Objective information about financial planning, investments, and retirement plans

Stock Market Highs and Your Retirement

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Today both the S&P 500 Index and the Dow Jones Industrial Average hit all-time highs. This comes less than a month after a 610 point drop in the Dow in the wake of the Brexit, the vote taken in U.K. where they decided to leave the European Union.

Difference Between Stocks and Bonds

Over the past 15 + years we’ve seen two market peaks followed by pronounced market drops.  The S&P 500 peaked at 1,527 on May 24, 2000 and then dropped 49% until it bottomed out at 777 on October 9, 2002.  The Dot Com Bubble and the tragedy of September 11 all contributed.

The S&P 500 rose to a high of 1,565 on October 9, 2007 only to fall 57% to a low of 677 on March 9, 2009 in the wake of the Financial Crisis. Since then the market has rallied with the S&P closing at a record 2,152 today. As someone saving for retirement what should you do at this point?

Review and rebalance 

During the last market decline there were many stories about how our 401(k) accounts had become “201(k)s.” The PBS Frontline special The Retirement Gamble put much of the blame on Wall Street and they are right to an extent, especially as it pertains to the overall market drop.

However, some of the folks who experienced losses well in excess of the market averages were victims of their own over allocation to stocks. This might have been their own doing or the result of poor financial advice.

This is the time to review your portfolio allocation and rebalance if needed.  For example your plan might call for a 60% allocation to stocks but with the gains that stocks have experienced you might now be at 70% or more.  This is great as long as the market continues to rise, but you at increased risk should the market head down.  It may be time to consider paring equities back and to implement a strategy for doing this.

Financial Planning is vital

If you don’t have a financial plan in place, or if the last one you’ve done is old and outdated, this is a great time to have one done. Do it yourself if you’re comfortable or hire a fee-only financial advisor to help you.

If you have a financial plan this is a great time to review it and see where you are relative to your goals.  Has the market rally accelerated the amount you’ve accumulated for retirement relative to where you had thought you’d be at this point? If so this is a good time to revisit your asset allocation and perhaps reduce your overall risk.

Learn from the past 

It is said that fear and greed are the two main drivers of the stock market. Some of the experts on shows like CNBC seem to feel that the market still has a ways to run and might even be undervalued. Maybe they’re right. However don’t get carried away and let greed guide your decisions.

Manage your portfolio with an eye towards downside risk. This doesn’t mean the markets won’t keep going up or that you should sell everything and go to cash. What it does mean is that you need to use your good common sense and keep your portfolio allocated in a fashion that is consistent with your retirement goals, your time horizon and your risk tolerance.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner . Please check out our Resources page for links to some additional tools and services that might be beneficial to you. 

Photo credit:  Phillip Taylor PT

Is a $100,000 Per Year Retirement Doable?

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Is a $100,000 a Year Retirement Doable?

A 2013 New York Times article discussed that a $1 million retirement nest egg isn’t what it used to be.  While this is more than 90% of U.S. retirees have amassed, $1 million doesn’t go as far as you might think.  That said I wanted to take a look at what it takes to provide $100,000 income annually during retirement.

The 4% rule 

The 4% rule says that a retiree can safely withdraw 4% of their nest egg during retirement and assume that their money will last 30 years.  This very useful rule of thumb was developed by fee-only financial planning superstar Bill Bengen.

Like any rule of thumb it is just that, an estimating tool.  At you own peril do not depend on this rule, do a real financial plan for your retirement.

Using the 4% rule as a quick “back of the napkin” estimating tool let’s see how someone with a $1 million combined in their 401(k)s and some IRAs can hit $100,000 (gross before any taxes are paid). Note this is not to say that everyone needs to spend $100,000 or any particular amount during their retirement, but rather this example is simply meant to illustrate the math involved.

Doing the math 

The $1 million in the 401(k)s and IRAs will yield $40,000 per year using the 4% rule.  This leaves a shortfall of $60,000 per year.

A husband and wife who both worked might have Social Security payments due them starting at say a combined $40,000 per year.

The shortfall is now down to $20,000

Source of funds

Annual income

Retirement account withdrawals

$40,000

Social Security

$40,000

Need

$100,000

Shortfall

$20,000

 

Closing the income gap 

In our hypothetical situation the couple has a $20,000 per year gap between what their retirement accounts and Social Security can be expected to provide.  Here are some ways this gap can be closed:

  • If they have significant assets outside of their retirement accounts, these funds can be tapped.
  • Perhaps they have one or more pensions in which they have a vested benefit.
  • They may have stock options or restricted stock units that can be converted to cash from their employers.
  • This might be a good time to look at downsizing their home and applying any excess cash from the transaction to their retirement.
  • If they were business owners, they might realize some value from the sale of the business as they retire.
  • If realistic perhaps retirement can be delayed for several years.  This allows the couple to not only accumulate a bit more for retirement but it also delays the need to tap into their retirement accounts and builds up their Social Security benefit a bit longer.
  • It might be feasible to work full or part-time during the early years of retirement.  Depending upon one’s expertise there may be consulting opportunities related to your former employment field or perhaps you can start a business based upon an interest or a hobby.

Things to beware of in trying to boost your nest egg 

The scenario outlined above is hypothetical but very common.  As far as retirement goes I think financial journalist and author Jon Chevreau has the right idea:  Forget Retirement Seek Financial Independence.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out our resources page as well.  

Photo credit:  Flickr

Social Security-The End of the File and Suspend Couples Strategy

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The big news in the world of retirement planning is end of a lucrative couples Social Security claiming strategy, file and suspend with a restricted application. The ability take advantage of this lucrative option comes to an end as of April 30, 2016 thanks to the passage of the Bipartisan Budget Bill of 2015.

Social Security-The End of the File and Suspend Couples Strategy

What is the file and suspend strategy?

Under this strategy spouse A upon reaching their full retirement age (FRA) would file for their benefit and then suspend it. They would accrue delayed credits at 8% per year out to age 70 (or sooner) at which time they would resume taking their benefit.

Once spouse B reached their FRA they would then file a restricted application for benefits in order to receive a spousal benefit based upon spouse A’s earnings record. Their own benefit would continue to accrue out until age 70 at which time they would switch to their own benefit if it was higher than the spousal benefit or continue to take the spousal benefit if it was larger.

In many cases this might add an additional $60,000 in benefits to the couple over the four years between spouse B’s FRA and age 70.

There are numerous reasons to do this and it has become a popular couples claiming strategy in recent years.

This option ends as of April 30, 2016.

Who can still take advantage? 

Couples who have executed this strategy are fine and there will be no changes. Couples who are eligible to execute this strategy prior to April 30, 2016 will still be able to.

What are the implications? 

Couples who might have factored this into their retirement strategy will need to rethink their plans and their Social Security claiming strategy.

Those who advise clients nearing retirement and those who provide Social Security tools to the financial advisors will need to rethink their advice and redo some of these tools. Websites offering Social Security calculators will need to redo them as well.

If this change impacts your situation I’d urge you to consult with a knowledgeable financial advisor.

There is much more detail on this change and much has been much written on this topic by a lot of folks whose opinions and knowledge I respect. Below are some excellent articles to check out to learn more about this.

8 Questions About Social Security Claiming Strategies by Mark Miller

The Death of File & Suspend and Restricted Application by Jim Blankenship

Congress kills Social Security claiming loopholes by Alice Munnell

Social Security changes will hit couples, divorced women hard by Robert Powell

Navigating The Effective Date Deadlines For The New File-And-Suspend And Restricted Application Rules by Michael Kitces 

Congress Eliminates Two Popular (and Profitable) Social Security Claiming Strategies by Tim Mauer 

New Social Security Rules: What You Need to Know by Mike Piper 

Check out these two books on Amazon by Jim Blankenship and Mike Piper which have both been updated to reflect the new rules (note these are affiliate links and I earn a small fee if you purchase at no extra cost to you)

In addition here are two pieces on the topic that I recently wrote for Investopedia:

Social Security File and Suspend to End: How to Adjust

Social Security File and Suspend Claiming Strategy is Ending: Now What?

The Bottom Line 

The popular couples Social Security claiming strategy, file and suspend with a restricted application is coming to an end as of April 30, 2016. This is a game-changer for a lot of couples. This may be the time to seek out a knowledgeable financial advisor to advise you. Also stay tuned as there will undoubtedly be much more written on this topic moving forward.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email.

Discover the Secret to Living Tax-Free in Retirement

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On those rare occasions that I develop writer’s block in terms of what to write about here the financial services industry seems to bail me out. Case in point the invitation to a “Private Taxation Workshop” (versus just a plain old seminar) I recently received in the mail. The title of the seminar on the invitation was title I used for this article.

Think about the words “secret to living tax-free in retirement” and while doing so make sure you know where your wallet is.

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Look I’m not saying the accounting firm who is conducting the session in conjunction with a financial services firm is anything but above-board but when I hear words like living tax-free in retirement my first thought is that there will be someone telling you that purchasing the cash value life insurance policy or annuity product being peddled is the answer to your retirement anxiety.

To top this off the seminar is being held at a park district facility, not at a restaurant. In other words they aren’t even providing dinner. Those of you who are regular readers of The Chicago Financial Planner know that I do not hold the sponsors of these sessions in high regard. (Please read Investing Seminars – Should You Attend? and Should You Accept That Estate Planning Seminar Invitation? )

How to legally be in the 0% tax-bracket for any income level

This is one of the bullet points listed under the items they will be discussing at the session. Come on, really? If it were that easy wouldn’t everyone be doing it?

Again I’m guessing that there is some sort of life insurance or annuity product that will be promoted. Note nothing will be sold at the session (it says so right on the invitation) but you can be sure that if you schedule a follow-up session the hard-sell with be there right after the hand-shake. In fact you can count on being given the hard-sell to schedule a follow-up session.

The most overlooked strategy for creating tax-free income from your taxable investments

Another bullet point on topics that will be covered. This sounds great! Wow!

OK back to reality. Remember the adage if it sounds too good to be true it probably is? Well this sounds like it fits.

Again I have no idea what they will be saying but if this was some super-secret sophisticated tax strategy would they be sharing it with a group of non-screened attendees in a park district building for free?

The Bottom Line

I am not saying anyone is doing anything fraudulent, illegal or untoward. What I am saying is that this appears to be nothing but a thinly veiled sales pitch by an accounting firm and a financial services firm to pique your interest and to ultimately sell you some sort of life insurance policy, annuity or some other financial product with hefty commissions attached. I’m guessing the accounting firm has some arrangement to realize a portion of the product sales arising from session attendees.

I’m not against learning and improving your financial knowledge. In fact that’s why I started this blog and why I write for Investopedia, Go Banking Rates and elsewhere. If you go to one of these seminars go with a very skeptical attitude, listen hard and be non-committal about your interest when they urge you to schedule a follow-up meeting. Go home afterwards and at least research the ideas they are touting and the firms involved. Be a smart consumer of financial products and advice. That is the best way to protect yourself from financial fraud and from buying expensive financial products that serve someone else’s needs better than they serve yours.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out our resources page as well.

Should You Wait Until Age 70 to Collect Social Security?

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This post was written by financial planner Daniel Zajac. 

The decision to start or delay Social Security is a big one, one that may materially impact retirement success or failure. Because it is so important to retirement success, it bothers me when I hear soon-to-be retirees say they are going to take Social Security benefits early.  It also bothers me when they take Social Security benefits at full retirement age without considering the alternatives.

Perplexed? Stay with me.

I know what you’re thinking: “Why wouldn’t a financial advisor be okay with someone taking Social Security benefits at full retirement age?”

It’s not that I’m never okay with starting Social Security early or at full retirement age, I’d just want to make sure they take their benefits for the right reasons and do the right research into all the available options.  When it comes to Social Security benefits, there’s a lot of money to be left on the table if you don’t know what you’re doing (or if you decide to collect at any age, “just because”).

Plan A: Wait Until Age 70 to Collect Social Security Benefits

The Social Security Administration explains that full retirement age “is the age at which a person may first become entitled to full or unreduced retirement benefits.”

(Specifically, your full retirement age depends on your birth year. Someone born in 1940 has a full retirement age of 65 and 6 months. Someone born in 1960 has a full retirement age of 67. Waiting until age 70 to collect Social Security benefits shouldn’t feel like that long of a wait.)

Unfortunately, a little digging is required to realize that even if you take full benefits at your full retirement age, you won’t get the maximum Social Security available per month.  The maximum benefit is reached at age 70.

So why wait until age 70 if you can start earlier in the first place?  You’ll get an 8% increase in your benefits per year.  For example, let’s assume your full retirement age is 66 and you are to receive $2,000 per month.  If you wait until age 67 to collect (1 year), you will receive $2,160 per month, 8% more.

Now, when is the last time you heard of an 8% rate of return? That’s difficult to find. Better yet, it’s government backed. If you think you’re going to live a long time and you don’t need the money right now, “Plan A” may be the right plan for you.

But the 8% isn’t the only reason:

  • Get paid a higher amount for life. Generally speaking, people are living longer.  The longer people live, the more years they spend in retirement and the greater the chance of running out of money.  Optimizing Social Security to produce the highest monthly income could be a prudent, cost of living adjusted hedge against living too long.
  • You can take a spousal benefit. Spouses have more options for collecting Social Security.  If you are married, you can optimize your total income from Social Security by strategically taking a restricted spousal benefit and waiting until age 70 to collect your own benefit.

If you can afford it, waiting until you reach age 70 may be your best option to receive Social Security benefits – your benefits will max out at that age.

Plan B: Take Social Security Benefits at Your Full Retirement Age

Many people go with “Plan B.” They choose to because they don’t want to wait any longer.  They have paid into the system for many years and want to start collecting what is due to them.  However, by starting at full retirement age, they’re losing out on all the benefits I mentioned above. Even still, there are reasons to take Social Security benefits at your full retirement age.

If you’re at full retirement age, are strapped for cash, don’t have any other potential income sources, and are unhealthy, it may be reasonable to start your benefits.

However, before you start collecting at your full retirement age, I advise you to consider the alternatives.  Consider funding your retirement expenses through your savings while deferring Social Security.  Or, if you’re able, work a few years longer.  Retirement doesn’t have to occur at a certain age. Many choose to work well beyond their full retirement age. There may be many potential benefits that come with work, including continued socialization and better health – in some occupations.

For those who plan to work and collect Social Security, your full retirement age is the age at which you can collect your benefit and not receive a reduction for earned income.  Prior to your full retirement age, you may receive a reduction in your benefit if you collect Social Security and work (you can make up to $15,720 per year in 2015 prior to your full retirement age and not receive a reduction of income).

Before you apply for benefits, use the Social Security Retirement Estimator to get a feel for how much you’ll receive.

Plan C: Take Social Security Benefits Before Your Full Retirement Age

When you take Social Security benefits before your full retirement age, your monthly benefit will be reduced. For example, if your full retirement age is 66 – at which you’d receive $1,000 per month – and you choose to start receiving benefits at age 62, your monthly benefit will be reduced by 25% to $750 per month.

That’s quite a drop in benefits. I love Social Security, but I wouldn’t choose this plan without good reason.

Are there times when it would be reasonable to go with this plan? Of course. For example, you might be working in a job that is physically demanding and bad for your health. In this case, it might be more reasonable to quit your job and take Social Security benefits than to suffer a possible heart attack from overexertion.

Which Plan is Right for You?

This is by no means a complete list of the available options to you as a retiree.  It is, however, a quick review of several advantages and disadvantages of oft chosen plans.  As you progress through your 60s, it will become more clear which plan is right for you. However, the ultimate clarity can be derived via a detailed analysis of your total financial plan including other income, assets, and taxes.

Consider seeking the help of a financial advisor if you’re having trouble sorting through your options. Make sure your family is on board with your decisions. Seek wise counsel before you decide to retire. With a little help from those around you, you can find the confidence you need to make the right decision.

None of the information in this document should be considered as tax advice.  You should consult your tax advisor for information concerning your individual situation.

Daniel Zajac, CFP®, AIF®, CLU®, is a Partner and Financial Advisor with Simone Zajac Wealth Management Group based in the Philadelphia, PA area. As a 33-year-old veteran of the financial planning industry, Daniel loves to share his financial expertise with the masses at FinanceandFlipFlops.com. There, he explores the ins and outs of topics such as life insurance, investing, retirement planning, and much more.

Advisory services offered through Capital Analysts or Lincoln Investment, Registered Investment Advisors.  Securities offered through Lincoln Investment, Broker Dealer, Member FINRA/SIPC   www.lincolninvestment.com

Simone Zajac Wealth Management Group, and the above firms are independent, non-affiliated entities.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner.

7 Retirement Savings Tips to Help Avoid Regret

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According to TIAA-CREF’s Ready to Retire Survey “…more than half of people approaching retirement (52 percent) say they wish they had started saving for the future sooner.”    Some key findings from the survey include:

  • “Many respondents say they wish they had made smarter financial decisions earlier in their career, including saving more of their paycheck (47 percent) and investing their savings more aggressively (34 percent).
  • Forty-five percent of participants age 55-64 say financial readiness is the most important factor in determining when they will retire, but only 35 percent say they saved in an IRA or met with a financial advisor.
  • By not making the most of these options, many Americans now feel uncertain about their financial futures, with 68 percent of those approaching retirement saying they are not prepared for what’s to come
  • These retirement savings challenges are causing Americans to reconsider their vision of retirement. Forty-two percent of survey respondents age 55-64 say they plan on working in a part-time job, and 39 percent say they’ll be more conservative about how much they spend on entertainment and other luxuries.” 

Here are 7 retirement savings tips to help you avoid regret as you approach retirement. 

Start early 

If you are just starting out in the workplace, enroll in your employer’s 401(k), 403(b), or whatever type of retirement plan they offer.  Contribute as much as you can.  If there is a match try to contribute at least enough to earn the full matching contribution from your employer, this is free money.  There is no greater ally for retirement savers than time and the magic of compounding.  As tough as it may be to save early in your career put away as much as you can reasonably afford as early as you can afford it.

Increase your contributions 

The maximum 401(k) contribution limits for 2015 are $18,000 and $24,000 for those 50 or over at any point in the year.  No matter what you are currently contributing to your plan try to increase it a bit each year.  If you are currently deferring 3% of your salary bump that to 4% or even 5% next year.  Increase a bit more the following year.  You won’t miss the money and every bit can help fund a comfortable retirement.

Start a self-employed retirement plan 

If during the course of your career you become self-employed it is still important that you save for retirement.  Starting a plan such as a SEP or Solo 401(k) can be a great way for you to put away money for retirement.  You work hard at your own business and you deserve a comfortable retirement.

Contribute to an IRA 

Anyone can contribute to an IRA.  Traditional IRAs are subject to income limits as far as the ability to make pre-tax contributions, but anyone can contribute on an after-tax basis with no income limits.  All investment gains grow tax-deferred you do need to keep track of any post-tax contributions however.  Roth IRAs can also be a good alternative; again there are income ceilings that can limit your ability to contribute.

Don’t ignore old retirement accounts 

Today it isn’t uncommon for people to have worked for five or more employers during their career.  It is important that you make an affirmative decision as to what you with your old 401(k) or other retirement account when you leave your employer.  Leave it where it is, roll it to an IRA, or to your new employer’s plan (if allowed) but don’t ignore this money.  Even smaller balances can add up especially if you have several such accounts scattered about.

By the same token make sure that you stay on top of any pensions that you might be eligible for from old employers.  Make sure these companies can find you and be sure to carefully evaluate any pension buyout offers you might receive from old employers.  These can often be a good deal for you.

Beware of toxic rollovers 

Recently I have read a number of accounts about brokers and registered reps looking for employees of large organizations and convincing them to roll their retirement accounts into questionable investments with their brokerage firms.  Certainly rolling your 401(k) into an IRA via a trusted financial advisor is a valid strategy but like anything else you need to vet the person suggesting the rollover and the investment strategy they are suggesting.

Avoid high cost financial products

Many financial advisors who make all or part of their income from the sale of financial products will often suggest high cost financial products to implement their financial recommendations.  These might include annuities, certain mutual funds, non-traded REITs, and others.  Be leery and ask about the costs and fees associated with these products.  There is nothing wrong with annuities, but many of them that are pushed by registered reps carry excessive fees and have onerous surrender charges.

In the case of mutual funds, index funds are not the end all be all.  But you should certainly ask the advisor why the large cap actively managed fund with an expense ratio of 1.25% or more that they are suggesting is a better idea than an index fund with an expense ratio of 0.15% or less.

At the end of the day starting early, investing wisely and consistently, and being careful with your retirement savings are excellent ways to avoid the regrets expressed by many of those surveyed by TIAA-CREF.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out our resources page as well.