Should I Consider an Annuity In My Financial Plan?

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

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

Understanding That an Annuity is an Insurance Product

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

You can find rating systems for each company.

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

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

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

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

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

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

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

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

Tax Benefits of an Annuity

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

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

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

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

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

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

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

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

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

Why Should You Use an Annuity Retirement?

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

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

Income Planning

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

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

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

Why?

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

Safety Alternative

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

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

Tax Deferment

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

How an Income Rider Works

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

  • Account value
  • Income account value

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

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

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

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

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

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

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

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The Market Is High. Should I Sell?

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

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

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

The market has to come down eventually, right?

Well, not necessarily.

The Market is High: Should I Get Out?

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

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

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

What we do is:

  • Analyze the data
  • Make informed decisions

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

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

If the market crashes, the person holds.

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

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

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

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

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

What Happened in 2020?

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

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

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

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

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

Emotional Toll on Retirees

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

Our active approach uses numbers rather than emotion to invest.

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

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

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

So, Should You Sell in a High Market?

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

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

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

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

IRAs – Required Minimum Distributions

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

Tax-deferred vehicles are:

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

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

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

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

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

Understanding When You Must Take RMDs

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

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

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

How RMDs are Calculated

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

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

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

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

  • $19,531.25 ($500,000 / 25.6)

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

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

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

What to Do If You Have Multiple Tax-deferred Accounts

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

What Happens If You Miss an RMD?

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

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

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

1. Roth Conversions

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

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

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

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

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

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

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

3. Qualified Charitable Distribution

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

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

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

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

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

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

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

Inflation and Your Retirement

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

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

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

What is Inflation?

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

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

  • Groceries
  • Automobiles
  • Gas 
  • Airplane tickets

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

However, manufacturers increased prices because the demand still existed.

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

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

When deflation occurs, your purchasing power increases. 

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

Overview of the Inflation Over the Long-Term

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

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

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

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

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

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

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

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

1. Long-term Fixed Income Investments

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

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

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

2. Risk Management for Your Portfolio

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

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

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

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

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

3. Think About Your Guaranteed Income

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

  • Social Security
  • Pension
  • Etc.

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

Growth buckets can help cover the increase in inflation.

4. Maintain a Good Spending Plan

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

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

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

5. Sit Down with a Financial Professional

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

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

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

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

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

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

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

Resources

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

How To Protect Against Being Scammed

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We were reading an article on MarketWatch titled “Phishing emails, texts and calls—scamming is getting worse, so stay up on the latest cons.” *

The article discusses scammers, and it really hit home. In fact, we were so moved by the article that we want to help others avoid being scammed. The worst thing is trying to secure your retirement and lose it all to someone that scams you.

Unfortunately, scammers are ramping up their efforts, and we don’t want you to be another victim.

Since scammers are becoming so prevalent, we want to walk you through a quick summary of the article and how you can begin protecting yourself.

Quick Overview of MarketWatch’s Article

In the article, the author discusses a woman that fell for a scam that started with a phone call. The woman received a call about her PayPal account being compromised. Of course, the woman is very concerned, and believing that she’s speaking to PayPal, she follows their directions.

To solidify the scam, the scammer took $500 out of the woman’s account to continue through the fraud.

Unfortunately, the directions involve her moving money from her bank account into another account.

You can read the entire story on MarketWatch, but we want to discuss how you could avoid a similar scam from happening to you.

How the Scammer Gained Control of the Situation

First, the scammer calls the woman and frightens her with the idea that she’s been a victim of a scam. Then, trusting the person on the phone, she gives the person access to her computer to fix the issue remotely.

The scammer spent two and a half hours on the woman’s computer, so a lot of damage was done.

Within these two hours, the scammer was able to gain access to the woman’s:

  • Bank account
  • Social security number
  • Passwords

Plus, these scammers work in teams, so when the woman asked to speak to a manager, there was one to talk to available. The woman is also told to install an app on her phone, which results in more money being taken from her account.

The woman realized that the scam was very real when the person on the phone asked her to go to Walmart to purchase a gift card.

Sadly, the woman felt very violated and even stupid for falling victim to the scam. However, a lot of people fall victim to scammers every day because they seem so authentic.

We’ve experienced a lot of scammers on our end, too.

Our Experience With Scammers

Scammers often contact us from the “IRS” stating that we didn’t submit a document, and they need to verify this information immediately. Of course, the documents must be uploaded within 24 hours.

The document in question is your social security information.

As a rule of thumb, the IRS will never, ever call you. So if you receive a call from the IRS, hang up because it’s not them.

Scammers are also trying to impersonate Amazon. The scammer will text you a tracking number of a package from Amazon, and when you click on the link, it will direct you to a fake page trying to steal your credentials.

How Prevalent These Types of Scams Are 

If you’re thinking that very few people are being scammed, you’re wrong. We want to share a few statistics with you on just how often scammers are upending people’s lives.

  • The FTC states they’ve received 2,1 million fraud reports in 2020, up 24% from 2019
  • Losses due to scams totaled $3.3 billion in 2020
  • 67,000 tax-related scams occurred in the first half of 2021
  • The FBI states that there was a 69% increase in cyber crimes between 2019 and 2020

Why Scams are Growing

The number of scams is growing due to the unique position people are in because of the pandemic. In addition, a large segment of the population was forced to adopt technology at-home, opening the doors to scammers.

Sadly, people 70 and 80 years old are the primary victims of these crimes.

Due to people being ashamed, only 25% of victims will report being scammed. Today, we’re going to help you avoid being scammed from the start so that you don’t have to become a victim or feel ashamed or “stupid.”

How to Avoid Being Scammed

  1. Never click on an email link or a link in a text unless you’re expecting it. Slow down and never click on the link unless you know the person and are waiting for them to send you something. We take this a step further and verify the person’s email address before opening any links.
  2. Before responding to an email from a company, go to the business’ website and access your account, or call the company yourself. For example, the woman in the example above, should have contacted PayPal to verify that something was fishy with her account.
  3. If you get a call asking for financial information, stop and wait a minute. Scammers want to frighten you. Stop. Hang up and do your own research. Of course, you can always call the electric company, bank or whoever the person is trying to impersonate to verify these claims.
  4. Sign up for fraud alerts on your credit cards. Lenders will monitor credit card accounts and alert you if something is wrong. Sign up for these alerts because they can bring you a lot of peace of mind.

What to Do If You’ve Been Scammed

  1. Immediately close or put holds on bank or retail accounts.
  2. Notify all three credit bureaus of the scam. They’ll have best practices for you to follow, too.
  3. Change all of your passwords for your email, bank, credit card and others.
  4. Remain vigilant. Scammers will continue trying to attack you if you were a victim in the past.
  5. Contact the authorities. You can call the police and the FBI to report the incident.

Whether you lose $1 or $100,000, it’s never a good feeling. But, if you follow the advice above, you’ll be better prepared to fight off scams.

Are you interested in listening to other content that we provide?

Click here to sign up for our podcast – it’s 100% free.

*-https://www.marketwatch.com/story/phishing-emails-texts-and-callsscamming-is-getting-worse-so-stay-up-on-the-latest-cons-11633108132

4 Questions to Help Your Income Plan

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

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

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

4 Questions to Build Your Retirement Income Plan

1. How Long Should I Expect to Live?

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

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

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

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

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

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

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

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

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

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

For example:

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

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

We use special software that estimates inflation for our clients.

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

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

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

3. When Should I Retire?

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

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

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

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

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

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

4. Where Should I Place My Assets?

You need two different types of money:

  1. Income-producing
  2. Growth and income

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

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

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

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

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

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

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

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

4 Steps to a Healthy, Financially Secure Retirement

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

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

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

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

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

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

People often push off their financial checkups because:

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

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

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

Step 2: List Your Objectives

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

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

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

Step 3: Ask Questions

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

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

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

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

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

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

Additionally, get everything in writing, including:

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

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

Bonus Step: Credential Certification vs. Title

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

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

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

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

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

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

Protect Against Identity Theft and Fraud

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Did you know that over 33% of adults in the US have already experienced identity theft? It’s a scary thought. When you work diligently to pay your bills and eliminate debt, the last thing you want to do is deal with identity theft.

We’re not trying to scare you by any means, but it’s more important than ever to protect against identity theft on the Internet-connected world that we live in.

Scammers are becoming more sophisticated, but you can still take steps to reduce your risk of theft and fraud. As financial advisors who work on retirement planning on a daily basis, we would like to share with you two stories before we go through our checklist on how to protect against identity theft and fraud.

Story 1: Fraudsters are Nearby

One time, we received an email from one of our clients asking us to transfer money to a particular account. We knew this account, but we called the client before a transfer because that’s an additional step we always take for our clients.

We never transfer money because of an email that we receive.

The client was happy we did call because someone hacked their email and found out their:

  • Mortgage information
  • Retirement information
  • Insurances
  • Etc.

Emails were sent to the numerous contacts in the person’s list trying to steal their identity. The client opened an investigation with authorities, and the culprit was someone living on their street who went through their trash to steal their identity.

Story 2: Duke Energy Call

In our second story, a scammer came close to tricking us, and it began with a phone call. The call came from “Duke Energy,” my energy provider. The provider told me that my electricity would be turned off within an hour.

Being out on vacation at the time, I was almost tricked until asking the person on the other end of the line a question or two.

Auto-pay is set up on my account, and I hung up and called Duke Energy. The scammer hoped that I would provide a credit card to avoid getting my electricity turned off.

Common Mistakes People Make That Increase the Risk of Cyber Threats

Cyber threats are constantly evolving, but the biggest ones that we’re seeing right now are:

Using the Same Password Across All Sites

A basic yet vital way to protect your identity and accounts is to use different passwords. According to security experts, 91% of people know that using the same password on websites is a security risk, yet 59% of people use the same password on all websites.

All it takes is a single security breach to gain access to all of your accounts.

Just think about it. If you use the same password and email for Twitter as you do for all of your other accounts, a single breach could lead to others gaining access to your:

  • Email account
  • Bank accounts
  • Retirement accounts
  • Social media
  • Etc.

You can use password lockers that can help you create and store unique passwords for all sites with high-end encryption, too.

Not Using Two-Factor Authentication

When you log into your account, two-factor authentication can add an additional security measure to your account. For example, when you log into your bank account, you enter your username and password, and then you will have to:

  • Access an email for a code, or
  • Access a text message, or
  • Get the code via phone

If you set up two-factor authentication, if it’s available, this will provide you with an additional layer of security that makes your account safer.

Sharing Your Password with Others

Do you share your password with other people? If so, you’re increasing your risks of fraud drastically. The individual may not be personally responsible for the fraud, but what if their device has malware that steals your account information?

Failing to Update Your Devices and Software

Your device, whether it’s a personal computer, tablet, smartphone or any other device, may be a weak point in your overall security. For example, a security hole on iPhone was recently discovered that could allow hackers to access the phone’s contents.

Updating the operating system fixes the issue, but a lot of people skip these vital updates.

You want to be sure that you update your:

  • Operating system
  • Web browser
  • Anti-virus
  • Etc.

Anti-virus updates are crucial because they work to prevent breaches in real-time.

Opening Unsolicited Emails

Email is one of the most common ways that theft occurs. If you receive an unsolicited email or something doesn’t seem right with an email, delete it. Following a link or downloading an attachment in the mail can lead to you unknowingly giving a scammer access to your computer.

Hackers can spoof an email so that it looks like it’s been sent from Amazon, Facebook, friends or others.

Remain diligent with your email and even texts because scammers routinely send messages with:

  • Tracking links
  • Download links
  • Etc.

If something doesn’t seem right, delete the mail, or call the sender to verify that it’s really them.

Being Too Open on Social Media

People share far too much information on Facebook, Instagram, Twitter and other social media accounts. When you have the following information out there, hackers will use this information to gain access to your accounts, such as your:

  • Email
  • Birthday
  • Name
  • Address

Hackers can use this information to answer security questions on certain accounts to gain access to them. For example, a person posts a picture of their first-grade class and on their bank account, the “Name of Your Elementary School” is your security question.

It’s easy for a hacker to look at the photo, do some digging and find the school’s name.

For your own safety and security, don’t post too much personal information on social media accounts.

Opening Emails from Friends and Family

Friends and family are being used to trick people into downloading files, sending money or following links. Just imagine that a close friend sends an email asking to donate to their fundraiser, and you enter in all of your information to help this friend.

But your friend’s email was hacked, and you only find out months later.

If someone doesn’t email you often or even if they do, there’s no harm in calling them to ensure that the mail is legitimate.

We’re also seeing hackers do this to elderly individuals. The hacker will message them saying that their grandchild needs money or something similar because they found the child’s name on their social media accounts.

In short, don’t send money or follow instructions through email unless you’re 100% positive that the sender is not scamming you.

Not Paying Attention to Breaches or Hacks

Since you use a variety of sites and platforms, one may be hacked. For example, if you have a Chase account and a breach just occurred, you can request that your account be frozen. You should be taking a proactive approach to freeze your accounts and get ahead of potential identity theft.

Not Changing Your Password Periodically

Using the last point, if a breach occurs and someone gains access to your password, you may circumvent the risk due to your password changing habits. Security experts suggest changing passwords every 60 to 90 days.

Following this schedule will help you minimize your risks of someone stealing and using your password.

Common Phone Scams We’re Seeing Right Now

Phone scams are growing in popularity, too. A few of the scams to be cautious of are:

  1. The Social Security Administration will never give you a call. It’s a scam.
  2. The IRS will never give you a call. It’s a scam.
  3. Someone calls you saying that you won money. Probably not. It’s a scam.
  4. Microsoft calls and says that something’s wrong with your computer. It’s a scam.
  5. Credit card companies call and say they’ve detected fraud. Maybe. But hang up and call the number on the back of your card to make sure it’s not a scam.

We just want you to be careful to protect your identity. We’re not trying to scare you. Rather, we want you to be prepared and know how to keep your identity safe.

If you want to grab our free checklist that covers all these points, simply call our office at 919-787-8866 and ask for Laura or Morgan. They’ll send out the checklist for you to follow to ensure you’re taking proactive steps to keep your identity safe.

Want to learn more great information from us? We have a podcast where we discuss great topics, just like this, twice a week.

Click here to sign up for our podcast.

8 Mistakes to Avoid When Choosing an Advisor

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

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

And there are a lot of them.

8 Mistakes to Avoid When Choosing an Advisor

1. Working with an Advisor Without a Written Contract

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

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

The contract should include:

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

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

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

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

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

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

3. Working with an Insurance-Only Advisor

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

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

4. Working with a Stock Market-Only Advisor

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

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

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

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

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

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

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

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

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

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

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

7. Doing It All Yourself

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

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

8. Choosing an Advisor Based on Only Their Fee

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

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

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

Low fees may mean:

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

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

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

Want to hear more, great advice from us?

Click here to join our podcast, where we upload two new talks each week.

10 Step Layoff Survival Guide

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Whether you’re nearing retirement or are decades away, one of the scariest situations to be in is being part of a layoff. In March 2020, 8.8% of the workforce was laid off, but this figure was down to less than 4% in August 2021.

If you or someone that you know sees the writing on the wall at their job, we’re going to cover a 10-step survival guide if you are laid off.

Whether the layoff means early retirement for you or having to find a new job, this guide can help you navigate this murky period in your career.

Step 1: Keep Calm and Take It One Step at a Time

It sounds easier than it is, but you need to keep calm and not stress too much. How? It’s difficult. First, just know that you do have options out there. You need to sit down and think about what your options are.

Also, you want to leave your employer on good terms and not ruin future potential employment if/when the employer starts hiring again.

Step 2: Determine Your Living Expenses

What are your actual living expenses? Many people don’t know. Take the time to come up with a spending plan. Look through the following:

  • Income coming in per month
  • Contributions to your retirement planning
  • Expenses going out

Let’s assume that you have $7,000 coming in every month. Work through your expenses, investments and others to calculate the actual expenses you have every month.

Knowing your living expenses will be essential for you during a layoff so that you can learn where your money is really going.

Step 3: Knowing What You Have

What assets do you have to work with now that there’s no money coming in? Assets will include:

  • Bank accounts
  • Savings accounts
  • Brokerage accounts
  • IRA / 401(k)
  • Home equity line of credit
  • Spousal income

These assets can be tapped into to help you survive a layoff. For a 401(k), if you’re 55 or older, you can tap into this asset to continue paying your living expenses.

Step 4: Add in Severance Pay

Some people receive severance pay, and others will not receive any form of payment. If you’re laid off and severance pay is offered, it may be worthwhile to take some this year and the remaining next year.

If you’re accepting severance packages late in the year, it may make sense to ask if you can take most of the package next year.

Why?

Taxes. If you receive a 12-month severance in November, you’re likely going into a new tax bracket and will have to pay more money to the IRS. Never say no to a severance package, but always ask if you can split it up in these scenarios.

If it’s the beginning of the year, you can just take the package upfront without much concern.

Step 5: Understand Unemployment Benefits

Unemployment is likely available to you, so it’s important to understand what level of income is available to you through these benefits. Often, you’ll receive 40% – 45% of your weekly pay from these benefits.

Learn the unemployment benefits, how to apply and how long you’ll receive them.

Step 6: Learn About Your Health Insurance Options

Health insurance is going to be a major concern. Most companies offer COBRA benefits that allow you to keep your plan for a certain amount of time. You may be able to tap into a healthcare savings account to help pay for the COBRA premiums.

When COBRA benefits run out, then you need to go out and shop for health insurance, which can be very expensive.

We have some clients paying $1,000 a month in health insurance for each person. So, it’s important to learn your options early on and take COBRA to lower these costs.

Step 7: Get a New Social Security Estimate

You’ve paid into Social Security, and you can start taking out Social Security as early as 62, although at a lower rate. First, you should go to SSA.gov, create an account and then ask for an estimate on the amount of money you’ll receive.

It’s important to think this decision through because it is really a final choice.

Taking your benefits early means less money overall for the remainder of your retirement. Sit down, review the numbers and even speak to someone specializing in Social Security to work through these numbers with you.

Step 8: Consider a Lump Sum Payment

If you’re privileged enough to have a pension, you may want to consider a lump sum payment. Pensions will require you to wait to a certain age before you can take monthly draws from the account.

However, some pensions will allow you to take a lump-sum payment that can be rolled into your IRA and used and invested as you see fit.

It’s important to really crunch the numbers here to see what money you’ll lose out on if you take an upfront payment. Working with a financial advisor can be very helpful to ensure that you’re not losing out on a significant amount of money by taking a lump sum.

Step 9: Determine If You Want to Go Back to Work

If you’re part of a layoff, you need to consider whether you want to go back to work. People who are close to retirement may find that they have enough money in their accounts to retire comfortably.

You need to do your calculations, determine whether you have enough money, and then decide whether you can retire now.

Work the numbers and see if retirement is an option for you. If you can, it’s up to you to determine whether you want to retire.

Step 10: Seek Professional Guidance

This point may seem self-serving to some of our readers, but it’s not meant to be that way. We always recommend seeking professional guidance during a layoff because financial professionals can help you better understand:

  • Your income
  • Your expenses
  • What decisions you can confidently make

When a financial advisor outlines what you can and cannot do based on your expenses and income, it provides peace of mind when taking your next steps forward.

Working through these ten steps can help you make sense of a layoff and what you need to do next.

Click here to sign up for our 4 Steps to Secure Your Retirement Course.

Chess Griffin – Special Needs Trust – What You Need to Know

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This week, we’re going to be talking to someone who we’ve had the pleasure of having on our podcast multiple times: estate planning attorney Chess Griffin. We’ll be discussing the very important topic of special needs trusts. If you haven’t heard the podcast yet, we encourage you to listen to it yourself.

Click here to listen to our podcast on your favorite platform.

But, as always, we’re going to be covering all the fine details of the podcast in this post so that you have quick access to this information any time that you like.

What are Special Needs Trusts?

A special needs trust, often called a supplemental needs trust, is generally created when a person has a family member who is on an assistance program, such as Social Security Disability or Medicaid. The trust allows you to provide for this family member without disqualifying them from these programs.

Oftentimes, clients want to create a trust when their child has a disability.

How Do Special Needs Trusts Actually Work?

For example, let’s look at a standard situation where a person has adult children who are all mature and doing fine. Often times, a trust would be created for these children that allows them to take money out of the trust at a specific time.

Trusts can be created to allow these children to take money from the trust at age 30, or any age that you desire.

However, when dealing with a child who has special needs, you may not want them to access these funds freely. When a person can draw money from a trust, Medicaid or disability will look at a person’s available assets.

If a trust is an available resource, the person may become ineligible for some of these special need’s programs, such as Medicaid. A special needs trust can be drafted in such a way that it allows the trustee to take money out of the account to fill supplemental needs.

Beneficiaries of a special needs trust cannot draw from these accounts, but the trustee can have broad power to access the funds for the beneficiary’s supplemental needs.

Special Needs Trust for Minors

If a person has special needs as a minor, you can still create a supplemental needs trust to safeguard them in the event that you die prior to your child reaching adulthood. What many people do is create trusts for their children at a very young age.

What you can do, and it’s quite common, is:

  • Create a regular special needs trust for your child
  • Add specific language into the trust in the event the child does become special needs

Your child may be perfectly healthy now, but if they become disabled in the future, the right language in a trust can protect your child’s best interests.

When we use the term “special needs,” it’s also important to understand that this term is usually connected to a person receiving some form of government assistance. However, while many people that are beneficiaries of these trusts are on government programs, it’s not always the reason for creating these types of trusts.

Chess has drafted numerous special needs trusts where the individual may never apply for Social Security disability or Medicaid. These trusts are often drafted “just in case.” The beneficiary may never qualify for these programs, but their parents create a trust just in case they do qualify at some point in the future.

A child’s condition can progress, but if the child can live independently and may never qualify for benefits, the trustee can then distribute the money to them in the future.

Special needs trusts cover the what ifs of:

  • What if the child’s condition progresses and they become eligible for these programs?
  • What if the condition never progresses?

Since these trusts are for special needs, they’re often created with the idea that the parents are deceased when the funds are distributed. A third-party often becomes a trustee of the account. When the trust is created, you can create an outline of the things to keep in mind if something happens to the parent.

The trustee almost becomes a guardian to the individual, and these directions and guidance can help the trustee act in the best interests of the beneficiary (whether they’re 10 or 60).

How are Special Needs Trusts Funded?

Special needs trusts can be funded with cash, but can they be funded with life insurance? Yes. A lot of these funds are funded with money from life insurance. The one asset that is never a good idea to help fund a special needs trust is a retirement account.

Due to the required minimum distributions of retirement accounts, the special needs trust can be very complex.

Is the Trustee Responsible for the Trust’s Investment?

Yes. The trustee has a fiduciary duty to manage the trust’s assets. Trustees can seek out professionals to help them with the investment side of the trust so that the trust can continue to grow.

Where are Checks and Balances for a Special Needs Trust?

A beneficiary may not be mentally able to know what checks and balances are for their trust. The trustee has a lot of power, and it’s possible to abuse this power. Estate agencies are often in charge of these assets, and they have a legal right to act in the best interest of the beneficiary.

However, the reality is that there’s little oversight of the trustee.

There are certainly times when the trustee uses the funds inappropriately. When drafting the trust, it’s so important to choose the trustee properly so that you reduce the risk of the fund’s misuse.

Can a Person Create Their Own Special Needs Trust?

A third-party trust, when it’s created for someone else, is very common. But what happens if you have a condition and are concerned that you may be mentally or physically unable to manage your own money and assets?

Can you create a special needs trust for yourself?

Yes, but it’s very complex and complicated. Complexity occurs when a first-party trust is created because it’s a very murky area of law. Medicaid looks at an applicant’s assets and transfers.

Medicaid will look at transfers, and the lookback period is often five years.

So, the issue exists when you’ve created a trust for yourself in the last five years, transferred your assets into the trust and applied for one of these programs. Medicaid, for example, doesn’t want recipients to hide their money to leverage the system.

An expert would be needed to draft one of these first-person accounts because it can be difficult to meet eligibility requirements of special needs programs.

Special needs trusts are an important part of estate planning, and it’s important for you to think about creating trusts for family members who may need supplemental help in the future. These trusts can protect assets while ensuring that the beneficiary can still leverage important programs with strict eligibility requirements.

Click here to listen to our podcast on your favorite platform.

Fees, Commissions, and Being a Fiduciary

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

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

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

What are Your Fees and Commissions?

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

For you, lower fees are always a good thing.

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

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

It’s essential to:

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

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

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

Commissions

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

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

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

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

Fees

Advisors can charge fees in a variety of ways:

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

Advisors may also charge a combination of the fees above. 

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

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

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

Are You a Fiduciary?

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

What is a Fiduciary?

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

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

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

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

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

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

Legal vs. Assumed Fiduciary

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

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

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

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

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

Fiduciaries Must Disclose Things That May Be a Conflict of Interest

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

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

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

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

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

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What Should You Consider If Your Spouse Passes Away?

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

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

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

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

A few of the things to consider are:

6 Things to Consider If Your Spouse Passes Away

1. Cash Flow: From Two Incomes to One

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

The main issue is cash flow because:

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

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

2. Expenses: The Key to Life Without a Spouse

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

  • Two sources of income
  • Two sources of expenses

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

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

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

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

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

3. Estate Settlement Issues

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

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

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

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

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

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

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

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

4. Insurance Accounts and Benefits

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

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

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

Insurance and death benefits may come from:

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

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

5. Taxes

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

Your house may generate a gain if you sell it.

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

6. Assets and Investments

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

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

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

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

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

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

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

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

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

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

4 Costly Misconceptions About Retirement Planning

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

4 Retirement Planning Misconceptions That Need to be Put to Rest

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

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

Why?

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

  • Financial advisors
  • Financial planners
  • Retirement planners

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

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

2. The Lowest Fees are the Best Solution

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

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

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

Low-cost advisors may not:

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

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

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

We actively update portfolios to mitigate these potential losses.

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

A good option is to:

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

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

3. All Credentials or Certifications are the Same

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

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

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

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

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

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

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

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

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

This isn’t necessarily true.

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

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

Independent financial planners are free to:

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

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

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

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

College Planning Using a 529 Plan

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

What is a College 529 Plan?

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

Why would you want to invest in a 529 plan?

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

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

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

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

For example:

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

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

The $30,000 growth is tax-free.

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

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

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

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

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

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

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

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

Which Investment Options Does a 529 Offer?

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

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

Common Myths and Questions Surrounding 529 College Savings Accounts

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

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

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

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

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

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

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

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

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

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

529 Accounts Will Eventually Disappear

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

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

You Can’t Change Plans

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

How to Setup a 529 Plan

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

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

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

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

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

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