesla holdings, and the stock is booming. You hold on to the stock for years, and natural market fluctuations occur.

Your stock holdings may have been worth 30% more three years ago, but you wanted to avoid paying taxes, so you didn’t sell.

In this case, you managed your taxes rather than your investment and the risk is that the stock went down. You’ll still have to pay taxes if and when you sell your holdings, and you lost significant value in the process.

It’s not an easy conversation to have because no one wants to pay taxes, but there’s no way to avoid them completely.

You need to decide:

  • Do you want to protect your investments?
  • Do you want to shelter against taxes?

We deal with this scenario a lot, and it “sounds” like it actually goes against what we’ve said in the past. But you have to keep reading because this is a strategy that works well if you’re stuck debating on what to do with your brokerage account taxes.

What’s the strategy? A variable annuity.

Yes, we did an entire episode on variable annuities, and we don’t like them personally. Why? You’ll be paying fees of 3% to 5% per year, but then you have to pay additional fees on top of this.

We still wouldn’t put IRA money into an annuity because it doesn’t make sense.

Wait! Is There Really an Option in the Variable Annuity World?

Yes, even though we’ve given you a bunch of negatives to think about with these variable annuities, this is one of the rare circumstances where they may have some benefit. We’ve found a positive in variable annuities when you don’t want to pay capital gains taxes.

Why?

Your goal is to save on taxes and not have to pay taxes on the brokerage account. We want to be able to alleviate the tax gain while protecting it, too. The simple plan is to put your money into a tax-sheltered product like an annuity.

In this case, you can:

  • Avoid surrender charges
  • Avoid having to pay commission
  • Liquidate the fund immediately

The only thing that you will have to pay is a $20 monthly fee. You only need to think about taxes when you make a withdrawal, which can be 10, 15 or even 20 years from now. You can do everything that you can with a brokerage account with this variable annuity.

For a small $240 fee a year with this particular annuity, you can avoid having to pay short-term capital gains or when you need to make withdrawals.

The account can even have beneficiaries that you leave the account to if you die.

If you’re interested in this type of account, please contact us to find out whether it’s a good option for you. Again, not all annuity accounts work in the way that we described above, so this is a special option that we’re using with our clients.

Not sure how to begin to secure your retirement? Click here to access our 4 Steps to Secure Your Retirement Course.

Resources

  1. https://www.irs.gov/taxtopics/tc409 

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.

Retirement Financial Plan

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Retirement planning has a lot of moving parts, and if you’ve been reading our blog or listen to our podcast (listen here), you know that we’re big on creating a holistic retirement financial plan.

We believe that you should have a retirement plan that is well-put-together and really hits on all of your goals.

How can you create this plan?

With a team.

We’re going to help you start to secure your retirement with a quick overview of what your retirement financial plan team should look like.

Retirement is a Lot Different than Most People Realize

A lot of people think about their retirement briefly while they put money into their 401(k) plans, and a lot of people know when they want to retire and take social security. But when you sit down and get closer to retirement, you’ll realize that there are a lot of moving parts to consider.

Retirement is more than just putting money away, although money plays a big role in retirement.

And when you begin doing your research, you’ll find a lot of advisors to choose from, which can make your head spin. We’re going to discuss the key people that should be involved in your life and can help you retire the way that you want.

Advisors to Hire and Work with to Secure Your Retirement

Advisors help you go well beyond just a 401(k) and saving money. These professionals will assist you with investing your money in many cases. For example, you may have an advisor that works with your employer and will:

  • Assist with asset allocation
  • Invest for you
  • Offer a quarterly report
  • Provide yearly statements

These advisors work with money management, but they fail to look at the whole of your retirement.

We take a holistic approach to retirement. For example, you’ve received a paycheck from an employer, and now that you’ve saved money to retire, it’s time to pay yourself. You have access to this money at any time, but if you’re spending way beyond your means, your retirement buckets can quickly dry up.

An advisor that works to invest your money only isn’t considering how you’ll pay yourself.

You’ve saved and grew your money, and that’s where a lot of advisors stop. They don’t consider how you’ll manage your money after retirement, nor will they continue checking up to understand your goals. As your goals change, your asset allocation should also change.

Money managers grow and build money; not plan for when you want to retire.

Your money manager won’t consider:

Holistic advisors tend to look at your retirement plan as a whole. There’s a lot to consider, so these individuals will discuss your retirement desires with you and help make retirement possible.

Types of Advisors to Work With

You may work with a variety of advisors, including:

  • Money manager or financial adviser. These professionals will be focused on investing and growing your money.
  • Tax advisor. A tax advisor is key because they’ll help you find innovative ways to shelter a lot of the money that you save for retirement so that you don’t have to pay it in taxes. Imagine needing $1 million to retire and not realizing that you owe $250,000 in taxes.
  • Estate planner. An estate planner will help you with ensuring that all of your documents are in order so that if you become incapacitated or want to leave assets to children or family members, you can.
  • Social security specialists. These individuals will help you determine the best time to apply for social security. They’ll also assist you with maximizing your payments by retiring later. 
  • Insurance experts. An insurance expert can help you obtain the best life insurance or health insurance just in case you or a spouse pass on.

No one is a master of all aspects of retirement, but with the right team, it’s possible to bring the collective knowledge of these professionals together in one place.

Working With a Holistic Team

A holistic team, like us, will help with all aspects of your retirement. We always start with your retirement plan, which is an extensive plan that looks at your retirement goals, needs, and the “what ifs” that pop up before and during retirement.

Comprehensive plans can and should be updated annually, and they’re a clear roadmap to your retirement.

Once we have this plan in place, you can sleep better at night. You’ll know what it takes to retire and can follow a roadmap to success.

And since we’re a holistic advisor, we bring in:

  • Tax advisors
  • Social security specialists
  • Other advisors

Your team must look at your goals, and how they change, so that you can confidently enter retirement. Working on just investing your money isn’t enough to retire. Bringing together the right team that offers a holistic approach will look beyond your investment portfolio and really bring everything together, from social security, to tax considerations and so much more.

Click here to sign up for our 3 Keys To Secure Your Retirement complimentary training.

Life Insurance in Retirement

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Life insurance is a complex subject. There are people that will tell you that you need life insurance, and there are others who would rather focus on their retirement planning. And there’s really no wrong or right answer here.

Some people want to leave money to loved ones or spouses, and their way of doing this is through life insurance.

Today, we’re going to discuss life insurance in terms of retirement planning with an objective view. Not every client that we work with will benefit from life insurance, but there are times when life insurance may align with your overall goals.

But before you can really decide on getting life insurance, it’s important to know what types of insurance are available:

  • Term insurance
  • Whole life
  • Universal life
    • Variable universal life
    • Indexed universal life

All of these types of life insurance are important to know about because they have their advantages and disadvantages. If you don’t know these key points, how can you determine if a certain type of life insurance is right for you?

Understanding Term Life Insurance

Term policies are a type of life insurance that is the easiest to obtain. You take out term life insurance for a period of time. Let’s say that you pay into the policy for 10 to 20 years. If you die during this period, the insurance will pay out a death benefit.

With every type of life insurance, death benefits are tax free.

If a beneficiary receives a $1 million payout from your insurance, they don’t have to pay a single penny in taxes, which is very beneficial.

Why Term Life Insurance Makes Sense

Term life policies are cheaper and easy to get started with. A lot of people take out a term policy when they’re younger so that the person’s family can pay their bills or even pay off the house if you die.

You may even receive this type of insurance for free from your employer.

Sometimes, the policy can be expanded when it’s from your employer, which allows you to pay lower rates for even higher levels of insurance.

Underwriting is common, so you will have to take a physical exam to satisfy the insurer. We’re also seeing a lot of insurers online offering term life policies with no underwriting. While no underwriting is beneficial and easy to get started with, the insurer takes on more risk, meaning your premiums will be higher.

Understanding Whole Life Insurance

Whole life is an insurance that is offered until the end of your life. Your policy will pay out a death benefit, and it can also accumulate a cash value. The policyholder can access the cash value of their policy during their lifetime to:

  • Invest the money
  • Borrow against it
  • Withdraw it

When legacy planning, let’s say that you want to leave your two children $500,000 each. You can use your IRA to pay for your whole life policy and leave the money to your children tax free.

The cash value of the whole life policy is very beneficial because you’re able to use the cash value you build. 

Understanding Variable Universal Life Insurance

A variable universal life (VUL) policy is similar to a whole life in that it is for the entirety of your life and has a built-in savings component. The main difference is that this savings component has an investment subaccount that is similar to a mutual fund and is invested on your behalf.

You can lose cash value when investing in a VUL.

Understanding Indexed Universal Life Insurance

An indexed policy is the same as a VUL, but the key difference is that instead of a mutual fund being used to invest your cash value, the investment is put into an index. This is very similar to an index annuity.

The cash value can be linked to one or multiple indexes, such as the S&P 500 or NASDAQ.

Investing in an entire index allows investors to automatically diversify their portfolios. You also can’t lose your cash value in an indexed policy. You’ll be able to rely on a nice rate of return with an indexed universal life plan.

Let’s imagine, for a minute, that you have cash that is stashed away in a CD or a savings account. You could, instead, put this money into an indexed policy that earns a 2% to 5% return (it can also be much higher).

And you have access to 100% of this money at any time that you need it.

If you die, all of this money and the death benefit will go to your beneficiaries.

When talking about retirement planning, life insurance is a small piece of the plan. You can leverage the right type of account for its tax advantages and even grow your money while still having access to it.

The added perk is that the death benefit is dispersed to your beneficiaries.

Life insurance is fully underwritten, meaning that the insurer will want to look at your medical history. If you have some medical issues but they’re under control, you might still pass-through underwriting.

For example, let’s say that you have high blood pressure. You might assume that you won’t be able to pass through the underwriting. Medications can help get your blood pressure under control, and if it’s under control, you have a good chance of getting approved.

We believe everyone should consider life insurance, but for some people, this type of insurance won’t make sense. The best thing that you can do is educate yourself on the benefits of life insurance and determine if it’s the right choice for you.

We can also discuss your options and help you determine if life insurance is the right choice for you. 

For some people, it may not be part of their retirement plan. But for other clients, life insurance can provide you with peace of mind that you’re leaving your family with financial security when you’re gone.

Click here to schedule a free introduction call with us today.

What Is A ROBO Advisor?

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ROBO advisors seem to be everywhere today. They’ve really gained attention in the past few years, so many of our clients have been asking questions about them. We’re here to talk about ROBO advisors in a nonbiased manner so that you can decide what the best option for you is when trying to secure your retirement.

What is a ROBO Advisor?

The term “ROBO” should give you a clue that a ROBO advisor is a computer that helps manage your investments for you. When you work with one of these advisors, you’ll add in your own instructions, and then let the advisor do all of the work for you.

You don’t have to think about your investments, but the advisor is also somewhat limited because it’s listening to your instructions and not going outside of those parameters.

ROBO advisors won’t go out and recommend that you drop Apple and invest in Amazon, for example, because it’s not an active advisor. The main way that these platforms work is through what is called allocation.

What is Allocation?

ROBO advisors work on the computer. You’ll open an account, go through a risk assessment, and then the advisor will use this information to create an asset allocation ruling. You may be put into a moderate portfolio, based on the assessment, which may mean an allocation of 60%/40%.

What does this mean?

Your portfolio may be broken down into:

  • 60% equities
  • 40% fixed income / bonds

And then within this allocation, the platform may decide that you have 60% in equities allocation, which may include:

  • 10% small cap
  • 10% mid cap
  • 10% large cap

You may have committees, international stocks and so on. ROBO advisors will select all of these investments for you. Over time, potentially every quarter, the program will look at your portfolio and readjust as necessary.

For example, let’s assume that stocks performed well and now your small cap is at 12% of your allocation. The platform will balance this out, based on the original allocation ruling, so that your portfolio is rebalanced.

ROBO advisors are algorithmic, and they will rebalance almost perfectly based on your input.

If you’re a person that is just starting their retirement planning or someone that doesn’t want to work with an advisor, the ROBO advisor may be a good option for you because it listens to your input from start to finish.

But these platforms are also limited.

What ROBO Advisors Can’t Do

ROBO advisors are advancing, but they’re still limited in what they can do. Let’s assume that the market is crashing, the platform will just keep rebalancing. The advisor doesn’t understand what is going on in the world.

Let’s assume that you have a large holding of oil stocks, the platform won’t know to adjust out of these holdings if a huge stockpile is entering the market and devaluing the price of oil.

Your advisor won’t consider:

  • The financial goals you set
  • You wanting to travel and needing income every month
  • You wanting to leave money to your grandkids

ROBO advisors only work inside of the allocation ruling created, so if the market drops or another pandemic hits, you can lose a lot of money in the process.

Human advisors, on the other hand, will consider your goals and having to draw from multiple sources of retirement. A human advisor will look at the entire picture of your retirement to determine:

  • What income is coming in
  • How a pension can benefit your retirement
  • If your current lifestyle may lead to not having enough assets for retirement
  • Etc.

Retirement planning has a lot of moving parts. It’s difficult for a ROBO advisor to consider that you’ll need money for long-term care because the platform isn’t designed to provide this type of advice.

What if your expense plan needs adjustments? What can you afford? Do you need some form of insurance?

These “what if” scenarios can’t be answered with a computer. A person can provide this advice to you and think about your needs.

But that doesn’t mean that a ROBO advisor is bad either.

If you believe that a “buy and hold” strategy is the best option for you, a ROBO advisor is extremely cost effective. An advisor can then help you with other things, such as insurance or long-term care needs.

Both a ROBO advisor and a human have their advantages, and it’s important to consider all of these advantages and disadvantages to determine what type of advisor is best for you.

Want more great retirement planning information?

Click here to listen to our Secure Your Retirement Podcast.

How To Have a Successful Retirement Plan

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Retirement planning is on a lot of people’s minds, but they don’t know where to start. It can be overwhelming reading blogs, watching videos on retirement or even listening to our podcast and trying to implement everything that you learn.

But today, we’re going to break down how to create a successful retirement plan by following four key components that we use when helping others secure their retirement.

4 Key Components of a Successful Retirement Plan

1. Retirement Financial Plan

Your retirement financial plan is the foundation of your retirement. If you don’t have a plan, the rest of the components don’t work. You’re likely familiar with coming up with a plan for saving for vacations or paying off debt, but a retirement financial plan is a lot different.

Why?

You’re likely not working and making income in the same way that you did in your 20s, 30s, 40s, 50s, and early 60s. We normally work with clients about 10 years before their retirement to put a plan in place that works for them.

Retirement Financial Plan Outline

A well-thought-out plan is the foundation of your retirement. You need to put your plan together, which will include:

Goals

What would you like your retirement to be? When do you want to retire? What lifestyle do you want to have? Do you want to travel? Do you want to have a second home? These should all be part of your goals.

Assets

You’ve worked hard, and you’ve acquired a lot of assets. You need to list all of your assets including 401(k), IRA, real estate and so on.

Income

Will your assets be able to provide you with income? You’re not working, so you need income to cover your expenses. How much money do you need? You need to consider your basic cost of living, your wants and any legacy money that you want to leave behind or gift to others.

You need to determine how your assets will provide an income.

Income will also include things like:

  • Social security
  • Pension plans

Social security is a big one because there is a lot of talk that the program will run out of money. If you retire early, you’ll receive less money from social security which may or may not be acceptable for your retirement plans.

You need to do a full valuation of social security to find what’s right for you. Waiting until 70 for retirement may not be what you want to do.

What Ifs

There are a lot of “what if” scenarios which can be both good and bad. A few things that you’ll want to think about are:

  • What if you planned to spend a certain amount of money and spend too much? What if you’re spending less than projected?
  • What if you want to travel for the first ten years of retirement?
  • What if long-term care is needed? Long-term care is very expensive.
  • What if your spouse dies? Will you be financially stable?

A plan can really help you because it’s on paper and can be referred to time and time again. You can look over your plan and determine if you’re on track to reach your retirement goals or not.

Your plan doesn’t need to be massive – a smaller plan is great.

We start with this retirement plan because it leads directly into the next point.

2. Investment Strategy with Risk Management

You have assets and savings, and instead of letting your money sit, it’s important to invest it so that it can grow. Buy and hold strategies are great when you’re young, but as you get closer to retirement, it’s vital that you focus on risk management.

There’s a time to invest, and there’s also a time when you need to secure your retirement by pulling money out of the stock market or other investments.

We always run our clients through a risk conversation where we learn how much risk our clients are willing to take with their money. For example, let’s assume the following:

  • You have $1 million in investments
  • Your portfolio is down 20% – $200,000

A lot of people get nervous losing $200,000, so they say that they can better handle a 10% loss. Every individual is different. You need a portfolio that looks at your risk tolerance. The last thing many people want to do is lose 30% or 40% of their retirement overnight.

Other people have more than enough money stashed away, and they rather seek the highest returns possible because a 30% loss won’t impact their retirement.

Another thing to consider – taxes.

3. Retirement Tax Strategy

Taxes follow you forever, but there are ways that you can lower your tax burden. You need to think about your assets because there are a lot of different asset taxes:

  • Pre-tax
  • After-tax
  • No-tax

For example, you can have $1 million in your 401(k), but you have to pay taxes on this money which impacts it significantly.

Roth accounts are tax-free.

Gains are taxed with some assets, such as dividends and not others.

You may want to convert to a Roth through a Roth conversion where you pay the taxes prior to converting and allow the account to grow tax-free.

It’s very important to spend time understanding how you can shield yourself as much as possible from taxes. A CPA or accountant can help, and we actually have these professionals on retainer so that if our clients have a question we can’t answer, the tax professional can.

4. Estate Planning

Finally, the last piece of the puzzle is your estate plan. You want to make sure that you have:

  • Beneficiaries setup
  • Beneficiaries named and updated
  • A will in place
  • Healthcare power of attorney
  • Durable power of attorney

A durable power of attorney is very important because even if you’re married, there are certain retirement accounts that can only be owned by a person. Let’s assume that your wife is in a coma, and you rely on her accounts to pay your bills.

Without a durable power of attorney, you cannot access these certain accounts.

These are simple documents that everyone that is entering into retirement should have in place.

Just imagine if you had all of these four key elements in place for your retirement. Would you have peace of mind in retirement? A lot of people will say “yes.”

That’s what a solid plan offers – peace of mind.

Want to learn ways to secure your retirement? Listen to our Secure Your Retirement Podcast to get started.

Want to dive in and learn more about how we can help you secure your retirement? Feel free to schedule a complementary call with us. Just 15 minutes of your time can help you on the path to retirement.

Is Cryptocurrency Safe for Your Retirement Plan?

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Cryptocurrency is alluring for a lot of investors. It’s hard to overlook Bitcoin and Ethereum rising to $65,000 and $4,300 (1) in the last few months. But these crypto currencies have also dropped to $36,977 and $2,587 at the time of writing this article.

For someone in retirement or close to retirement, crypto may or may not be a smart addition to their portfolio.

Where Cryptocurrency Stands for Current Retirees or Someone Close to Retirement

A lot of our clients are interested in Bitcoin and other cryptocurrencies. There are stories of people investing $10,000 in these investments that are now worth $1 million or more. High returns on investment are always going to raise a person’s interest.

There are also some people saying that crypto could replace the dollar, which would make it less volatile and a lot more attractive,

The question is, for someone that is close to or in retirement, could you afford losing 40% or 50% of your investment in a month?

Crypto can provide massive returns, but you’re also entering an investment that can cause you to lose a lot of money overnight. Talks of regulating crypto in the past month sent a bunch of the currencies spiraling downward.

Your goal and objective when investing in cryptocurrency will be the determining factor in whether or not to add it to your portfolio. The last thing you want to do is secure your retirement only to see your portfolio suffer massive overnight losses.

Assessing Risk and How Risk Pertains to Crypto

Cryptocurrencies have a lot of risk because it’s still so new. You have strong backers like Elon Musk that can push Bitcoin high with one announcement and cause it to tumble with another.

Government regulations are also another issue.

All of this uncertainty adds to the risk of investing in cryptocurrency. Are you willing to lose 30% to 50% of your portfolio in a few weeks? If not, then cryptocurrency isn’t for you.

When we talk to our clients and run a risk assessment, people are typically willing to risk 5% to 10% of their portfolio. Let’s look at a real-world example. Let’s assume that you have $1 million in a retirement portfolio:

  • 5% to 10% loss would be $50,000 to $100,000
  • 30% to 50% loss would be $300,000 to $500,000

Wiping out $300,000 of your retirement can be very difficult for a person to withstand. For most people that have been investing and building up a retirement account throughout their adult life, jeopardizing retirement for crypto is simply unthinkable.

There are also some clients that are willing to put maybe 10% of their portfolio, or $100,000 using the example above, into crypto. If the person is comfortable losing this money, they may think that the risk is worth the reward.

How Much of Your Retirement Portfolio Are You Willing to Risk?

If you’re willing to take a risk on the unknown, you’ll want to ask yourself: how much should I risk? You can funnel 2% of your portfolio, or $20,000 into crypto, and keep the rest in low-risk investments.

While you stand to gain and lose a lot, most people are fine with diversifying into crypto if the potential loss isn’t devastating.

If you can afford to lose the money, you should have the mentality that you’re willing to lose it all. Perhaps you don’t mind losing $1,000 or even $100,000, and if this is the case, you can definitely invest in crypto.

We wouldn’t recommend a significantly high percentage of your retirement account being used for crypto because you worked hard for your retirement.

And if you do decide to invest in crypto, what is the upside? Will you pull out of the investment if you see 50% returns, or will you keep your money in the investment for the long-term? There are a lot of questions to ask yourself.

In the ideal world, we advise our clients that have worked so hard to secure their retirement that they should only invest amounts that they’re comfortable losing. The last thing you want is to not have enough money to retire because of a riskier investment.

If you’re close to retirement, are you willing to lose your retirement to crypto?

For most people, the answer is no.

Understanding Crypto Well Enough

Retirement planning is a learning experience. If you want to secure your retirement, you need to understand the investment vehicles that you’re choosing. In our opinion, and through experience, we only invest in things that we understand.

Sure, cryptocurrency has a lot of upsides, but if you don’t understand it, you don’t know what it can be applied to in the real world.

You don’t need to be a teacher of crypto, but we do recommend that if you want to add this investment to your portfolio, be sure that you know how they work.

Crypto is “created.” The coins are mined using processing power. The concept is all digital and essentially made up. But through backing, these digital currencies have been able to grow.

A lot of people want a decentralized currency, and this has given crypto its basis for existing.

You need to ask how crypto works.

  • What is crypto mining?
  • How are transactions logged?
  • What’s the future of crypto?

If you can answer these questions, then you may find that cryptocurrency is a good option for you. 

For our clients, we aim for stability in their portfolios. We certainly don’t want to lose all of a portfolio overnight, and we minimize risk with a diversified portfolio. Cryptocurrency is one of the investments that can lose a significant amount of value overnight, so there’s little that you can do to adjust your portfolio to reduce imminent risk,

You can go to bed at night and wake up with 30% of losses.

As advisors, we don’t invest our clients’ money in crypto because there’s far too much risk. We’ve had some clients that want to take on that risk and will invest themselves. But for us, with a long-term retirement plan in mind, we only recommend investing in small amounts of crypto at this time.

If a major government backs a digital currency or creates their own, we may change our mind completely on cryptocurrency investing.

But for now, we only recommend investing in crypto if it’s money that you can lose.

If you want more information about preparing your finances for the future or retirement, check out our complimentary Master Class, ‘3 Steps to Secure Your Retirement’. 

In this class, we teach you the steps you need to take to secure your dream retirement. Get the complimentary Master Class here.

Resources

  1. https://economictimes.indiatimes.com/markets/cryptocurrency/bitcoin-rises-4-eyes-37000-ethereum-gains-8/articleshow/83114422.cms

What is an Exchange Traded Fund (ETF)?

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You may have heard of an exchange traded fund, or an ETF before when trying to plan out your retirement or boost your investment portfolio. But what is an ETF and how would you benefit from one?

That’s exactly what we’re going to discuss in this article. We’re going to cover two main concepts:

  1. What is an ETF?
  2. Action items to secure your retirement

What are Exchange Traded Funds?

ETFs have grown in popularity over the past few years, with a lot of money being funneled into them for people’s retirement. We also use them in our own practice, but they should be a part of a diverse portfolio rather than the only investment that you make.

We’re going to compare an ETF to a few investment vehicles so that you have a clear understanding of ETFs and why you may want to add them to your retirement plan.

What is an ETF?

An ETF is a stock, and you can purchase it in the same way that you buy an individual stock. But the ETF itself is not a singular company. When you purchase an ETF, you’re buying into a stock of stocks.

If you wanted to purchase technology stocks, you might consider Google, Amazon, Oracle, Microsoft and plenty of others. 

You would have to sit down, do your research and then purchase the stocks separately. An ETF can make this process easier by allowing you to purchase shares in the ETF, which contains a diverse set of technology stocks.

One purchase allows you to purchase a nice portfolio of stocks without needing to sit down and pick and choose stocks. It’s a lot easier to manage a single ETF than it is to manage 20 tech stocks.

If you know anything about mutual funds, you may assume that they’re the same as an ETF, but they’re not.

ETFs vs Mutual Funds

Mutual funds are one of the most common and original forms of investing outside of a single stock. A mutual fund is, at the heart of things, a company that has different investment objectives.

The objective can be:

  • Mirror the S&P 500
  • Mirror a sector, such as tech or healthcare

The company behind the fund will align the fund’s stocks with this objective. Within a mutual fund, there are many moving parts, including a portfolio manager and various other employees.

A mutual fund will purchase a variety of stocks and place them into their fund.

Mutual funds are a great way to invest in a more hands-off manner because you don’t have to actively manage the mutual fund. The main drawback of the mutual fund is that there are management fees, which can be high.

Since the mutual fund is a company with employees and researchers, they do have fees, which eventually eat into your investments.

ETFs are a natural move forward because they’re more cost-effective than a mutual fund.

Another major difference between an ETF and a mutual fund is that when you put in a buy or sell order for a mutual fund, the order doesn’t go through until the market closes for the day. This can be bad for your investment.

Let’s see an example.

  • Overnight, a bunch of market indicators point to energy stocks dropping tomorrow.
  • You put in a sell order at 9:30 in the morning to avoid losses.
  • Mutual fund sell orders aren’t executed until the market closes, so you sustain losses.

You’ll find a lot of retirement accounts, such as a 401(k), relying heavily on mutual funds. 

Actively Managed ETFs

A new trend is popping up where people are gravitating toward actively managed ETFs, which are very similar to mutual funds without the constraints of only being able to purchase or sell at the end of the trading day.

The downside of an actively managed ETF is that you’ll pay more fees.

If you want to manage your portfolio, you can simply sell the ETF and purchase another one if the ETF isn’t performing well. So, you have a lot of options when it comes to ETFs, and if you don’t mind paying the additional fees, you can even choose an actively managed ETF.

You can also choose the old school investment route where you purchase single stocks, add them into your account and manage everything yourself.

ETF vs Stock Purchases

If you want to build a portfolio of stocks, you can go out and purchase stocks individually. You may want to invest heavily in healthcare stocks, or perhaps you’re interested in small- and mid-sized companies.

You can go out and purchase a lot of individual stocks to properly diversify your portfolio.

But you want to manage your risks when you’re investing your retirement. If you purchase just one or two hot stocks, you can make a ton of money or lose a ton of money. Instead, purchasing a mix of stocks across sectors allows you to take on less risk in your portfolio.

Volatility is less of a concern when you have stocks in multiple sectors.

You may own hundreds of individual stocks, leading to statements that span dozens of pages. It can easily get confusing when trying to figure out which stock is a small- or medium-sized company, and then keeping up with all of these companies can be very difficult.

Researching the direction of each company and their stock is a full-time job in itself when you have a portfolio of 100 or 200 stocks.

ETFs, on the other hand, allow you to purchase 100s of stocks at once. You purchase into an ETF that has massive diversification that helps keep volatility low and reduces your own management. It’s also much easier to see an overview of your portfolio with an ETF versus hundreds of stocks.

Remember, ETFs can be bought or sold just like stock, so your buy or sell order goes through immediately. 

Real World Example of ETFs in Action

Last year, in 2020, the pandemic hit, and the market was starting to fall. We chose to sell off our ETFs as the market dipped, sat on cash, and then bought back in when stimulus checks were sent out and the market started to perform better.

If you remember, Zoom and Amazon were performing very well and benefitted from the pandemic, along with other stocks.

Online and tech companies, especially large cap ETFs, were our go-to choice because these were the stocks that were performing best. When these companies started to cool towards the end of the year, we moved back to small- and mid-cap companies that began to perform very well.

You can choose a broad asset class, such as technology, or you can narrow your ETF down further with biotech ETFs.

ETFs are a great option because they allow you to purchase:

  • Indexes
  • Bonds
  • Stocks
  • Precious metals
  • Different classes of ETFs
  • Country-based ETFs

From a fee perspective, ETFs are more affordable than other options available. We’re seeing the entire investment world start to see the value of ETFs and even some 401(k) plans are moving in this direction.

If you want to learn more about what we do or how we can help you secure your retirement, you can sign up for 15-minute introductory call with us.

How Do Financial Advisors Get Paid?

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When people come to us for financial advice, and particularly retirement planning, they have a very important question to ask: how do financial advisors get paid? You’re entrusting an advisor with your money, and you have a right to know how that person’s fees are structured.

A client might like everything we’re talking about, but they almost always ask how we’re getting paid.

We think it’s very important to know how an advisor is paid because it’s your money being invested. There are three traditional ways that financial experts may be paid:

3 Ways a Financial Advisor Can Be Paid

1. Commission

Commission-based payments have been around the longest, and there’s always some controversy here. Let’s say that an advisor recommends purchasing 100 stocks in Microsoft. He or she may be paid a commission on this purchase.

When someone handles your money, they may be paid commissions, which some clients aren’t happy about.

There are a lot of people that assume commission-based is bad because the advisor:

  • Is incentivized to sell you a product
  • Puts their interest first
  • Etc.

But this isn’t always the case. There are a lot of good products that are commissionable. In some cases, products are always commissionable. Life insurance, for example, is commissionable, and the insurer pays an advisor commission because they recommend the product.

There are times when an advisor can’t get away from the commission, but this doesn’t mean that the product is bad by any means.

An annuity, which pays out money in disbursements, is one that needs servicing. Since the advisor is servicing the annuity, the insurer will pay them a commission because servicing can last 10 years or more.

An advisor may receive a commission:

  • Once per buy-in and/or
  • Once per year, etc.

Mutual funds are another product where there are three different types:

  • A Shares
  • B Shares
  • C Shares

A shares are commissionable and provide an advisor with a certain percentage upfront. B shares don’t have upfront costs, but when you sell the shares, a charge is made and goes to the advisor.

There are also some mutual funds that pay a small commission to the advisor annually.

Real estate investment trusts (REITs) also have commission attached to them. An advisor may be paid with an REIT in many ways:

  • Commission, which is most common. The advisor is paid by the REIT, but you’ll be required to keep the money in the trust for a specified period of time.
  • There are some REITs that don’t pay commission in the same way, which we’ll be talking about in the next sections.

It’s best to ask your advisor if they receive commission. Advisors may also have the option to waive a commission. For example, an A share commission can be waived.

Note: In the financial industry, the commissions are highly regulated. The financial advisor working on your retirement planning can’t do much in terms of changing the commission due to the strict regulation on these products.

2. Fee-only

Fee-only advisors can help you with retirement planning, and this classification means that the advisor cannot help you with a product that gives commission. For example, let’s assume that an advisor is looking through your retirement plan and thinks life insurance would be an amazing option for you.

As an advisor that offers fee-only services, it is required that refer you to someone else for this product because they cannot receive a commission on it.

This is a very restrictive space.

Fees can be:

  • Hourly fees
  • Flat rate
  • Asset-based (percentage of the funds or estate managed)

Asset-based fees are often preferred because as your estate or portfolio grows, the advisor is paid more. This type of fee structure makes sense for a lot of people because it’s in the best interest of the advisor to maximize your returns so that they’re paid more.

3. Fee-based

A fee-based advisor allows the individual to offer both commission and fee-only services, which offers the financial planner the most flexibility. If one of these financial professionals thinks that you may need life insurance, they can offer you this without needing to refer you to someone else.

In the broad spectrum, fee-based makes sense because the advisor can do everything for you.

But we recommend working with someone who is a fiduciary. 

What is a fiduciary?

A fiduciary is held to the highest standard. As a fiduciary ourselves, this means that we must take care of the client first. As a client, this provides you with the most protection.

When speaking to a financial planner who is fee-only or fee-based, any time that there’s a conflict of interest, such as a commission being paid for a product recommendation, it must be disclosed.

We work on a fee-based arrangement, and when we make a recommendation that has a commission, we have to disclose everything to the client.

Ultimately, commissions are built into rates, so there’s always some payment coming from the client. We believe as long as the advisor is upfront and you know all of the fees and/or commissions upfront, commissions are perfectly fine.

If you want more information about preparing your finances for the future or retirement, check out our complimentary Master Class, ‘3 Steps to Secure Your Retirement’. 

In this class, we teach you the steps you need to take to secure your dream retirement. Get the complimentary Master Class here.

Planning for Medicaid – What You Need to know!

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A lot of our clients that are in the midst of retirement planning hear about Medicaid planning. Since there are a lot of questions and misconceptions surrounding planning for retirement and Medicaid, we thought that it would be a great idea to clear up a few of these questions so that you can secure your retirement.

What is Medicaid and How Does It Relate to Your Retirement Planning?

Medicaid is a government program, and it’s, essentially, health insurance for certain individuals that meet a certain set of criteria, primarily “limited means.” There are a few criteria that must be met:

  • Limited income
  • Limited assets
  • Aged 65 or older, or disabled

Medicare vs Medicaid

When you hear the requirement “being 65 or older,” it’s not uncommon to think Medicare. There’s a difference between the two, and while they may both be an option for someone 65 or older, it’s important for your own retirement planning to understand the key differences between the two. 

  • Medicare isn’t means tested, so if you’re over 65, you qualify for the program.
  • Medicaid does require certain asset and income limits to qualify.

Medicaid, if you qualify, offers superb benefits if you can qualify for it. When it comes to long-term care, Medicare doesn’t cover much (20 days full coverage or 100-day partial). Medicaid will provide long-term care coverage, which is great for older individuals that may need to go into a nursing home.

Medicaid Planning and Your Retirement

Retirement planning is often all about protecting your assets and ensuring that you can draw an income stream to pay for your basic costs of living. Planning for Medicaid, since there are restrictions on income and assets, can be a little tricky.

Medicaid’s strict asset limit is $2,000 for assets, which doesn’t include your house or vehicle.

Protecting assets in the advance of the need is ideal because you can use strategic planning to qualify for Medicaid. A lot of people may assume that they can simply transfer assets out of their name to qualify, and this would be correct to an extent.

Medicare has a five-year lookback period, which, effectively, looks at whether you’ve transferred assets in the last five years. If you have transferred assets, you will be penalized and will lose eligibility for a period of time.

Pre-planning can help by allowing you to:

  • Plan five years in advance to transfer assets
  • Eliminate the risk of a penalty or losing eligibility

That’s why we recommend that you plan ahead of time if you think that Medicaid will be beneficial for you. You really want to think far ahead so that if you do need long-term care, Medicaid is available for you.

Trust us: the government will do its due diligence to make sure that you qualify for Medicaid.

But what about a crisis? You can’t predict everything. You might be as healthy as an ox at 64 and a half, and then a week after you’re 65, crisis strikes, and you need long-term care. There is crisis planning strategies that can help in these situations.

Crisis Planning to Meet Medicaid Eligibility

Medicaid’s rules change, and crisis strategies that work today, may not work tomorrow. The rules tend to get more stringent, so there’s no guarantee that one strategy will work for you. A few tactics that may work are:

  • Transferring assets to a disabled child or a trust for a disabled child because there’s no penalty.
  • If you’re under 65, a first-party special needs trust can be created.
  • You may be able to transfer assets to a spouse, but this can be tricky because there may be assets that are jointly owned.

Crisis planning involves trying to convert your countable assets into non-countable assets. Let’s assume that you have a lot of cash. One method may be to pay off your mortgage. A home is a non-countable asset.

By paying off your home, you’re able to transfer cash out of your accounts while building equity in your home.

Strategies like this can be a major part of your retirement plan to qualify for Medicaid.

Married Couple Crisis Planning

Married couples also have strategies that they can use if crisis strikes, including:

  • Medicaid compliant annuity
  • Medicaid compliant promissory notes

When you’re married, Medicaid will look at the combined assets and require the couple to spend down possibly half of the gross asset amount. Let’s say that you have $100,000 in cash as a couple.

Medicaid may say that you need to spend $50,000 or so to qualify for Medicaid if one spouse is in long-term care and the other is not.

The spouse can choose to:

  • Transfer the assets to the non-long-term care spouse, or
  • Put the assets in a Medicaid compliant annuity

If this strategy was employed, the spouse that needs Medicaid would then qualify for Medicaid. 

When you’re working on your retirement plan, it’s so important to spend the time to get your estate planning documents in place. You should have a will and other documents drafted, but one of the most important for Medicaid purposes is your power of attorney documents.

The power of attorney can use gifting strategies to help their spouse or loved one qualify for Medicaid using some of the strategies we just outlined above.

When to Seriously Start Thinking About Medicaid Planning

You can use legal strategies to qualify for Medicaid. It’s really never too early to begin your planning or at least start thinking about the planning. For example, even 35-year-olds can get into an accident or get diagnosed with cancer and need to enter long-term care.

A person in their 30s obviously isn’t thinking about long-term care, but the right legal documents would give their spouse or loved one the authority to transfer assets in their name to cover the cost of long-term care.

Long-term care is extremely expensive, so it’s never bad to think about Medicaid early on.

Since COVID hit, prices have skyrocketed for long-term care. Depending on your area, the cost can be $10,000 to $20,000 a month for care. It’s really important to consider how you would pay for such high expenses for long-term care.

Downsides of Early Medicaid Planning

If you’re healthy and/or young, chances are, you don’t want to transfer your assets away. But let’s say that you do. You know that you have an aggressive form of cancer and will need to be in long-term care.

You can transfer assets to your children, spend a year in long-term care, and then you make a recovery and can go back to normal life.

There’s no guarantee that your children will transfer the assets back to you, and you lose full control of these assets upon transfer. You should never take giving away assets lightly. While you’re sheltering these assets from Medicaid, the loss of control can have lasting implications, too.

Are you trying to secure your retirement and are considering your Medicaid or long-term healthcare needs? Give us a call today for a free consultation.

How to Avoid a Scam!

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Trusting your retirement savings with someone else is difficult. If you’ve spent your life working hard, the last thing you want to do is lose your retirement because of a fraudulent advisor. Bernie Madoff is a name that a lot of people in retirement planning associate with fraud.

After all, Madoff stole around $20 billion (1) in principal funds from his clients, although his firm stated they had returns of $65 billion.

If you want to secure your retirement, you need to know that your advisor isn’t pocketing your money and spending it to live the life of a billionaire. 

Today, we’re going to talk about safeguarding yourself against the Bernie Madoffs of the world.

Quick Background on Bernie Madoff for Everyone That Doesn’t Know

Bernie Madoff’s activities, initially, were legal. He setup custodianships so that he could manage his clients’ money. When you sign over custodianship, you’re putting a lot of trust in an advisor because manipulation can occur.

There’s a lot of oversight, but as we saw with Madoff’s business, regulators didn’t regulate him or his books like they should have.

He had free rein to move money to accounts, forge return numbers and get away with living the life of a billionaire in the process.

99% of Financial Advisors vs Bernie Madoff

Madoff ran a Ponzi scheme, and he did it exceptionally well, even though the activity was obviously illegal. When you hire an advisor, 99.99% of the time you’ll be hiring someone that isn’t Madoff.

You’re going to give someone access to your money, but it’s different than what Madoff was able to do.

When you work with someone – like us, for example – we use a third-party custodianship, which puts your money into Charles Schwab. You can also have money put into Fidelity, TD Ameritrade, or another custodian. It’s very difficult to create your own custodianship. These custodians will provide oversight for you.

For example, these entities create the statements that are sent to you so that an advisor can’t say, “hey, you made 15% returns,” when you really made 2% returns this year.

Bernie Madoff was able to manipulate the statements sent to his clients, who thought they were making a ton of money. Investors were happy to see their portfolios go up and didn’t question their statements.

Madoff, for all of the bad that he did, caused a shift in the way financial advisors can manage money. Oversight and regulations that allowed him to get away with his scam have been strengthened to provide safeguards for investors so that their money is safer in the hands of an advisor.

One of the protections that are in place now is that you own the entirety of your account.

Let’s say that we were managing your money and you decided that it’s time to go in a different direction. You could:

  • Contact Charles Schwab
  • Remove us from the account

You can log into your account to see the activities going on, which does provide some level of peace of mind that your funds are being managed properly. The custodian even prepares all of your tax documents.

Administering Your Account on Your Behalf

As an advisor, if you allow us to administer your account, we do have the power to put in an order to send you funds from the account. The power of an administrator provides us with some opportunities to manage your account, but you’ll never be able to ask us to personally write a check on your behalf.

And that’s a good thing.

The majority of advisors are setup in a similar way to us so that they don’t have the custodianship over your money. A third-party, well-known custodian will provide the oversight and protection necessary to keep your money safe and secure.

Licensing and an Advisor

Industry certification is a must-have in financial planning and the insurance industry. Your advisor should meet all of your state requirements and have the required certifications.

For example, we’re certified financial planners, but we’re also FINRA licensed.

FINRA provides oversight in the world of securities, and they have a variety of licensing available. Licenses offer protections that allow you, as someone looking for a financial planner, to have some peace of mind that your advisor is someone legitimate.

You should ask your advisor about their licensing and even go to your state’s board to learn more about licensing requirements.

If you look into 5 advisors and one says, “no, I don’t need a license,” that should be a red flag that maybe something isn’t right.

But licensing alone doesn’t mean that you can’t be taken advantage of or enter into a Ponzi scheme. Licensing should be seen as a bonus and adds credibility to the advisor, but that’s not the only thing that you should be considering when choosing a financial adviser.

Structure of the Advisor’s Business

Advisors can structure or setup their business in different ways. We’re setup as an RIA, or registered investment advisor, which gives us the ability to act on the behalf of our clients. Since we’re an RIA, we’re held to a fiduciary standard.

What does this mean?

This means that we have to put the client’s interest above our own. You’ll find that broker dealers and agents have their own setups.

And there are different ways that advisors are paid. For example, we’re paid a fee for managing money. We don’t receive commissions on transactions, so there’s no incentive for us to push you to one security or financial vehicle over another.

Brokerages, on the other hand, may be reputable, have a license and can push you to a mutual fund or other investment option. These brokers can sell mutual funds, securities, etc.

You should go to your state’s site and try to find out if the person you’re dealing with is licensed. Licensing means that the advisor is being regulated and must remain compliant.

Money Transfer the Right Way

Even if someone is licensed, this doesn’t mean that there aren’t ways in which fraud can take place. The biggest concern is when money transfers occur because there’s a standard, “right way” for these transfers to take place, and a not-so-standard means of transfers.

What’s the Right Way to Transfer Money?

The right way to transfer money is to write a check to a custodian company, not the investment company themselves. Custodians are highly regulated and are the safest option for transferring money.

What’s the Wrong Way to Transfer Money?

Let’s assume that you’re working with XYZ Corp and you want to invest funds. If you’re making a check out to XYZ Corp, you’re handing over your money directly. The company may be honest and put the funds into your account, or some or all of it can be taken.

It’s not a good idea for you to write checks directly to the financial advisor unless it’s to pay their fees.

When you read about Ponzi schemes, 99.99% of the time, the investor writes a check to the investment company that will then “disperse” the money to your account. If you’re not writing a check directly to the custodian, you’re putting yourself at risk.

Investing your money is always a risk, but you shouldn’t have to stress when you put your trust in a financial advisor. If you do your due diligence, you’ll be able to reduce the risk of being a victim of a Ponzi scheme.

Sources

1. https://www.wyff4.com/article/5-things-to-know-bernie-madoff-scam/36124939#:~:text=steal%20%2465%20billion.-,His%20Ponzi%20scheme%20is%20often%20referred%20to%20as%20a%20%2465,but%20those%20returns%20never%20existed.

Trusts Explained – What you need to know!

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Trusts can be a powerful part of your estate plan, but they’re not a tool that every estate needs to leverage. Do you need a trust? Let’s find out.

What is a Trust?

One of the most common questions we’re asked when working with someone that is in the retirement planning phase of their life is: do you need a trust? And the answer isn’t that simple. A trust may be a way for you to secure your retirement while putting assets in a trust for someone else, but it’s not an estate planning tool for every person or situation.

You can think of a trust as a relationship between:

  • Person that sets it up (grantor)
  • Beneficiary (beneficiary)
  • Person that takes care of the trust (trustee)

An example of a trust can be as simple as:

  • Giving someone $20 
  • Ask the person to give the money to someone else

When you create a trust, you’re allowing the trustee to grant assets, on your behalf, to the beneficiary.

When to Consider a Trust in Your Overall Estate Plan

A trust is not a part of everyone’s retirement planning because it’s really a part of your estate plan. You’ll be creating a trust for someone else, although while you’re alive, you may have access to the trust and all assets within, depending on how the trust was created.

Do you need a trust? No, it’s optional.

But that doesn’t mean that you might not benefit from one. A trust is a good option when you have:

  • Children who are too young to really be a beneficiary
  • Children who are disabled and receiving benefits that they may lose from inheritance
  • Beneficiaries suffering from addiction that may only be granted items in the trust under certain conditions

We also see a lot of trusts being made because the parent of a child isn’t sure that their child’s marriage is going to last, and they do not want part of their estate to go to the ex-wife or ex-husband.

A will distributes the assets out easily in an estate plan, while a trust allows the trustee to manage the estate over time until the beneficiary is ready to receive all or part of the trust.

Trusts are a great way to help divide assets in a second marriage. Perhaps you have children from your first marriage or prior to your second marriage, and you want them to receive a portion of your estate upon your death.

If you don’t have a trust in place, your assets would go to your spouse who may or may not distribute assets to these children.

So, there are a lot of great reasons to choose a trust as a way to strengthen your estate plan. The trust type that you choose will be very important, too.

Most Common Types of Trusts

There are a lot of different types of trusts, and some of these trusts can be very specialized. We’re going to cover the most common types of trusts, but before we do, it’s important to discuss something that is very important for all estate planning matters: probate.

What is Probate and Why You Want to Avoid Probate

When assets are transferred at death, this would be considered probate. A will is, essentially, probate because it helps transfer assets after your death, while a trust can have assets put into it while you’re alive.

Let’s say that you have a house when you die. The house will go through probate and then be given to your heirs.

When assets go through probate, there are drawbacks, such as:

  • Fees 
  • Longer time to transfer the asset

But there are some circumstances where probate may be beneficial. This is not as common, but it can happen.

Revocable Living Trusts

A trust that provides protections for beneficiaries, but they have one key benefit: they’re in existence when you’re alive. While you’re alive, you can place assets in the trust to avoid probate.

Irrevocable Trusts

These trusts are often created for life insurance or charitable donations. Once created, these trusts cannot be modified, revoked or changed after their creation. If an asset is placed in the trust, it cannot be taken out even if your wishes change.

Testamentary Trusts

A very common type of trust that is built into your will. These trusts are only “created” upon your demise, and they’re often in place to protect children that are too young to benefit from the estate just yet.

Special Needs Trusts

A trust for someone that has qualified for Medicaid or Medicare benefits. These trusts are drafted in a way that provides funds to the individual while also ensuring that they qualify for their benefits.

You can also have a trust that is more unofficial but is used when someone is less mature, suffers from a medical condition or is an addict and, at this time, shouldn’t benefit from the trust.

The person can still receive their fair share of the estate, but in the case of an addiction, you can put the share in a trust so that when the child is sober, they can receive assets from the trust. A trustee will often be the deciding factor on whether a special needs trust beneficiary is ready to benefit from the trust.

When a Trust Doesn’t Make Sense for Your Estate Plan

Trusts are a good option for some, but they may not be a good option for others. The times when a trust doesn’t make much sense are:

  • All heirs are doing well with no concerns, in happy marriages, etc.
  • Most of your assets transfer outside of probate, i.e. life insurance, retirement funds, etc.

It truly comes down to the beneficiaries whether a trust is necessary. If you have family dynamics, where maybe an heir is on drugs or gambles, you may want a trust. On the other hand, there are times when a 20-year-old is mature and responsible, so a trust isn’t required.

Choosing a Trustee

Sometimes, choosing a trustee is easy. You have someone in your life that you trust and know will handle your trust accordingly. When you don’t have a clear person that you can trust to handle these matters, then you have a few potential options:

  • Family
  • Friends 
  • Accountant
  • Lawyer 

You can also choose co-trustees where two people are left in charge of the trust.

Deciding on a trustee is very difficult. The trustee may be in their position for 20+ years. A trust can be around for decades, meaning that the trustee is in a vital position where they have to make decisions on distributing money or investing assets so that the trust grows over time.

The trustee may have to tell children “no” when they ask for a distribution.

You have to choose a trustee that you can trust and is very responsible. Since this is a position that the trustee may be in for a long time, they need to be reliable, dependable, in good health and someone that you have a lot of faith in to do the right thing.

Trusts are a complicated form of estate planning, and it’s important to speak to an estate planning professional to help you really determine if a trust is a good option for your estate.If you want to learn more about how to secure your retirement or need help with your retirement planning, click here to schedule an introductory call with us.

How Does a Variable Annuity Work?

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A variable annuity is another type of investment that you can make and add to your retirement account. When we talk about variable annuities, it’s important to fully understand what an annuity is and what they offer to your retirement account.

If you want to implement an annuity into your account, it’s important to know the three main types of annuities available.

Types of Annuities

1. Immediate annuity

The most common form of an annuity is the immediate annuity where you provide an insurer a lump sum of money. In exchange for your lump sum, you receive a certain amount of guaranteed income every month or year (your choice) for the rest of your life. 

You’re giving up your cash, so you don’t have access to this liquidity any longer. Need a new roof? You’ll need to save your income from the annuity or use funds from another account to pay for it.

2. Fixed annuity

A fixed annuity means that you receive a fixed interest rate. Your principal will never fall below a certain amount, and you’re guaranteed a certain amount of interest. The only time your principal goes down is when you withdraw money from the account.

You can have two main kinds of fixed annuities:

  1. Declared rate. A declared rate annuity means that you’ll have a fixed interest rate for certain numbers of years and then can choose to keep money in the annuity or walk away.
  2. Fixed index rate. When you choose this type of fixed annuity, the interest rate is based on an index similar to the way a stock index works. But you cannot lose money with this type of annuity. You can earn 0% interest, but you can never go into negative territory.

You can always draw an income from a fixed annuity. 

3. Variable annuity

What is a variable annuity? Basically, this is a type of annuity that has its interest rate vary based on the type of investment that this annuity is in. For example, you may invest in a certain type of financial instrument.

When you invest in a variable annuity, you can lose money if the financial instrument performs poorly similar to how the stock market works.

How Do Variable Annuities Work?

All annuities have their limitations, but a lot of people are intrigued by the variable annuity because they feel more in control. It’s important to remember that this is also the riskiest annuity because there’s no guarantee of:

  • Interest rate
  • Principal in the account

And you’ll also need to know how to invest using a variable annuity. Since your money is going into investments, this is one of the areas that you really need to sit down and learn about before deciding which type of annuity is best for you.

Making, or potentially losing, money all comes down to your investments.

It works out like this:

  • Put a lump sum into a variable annuity
  • Choose investments in the annuity, called sub accounts

You may be able to invest in mutual funds, ETFs, etc. All of these investments are considered sub accounts.

When you invest in a variable annuity, your investments are limited to what the insurance company offers. The insurance company will allow certain types of investments, and you lose a lot of your control over your money in the process.

Insurance often structures the fund around their own company. For example, the insurer may have their own mutual fund, and you may only be able to invest in these funds that the insurer created.

You may have just 20 or 30 total options with a variable annuity rather than investing freely.

Once you choose a fund, you’re hands-off and are subject to the market risk. You may gain a lot of return, or you may lose out on your investment. The protection that’s offered with the fixed and immediate annuities is completely lost with a variable annuity.

Losing Beyond the Market Dip

For full disclosure, it’s important that we look at how you may lose money with a variable annuity. Let’s assume that you’re able to heavily invest in the S&P 500, and the market falls 30%.

You put $100,000 into the sub account, so now you’ve lost $30,000.

But then there are also other potential losses, which come from fees. You may lose $30,000, but then the fee can be 1.5% to 3% (1) or more (we’re seeing 3% to 5% in total), causing you even more losses. Fees are not based on gains or losses, so your account can go down to $50,000 and fees are still going to be charged.

There are a lot of fees, including:

  • Admin fees. Cost for the insurance company.
  • Mortality expense. Essentially a death benefit.
  • Investment expenses. Costs of about 1% annually for investing.
  • Rider charges. Protection or income protection that can be added on to the annuity. Fees typically range from 1% to 2%.

It’s important that you’re aware of these fees. A lot of these insurers also have surrender charges.

When Would It Be Smart to Use a Variable Annuity?

When you really start understanding a variable annuity and all of the fees involved, you’re going to think “why would I ever choose a variable annuity?” We agree. For most people, a variable annuity doesn’t make much sense because you’re taking on more risks for higher fees.

There is one instance that we can think of where we may recommend a variable annuity.

When does this type of annuity benefit you? All of the annuities are tax deferred, but if you have a variable annuity, you’re likely to also put money into an IRA.

If you have a lot of money that’s not in an IRA and want to leverage a variable annuity for tax purposes, this is really the only time when you may want to put your money into a variable annuity.

What a Variable Annuity Might Look Like for Tax Purposes

Let’s say that you have $100,000 in a variable annuity and $100,000 in a brokerage account. When your brokerage account goes up or down, you’re going to pay taxes and capital gains. In the variability annuity, you wouldn’t be paying taxes because the account is tax deferred.

But when you do take money from the annuity, all of your gains are fully taxable.

You’re paying out taxes later on, which is a nice perk, but these taxes are still going to come out of the account. Keep in mind that the withdrawal from the account will be seen as income, so it’s not taken out as capital gains.

Taxes are not taken out of your original investment – just on the gains.

A variable annuity is beneficial when you don’t have a surrender charge and low fees and prefer tax deferral on your money.

While we don’t recommend a variable annuity to many of our clients, it’s still a viable investment option that you need to consider carefully. You may find that the tax deferment is great for your circumstances because you would rather be taxed at once rather than every year.

If you’re preparing for retirement and want a little guidance and peace of mind, schedule a 100%, no obligation introductory call with us today.

Sources

1. https://www.annuity.org/annuities/fees-and-commissions/

Beneficiaries – What you need to know!

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When you secure your retirement and have been diligent in your retirement planning, you’ll quickly find that your concerns may grow. One of the most common questions we get from others is: how to leave money to the next generation.

Our clients have a lot to say about leaving money to the next generation, including:

  • I’ve given enough to the next generation.
  • My goal is to enjoy my retirement. The kids can have what’s leftover.

But what happens if you’ve done everything that you wanted to do? You’ve traveled, purchased a vacation home and you still have more money than you need. Chances are that you’ll pass away with money that is left for your heirs.

You can use smart retirement planning to make sure that anything left does go to the next generation.

Account Types That You Can Setup

A lot of accounts can be setup so that the remaining funds can be passed down responsibly, including:

  • IRAs
  • 401(k)s
  • Savings
  • Brokerage accounts
  • Life insurance
  • Annuities 

You may even have private property, such as a home or other belongings that you want to pass down to either the estate or a specific heir.

How We Would Handle These Accounts

When you enter into your retirement, you’re likely going to have multiple accounts that you’ve put money into, with the most common being an IRA and 401(k). Accounts always have their own set of issues:

Traditional IRAs/401(k)s 

These haven’t had taxes deducted from them yet, so you need a withdrawal plan in place. But these accounts also make it easy to add a beneficiary to them. You can often log into your account, such as your Charles Schwab account, and add the beneficiary online.

We’ve had a lot of clients that have forgotten about these accounts completely.

If you’re juggling multiple accounts, it’s easy to forget one that may have a few thousand dollars tucked away in it. There’s also the risk that you have already added a beneficiary that you may no longer want to leave money to. For example, your ex may have been the beneficiary, and if still listed as such, he or she will be the beneficiary even if that isn’t your wish.

We recommend that you secure your retirement by consolidating these accounts so that all of your money is in one place, and it’s much easier for you to manage these accounts. 

It’s important to note that 401(k) accounts can be consolidated down into an IRA if you’re no longer working or aged 59 ½ or older.

Savings Account

Savings accounts may not have high interest rates, but they’re a good option to have access to cash when you need it. These accounts lack the great returns you’ll see with other accounts, but you can easily setup what is known as a TOD, which is a transfer on death, or POD (payable on death).

When you set these options on your savings or options, the account is able to avoid probate, which your beneficiaries will thank you for.

You can also setup multiple beneficiaries because what happens if your main beneficiary dies before you do? 

Brokerage Accounts

Setting up a brokerage account properly makes it much easier to separate assets even when compared to a will. The brokerage account may have a beneficiary designation, POD or TOD, that you can designate.

You would name someone to your account.

When you die, all the person has to do is file a claim and provide proof of who they are. This is much easier for the beneficiary than having to deal with probate or the courts.

Life Insurance

A life insurance account is one of the best accounts that you can leave to an heir. Why? These accounts are paid tax-free, so beneficiaries never have to worry about advanced tax strategies to keep more money in the estate.

Roth IRA

Roth IRAs are tax-free, too. The beneficiary is required to take the money out within a ten-year period.

Assigning Primary, Contingent and Further Benefits

Retirement planning should include knowing who you want to assign as your beneficiaries. The standard beneficiary documentation will include:

  • Primary beneficiary, which would be your first choice of a beneficiary. This may be your wife, child or anyone you like.
  • Contingent beneficiary or beneficiaries, which are the person(s) that you’ll want to leave your accounts to if the primary beneficiary is deceased at the time the document is executed.

We recommend that if you have a second contingent, you’ll want to add them as well. A good example of this would be your grandchildren, which would be second contingents. You can have percentages assigned to all of the grandchildren, and this is actually tax advantageous in most cases.

An example of the tax advantages:

  • You want to leave money to one grandchild to pay for their schooling.
  • The child’s parent is wealthy.
  • You might think that leaving the account to your child and allowing them to pay for schooling is beneficial, but it is not.

If you list the grandchildren, the parent can use “disclaiming,” which would help them not go into another tax rate. The grandchild will have to take the money out, allowing them to, in most cases, pay far less taxes if the grandchildren are listed.

You need to make sure that the grandchild is listed as a second contingent so that the money can be passed to them rather than their parents through disclaiming.

This is a tactic that is primarily used for a 401(k) or an IRA.

Per Stirpes and Per Capita

When you fill out a beneficiary form, you’ll often have to choose by per stirpes and per capita. If you don’t choose one, it will normally default to per capita. What does this mean? This means that if you put down three beneficiaries, and one of your children dies, their portion would be dispersed to the two remaining children.

This means that the two beneficiaries would now receive 50% of the account.

If you want the money to go to that child’s grandchildren, you will put “per stirpes” next to your child’s name. This would disperse the funds to your child’s children evenly instead of the money going to only your children.

These are some of the best retirement planning methods that you can use to leave money to the next generation. Even if you don’t want to plan your retirement around the next generation, these tactics can help keep money in your estate.

If you want more information about preparing your finances for the future or retirement, check out our complimentary Master Class, ‘3 Steps to Secure Your Retirement’. 

In this class, we teach you the steps you need to take to secure your dream retirement. Get the complimentary Master Class here.

Click here to schedule a free, complimentary call with us to discuss how you can leave money to the next generation.