Objective information about financial planning, investments, and retirement plans

Annuities: The Wonder Drug for Your Retirement?

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Annuities: The Wonder Drug for Your Retirement?

Annuities are often touted as the “cure” for all that ails your retirement.  Baby Boomers and retirees are the prime target market for the annuity sales types. You’ve undoubtedly heard many of these pitches in person or as advertisements. The pitches frequently pander to the fears that many investors still feel after the last stock market decline. After all, what’s not to like about guaranteed income?

What is an annuity?

I’ll let the Securities and Exchange Commission (SEC) explain this in a quote from their website:

“An annuity is a contract between you and an insurance company that is designed to meet retirement and other long-range goals, under which you make a lump-sum payment or series of payments. In return, the insurer agrees to make periodic payments to you beginning immediately or at some future date.

Annuities typically offer tax-deferred growth of earnings and may include a death benefit that will pay your beneficiary a specified minimum amount, such as your total purchase payments. While tax is deferred on earnings growth, when withdrawals are taken from the annuity, gains are taxed at ordinary income rates, and not capital gains rates. If you withdraw your money early from an annuity, you may pay substantial surrender charges to the insurance company, as well as tax penalties.

There are generally three types of annuities — fixed, indexed, and variable. In a fixed annuity, the insurance company agrees to pay you no less than a specified rate of interest during the time that your account is growing. The insurance company also agrees that the periodic payments will be a specified amount per dollar in your account. These periodic payments may last for a definite period, such as 20 years, or an indefinite period, such as your lifetime or the lifetime of you and your spouse.

In an indexed annuity, the insurance company credits you with a return that is based on changes in an index, such as the S&P 500 Composite Stock Price Index. Indexed annuity contracts also provide that the contract value will be no less than a specified minimum, regardless of index performance.

In a variable annuity, you can choose to invest your purchase payments from among a range of different investment options, typically mutual funds. The rate of return on your purchase payments, and the amount of the periodic payments you eventually receive, will vary depending on the performance of the investment options you have selected.

Variable annuities are securities regulated by the SEC. An indexed annuity may or may not be a security; however, most indexed annuities are not registered with the SEC. Fixed annuities are not securities and are not regulated by the SEC. You can learn more about variable annuities by reading our publication, Variable Annuities: What You Should Know.”

What’s good about annuities?

In an uncertain world, an annuity can offer a degree of certainty to retirees in terms of receiving a fixed stream of payments over their lifetime or some other specified period of time. Once you annuitize there’s no guesswork about how much you will be receiving, assuming that the insurance company behind the product stays healthy.

Watch out for high and/or hidden fees 

The biggest beef about annuities are the fees, which are often hidden or least difficult to find. Many annuity products carry fees that are pretty darn high, others are much more reasonable. In general, the lack of transparency regarding the fees associated with most annuity contracts is appalling.

There are typically several layers of fees in an annuity:

Fees connected with the underlying investments In a variable annuity there are fees connected with the underlying sub-account (accounts that resemble mutual funds) similar to the expense ratio of a mutual fund. In a fixed annuity the underlying fees are typically the difference between the net interest rate you will receive vs. the gross interest rate earned.  In the case of an indexed annuity product the fees are just plain murky.

Mortality and expense charges are fees charged by the insurance company to cover their costs for guaranteeing a stream of income to you. While I get this and understand it, the wide variance in these and other fees across the universe of annuity contracts and the insurance companies that provide them makes me shake my head.

Surrender charges are fees that are designed to keep you from withdrawing your funds for a period of time.  From my point of view these charges are heinous whether in an annuity, a mutual fund, or anyplace else. If you are considering an annuity and the product has a surrender charge, avoid it. I’m not advocating withdrawing money early from an annuity, but surrender charges also restrict you from exchanging a high cost annuity into one with a lower fee structure. Essentially these fees serve to ensure that the agent or rep who sold you the high fee annuity (and the insurance company) continue to benefit by placing handcuffs on you in terms of sticking with the policy.

Who’s really guaranteeing your annuity? 

When you purchase an annuity, your stream of payments is guaranteed by the “full faith and credit” of the underlying insurance company.  This differs from a pension that is annuitized and backed by the PBGC, a governmental entity, up to certain limits.

Outside of the most notable failure, Executive Life in the early 1990s, there have not been a high number of insurance company failures. In the case of Executive Life, 1,000s of annuity recipients were impacted in the form of greatly reduced annuity payments which in many cases permanently impacted the quality of their retirement.

Insurance companies are regulated at the state level; state insurance departments are generally the backstop in the event of an insurance company failure. In most cases you will receive some portion of the payment amount that you expected, but there is often a delay in receiving these payments.

The point is not to scare anyone from buying an annuity but rather to remind you to perform your own due diligence on the underlying insurance company.

Annuities and the DOL fiduciary rules

The Department of Labor’s fiduciary rules that will govern which financial products financial advisors use for clients in their retirement accounts do not prohibit the use of annuities, but the new rules do require much more disclosure and justification when they are used. The final draft of the rules also cover indexed annuities which is different from drafts of the rules prior to the final version.

Should you buy an annuity? 

Annuities are not a bad product as long as you understand what they can and cannot do for you. Like anything else you need to shop for the right annuity. For example, an insurance agent or registered rep is not going to show you a product from someone like Vanguard that has ultra-low fees and no surrender charges because they receive no commissions.

An annuity can offer diversification in your retirement income stream. Perhaps you have investments in taxable and tax-deferred accounts from which you will withdraw money to fund your retirement. Adding Social Security to the mix provides a government-funded stream of payments. A commercial annuity can also be of value as part of your retirement income stream, again as long as you shop for the appropriate product.

Annuities are generally sold rather than bought by Baby Boomers and others. Be a smart consumer and understand what you are buying, why a particular annuity product (and the insurance company) are right for you, and the benefits that you expect to receive from the annuity. Properly used, an annuity can be a valuable component of your retirement planning efforts. Be sure to read ALL of the fine print and understand ALL of the expenses, terms, conditions and restrictions before writing a check.

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.  

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Resolving Financial Issues Before Marriage

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Personal financial topics are often some of the most difficult topics for people to discuss. But since financial issues often cause significant problems in marriages, you should try to reach some sort of agreement on your finances before your wedding. Some items to consider include:

Resolving Financial Issues Before Marriage

Where do you want to be in five or 10 years?

Our dreams for the future often come with price tags. If one spouse wants to continue his/her education or start a business, significant sums may be needed for that goal. If children are part of your future plans, when you have those children, how many you have, and whether both of you continue working will have a significant impact on your finances. Planning now will allow you to set priorities and start saving for those goals.

What assets and liabilities are each of you bringing to the marriage?

Preparing a combined net worth statement will give you a starting point for determining how you can help achieve your financial goals. If one or both of you have significant assets, you might want to consider a prenuptial agreement to spell out what happens to your assets in the event of death or divorce. For a second or third marriage, especially if there are children from any of these prior marriages, proper estate planning is essential.

Do either of you have credit problems?

When you apply jointly for credit, both of your credit histories will be evaluated. Thus, if one of you has an outstanding credit history and the other has credit problems, it can affect the approval process and your debt’s cost. If one of you has credit problems, work hard during the early years of your marriage to correct those problems.

Should you combine your finances or keep them separate?

Some couples prefer pooling all funds, thinking it helps create a feeling of unity. Others, however, have difficulty losing their financial autonomy, especially if they have been on their own for many years. Keep in mind that this is not an either/or decision. You can set up a joint account for shared expenses, with each spouse contributing a predesignated amount to the account. For the remaining funds, separate accounts can be kept for discretionary spending.

How will you handle spending decisions?

The process of defining goals and setting a budget can help resolve differing views about money matters, forcing couples to compromise and make joint decisions about how money will be spent. While that might seem like a painful process, addressing these issues now can help prevent future misunderstandings. You may want to set a maximum amount that each of you can spend without consulting the other.

How will you handle insurance?

If you both have medical insurance through your employers, it may be cheaper to select one plan for both of you. Combining auto insurance may also reduce premiums. You’ll also want to evaluate your life insurance.

Who will handle financial tasks?

Decide who will handle financial tasks. One person may be more suited for these tasks due to his/her background or time availability. However, the other spouse should not give up total control. Set up a formal time, perhaps monthly, to go over financial matters. This keeps both spouses informed and provides a designated time to discuss spending or items of concern. You then won’t fret about how to bring up financial topics or let finances interfere at other times.

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.  

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Small Business Retirement Plans – SEP-IRA vs. Solo 401(k)

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One of the best tax deductions for a small business owner is funding a retirement plan.  Beyond any tax deduction you are saving for your own retirement.  As a fellow small business person, I know how hard you work.  You deserve a comfortable retirement.  If you don’t plan for your own retirement who will? Two popular small business retirement plans are the SEP-IRA and Solo 401(k).

Small Business Retirement Plans – SEP-IRA vs. Solo 401(k)

SEP-IRA vs. Solo 401(k)

SEP-IRA Solo 401(k)
Who can contribute? Employer contributions only. Employer contributions and employee deferrals.
Employer contribution limits For 2016, up to 25% of the participant’s compensation or $53,000 whichever is less. Contributions are deductible as a business expense and are not required every year. For 2016, employer plus employee combined contribution limit is 25% of compensation or $53,000 ($59,000 if the employee is age 50 or older) whichever is higher. Contributions are deductible as a business expense and are not required every year.
Employee contribution limits A SEP-IRA only allows employer contributions. Employees can contribute to an IRA (Traditional, Roth, or Non-Deductible based upon their individual circumstances). $18,000 for 2016. An additional $6,000 for participants 50 and over. In no case can this exceed 100% of their compensation.
Eligibility Typically, employees must be allowed to participate if they are over age 21, earn at least $600 annually, and have worked for the same employer in at least three of the past five years. No age or income restrictions. Business owners, partners and spouses working in the business. Common-law employees are not eligible.

Note the Solo 401(k) is also referred to as an Individual 401(k).

  • While a SEP-IRA can be used with employees in reality this can become an expensive proposition as you will need to contribute the same percentage for your employees as you defer for yourself.  I generally consider this a plan for the self-employed.
  • Both plans allow for contributions up your tax filing date, including extensions for the prior tax year. Consult with your tax professional to determine when your employee contributions must be made. The Solo 401(k) plan must be established by the end of the calendar year.
  • Note that the SEP-IRA contribution is calculated as a percentage of compensation.  If your compensation is variable so will the amount that you can contribute to plan year-to year. Even if you have the cash to do so, your contribution will be limited by your income for a given year.
  • By contrast you can defer the lesser of $18,000 ($24,000 if 50 or over) or 100% of your income for 2016 into a Solo 401(k) plus the profit sharing contribution. This might be the better alternative for those with plenty of cash and a variable income.
  • Loans are possible from Solo 401(k)s, but not with SEP-IRAs.
  • Roth feature is available for a Solo 401(k) if allowed by your plan document. There is no Roth feature for a SEP-IRA.
  • Both plans require minimal administrative work, though once the balance in your Solo 401(k) account tops $250,000, the level of annual government paperwork increases a bit.
  • Both plans can be opened at custodians such as Charles Schwab, Fidelity, Vanguard, T. Rowe Price, and others. For the Solo 401(k) you will generally use a prototype plan. If you want to contribute to a Roth account, for example, ensure that this is possible through the custodian you choose.
  • Investment options for both plans generally run the full gamut of typical investment options available at your custodian such as mutual funds, individual stocks, ETFs, bonds, closed-end funds, etc. There are some statutory restrictions so check with your custodian.

Both plans can offer a great way for you to save for retirement and to realize some tax savings in the process.  Whether you go this route or with some other option I urge to start saving for your retirement today 

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.  

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Some Excellent Online Financial Resources

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English: Taken from the internet, public teach...

I use social media and the web to interact with financial advisors, financial bloggers and writers and to keep up with the latest financial news.  Here are some excellent online financial resources, including some blogs and websites that I follow.

Websites and Media 

Market Watch is one of the best all around financial sites; I especially like their RetireMentors section which includes a variety of writers on topics useful to retirees and those planning for retirement.  Robert Powell (twitter @RJPIII) provides some great insights on retirement-related topics.

Morningstar is one of the best investing sites and their columnists provide some excellent insights into a variety of topics. I especially enjoy articles from their personal finance guru Christine Benz (twitter @christine_benz), Mark Miller (twitter @RetireRevised) and John Rekenthaler.

Investopedia is an excellent all-around financial website. They offer an almost encyclopedia-like range of definitions on countless financial terms and products. In addition, they offer insights on a wealth of financial, investing and retirement planning topics for both individuals and financial advisors. I have been a frequent Investopedia contributor for the past few years.

Go Banking Rates is a popular website dedicated to providing readers with information about the best interest rates on financial services nationwide, as well as personal finance content and tools. I have contributed a number of articles to the site over the past year.

Financial Bloggers

Financial advisor Jim Blankenship’s (twitter @BlankenshipFP) site Getting Your Financial Ducks in a Row is a must read blog for information on topics relating to retirement.  Jim is an expert on Social Security and also provides great information on IRAs, taxes, and a variety of essential financial planning topics.  Jim’s books on Social Security and IRAs are must reads.

Mike Piper’s blog Oblivious Investor does a great job discussing a variety of investing and retirement related topics.  Mike is also a published author on retirement, Social Security and several other topics.

Barbara Freidberg Personal Finance provides a wealth of information on a variety of personal finance and investing topics. Barbara does a great job of sharing her knowledge and experience in these areas with her readers in an easy-to-understand and actionable style.

Investor Junkie is published by long-time investor and entrepreneur Larry Ludwig. This site provides great information about investing, retirement and other related topics. Additionally, they do review of various financial products and service providers. I have contributed a number of articles to this site as well.

Frugal Rules is an excellent personal finance blog offering practical tips on investing, frugality, and a range of useful personal financial topics.

Robert Farrington’s blog The College Investor does a great job of discussing investing and a range of financial topics geared to younger investors.

Financial advisor Russ Thornton (twitter @RussThornton) focuses his practice on women clients and his blog Wealth Care for Women provides sound financial planning tips for women.

The Dollar Stretcher is one of the oldest but still one of the best all-purpose financial blogs out there.  Gary Foreman (twitter @Gary_Foreman) covers the full spectrum of personal financial topics.

The websites and blogs listed above are some of my favorites, but this is not meant to be an exhaustive list.  Are there financial sites or online resources that you would recommend?  Please feel free add to this list by leaving a comment.

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.

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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.  

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Life Insurance Over Age 50 – Approval and Savings Tips

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This is a guest post by Chris Huntley, President of Huntley Wealth & Insurance Services. All opinions and suggestions are his.

One of the most common misconceptions about life insurance is that you can no longer purchase it, or the premiums suddenly skyrocket, the day you hit 50 years old.

In many cases, the exact opposite is true!

In some instances, purchasing life insurance at certain “milestone ages” like 60, 65, or 70, can actually unlock huge savings for you!

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Having said that, purchasing life insurance over age 50 can be a bit of a balancing act, and you’ll need to understand some key factors about how age affects pricing and qualification.

Generally speaking, older age affects:

  • Your premium
  • The types of policies and term lengths you are eligible to buy
  • The health class you can qualify for

Let’s start with the obvious… How premiums increase as we age, and then move to savings opportunities.

The Cost of Waiting

Generally speaking, life insurance tends to become more expensive as you age.

As a rule of thumb, you will likely see the premium for a policy increase in the following increments:

  • Age 50 – 59 will see an increase of between 8 – 10% per year
  • Age 60 – 69 will see an increase of between 10 -12% per year
  • Age 70 – 79 will see an increase of between 12 -14% per year

So, if you are currently age 59 or 69, or approaching another birthday, you may not want to wait to apply for coverage.  Of course, you’ll also want to weigh that decision against the savings tips for waiting, which I’ll cover later.

Qualifying for Life Insurance Over Age 50

While in some ways, qualifying for life insurance over age 50 is easier, there are situations when it is more challenging.

For example, most life insurance policies require that you take a medical exam.

After 50 years of age, the medical exams become a bit more stringent. Your exam might include a resting EKG, even for a small amount of coverage.

If you’re over 70, you might also be required to take a “special senior” exam to test mental cognition.

I once had a 72-year-old declined for coverage because he couldn’t draw the face of a clock with the hands showing the time, 2:40.

The age when these and other tests apply vary, so if you are worried you might be disqualified, speak to an independent agent who can check the exam requirements by carrier, to find the carrier with the “easiest” medical exam requirements.

How Age Affects the Types of Policies Available

When it comes to term life insurance, and particularly the length of the term, those who are over age 50 should know that there are certain age cut-offs where certain terms are no longer available.

For example, in your 50’s, some companies may no longer allow you to buy a 30-year term.  Some carriers no longer offer it at age 50, while for others, the cut-off age could be age 55 or 57.

The same holds true for 20 and 25-year term.  As you get into your 60’s or 70’s you may not be able to buy 20 or 25-year term policies. The point to keep in mind is that ALL insurers have a cut-off point where they will no longer sell certain policies.

If you wait too long to buy your policy, you may no longer have access to the term length you desire and might have to opt for a much more expensive permanent policy, such as whole life or universal life instead.

Now that you understand how waiting to buy life insurance can affect the policies available to you and pricing, let’s discuss some savings opportunities for people over age 50.

How Key Birthdays Can Save You Money on Life Insurance

As stated previously, there are specific birthday milestones after age 50 that can end up saving you a lot of money on life insurance.

This can apply to individuals in a variety of scenarios such as:

  • “Big Boned” or Overweight Individuals
  • Individuals with High Blood Pressure and Cholesterol Levels
  • Individuals with History of Family Illness
  • And more

In all cases below, the savings come from being able to qualify for a better health rating.  As we age, many life insurance companies relax on some health and lifestyle concerns, giving us the opportunity to qualify for better health classes.

And since the name of the game in life insurance is getting the best health rate (better health rating = savings), you need to understand these tricks.

Life Insurance Savings Tips for “Big Boned” Individuals

Whether you’re a few lbs. overweight or more, this single tip can easily save you 25% to 50% on your life insurance premiums.

As it turns out, some companies offer more lenient height/weight guidelines to individuals as they get older, particularly for ages 60, 65, and 70.

For example, a 59-year-old male who is 5’9 and weighs 210 lbs. might qualify for an insurance carrier’s third best health rating.

However, if that same individual was 60 years old, he could qualify for the carrier’s best rating.

Since health classes increase premium by approximately 25% per class, the 59-year-old would have to pay about 50% more than the 60-year-old at the same weight!

If you’re overweight at all and over age 50, it would be worth your time to speak to a knowledgeable independent agent who can shop the market for the company that can offer you the best rate at your age, height, and weight.

Savings Tips for Individuals with High Blood Pressure/Cholesterol Levels

The same lenient guidelines over age 50 apply to those with higher blood pressure and cholesterol levels.For example, let’s use an actual chart from one life insurer for blood pressure. They will give the give the top health rating for:

  • Ages 0 – 60 for blood pressure: 140/85
  • Age 61+ for blood pressure: 150/85

If you are an individual who is age 55 and has a blood pressure reading of 145/83, you would not qualify for the top health rating. But the same individual, who is 61 with the same BP reading would qualify for the top health rating.

The same approach applies to cholesterol levels, and other lab levels.  You can even get more favorable underwriting over age 50 if you’ve had a history of cancer or heart disease in your family.

How to Find Affordable Life Insurance After Age 50

As you can see, every insurer has their own underwriting guidelines for those after age 50, and it’s a bit of balancing to determine when you should apply for coverage.

For example, if you are 58 years old and have a few health conditions, or are a bit overweight, you’ll probably pay more now to purchase life insurance than you will if you wait until you’re 60.

You might even be tempted to hold off any purchase until you hit that milestone age.

However, I never recommend that my clients wait.  A lot can happen if you “chance it”, and wait a year or two to buy coverage.  First of all, you could die without coverage!  Secondly, no one can predict your health down the line and whether you’ll still be insurable.

Best practice is to buy the coverage you need now, and then every year or two, check with your agent for savings opportunities.

Just be sure to use an independent life insurance agent.

Chris Huntley is President of Huntley Wealth & Insurance Services, a life insurance agency based in San Diego, CA, where he specializes in helping individuals with high risk medical issues.  He has been in business for 10 years and is licensed in 48 states.  He also owns eLifeTools, a site dedicated to online marketing for insurance agents.  Chris can be reached on Twitter: @mrchrishuntley

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.

The Bull Market Turns Seven Now What?

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On March 9, 2009 the market downturn fueled by the financial crisis bottomed out as measured by the S&P 500 Index. On that day the index closed at 677. Yesterday, on the bull market’s seventh birthday, the index closed at 1,989 or an increase of about 194 percent. According to CNBC the Dow Jones Industrial Average has increased 160 percent and the NASDAQ 267 percent over this seven-year time frame.

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With the bull market turning seven, now what? Here are some thoughts and ideas for investors.

How does this bull market stack up?

According to data from the most recent quarterly Guide to the Markets report from JP Morgan Asset Management, the average bull market following a bear market lasts for 53 months and results in a gain of 153%. By both measures this bull market is a long one.

Does this mean that investors should brace for an imminent market correction? Not necessarily but bull markets don’t last forever either.

There have been some speed bumps along the way, including 2011, a sharp decline in the third quarter of 2015 and of course the sharp declines we saw to start off 2016. Again this is not an indicator of anything about the future.

Winners and losers

A commentator on CNBC cited a couple of big winners in this bull market:

  • Netflix (NFLX) +1,667%
  • General Growth Properties (GGP) +9,964%

Additionally, Apple (APPL) closed at a split-adjusted $11.87 per share on March 9, 2009. It closed at $101.12 on March 9, 2016.

The CNBC commentator cited giant retailer Walmart (WMT) as a stock that has missed much of the bounce in this market, as their stock is up only 42% over this time period.

What should investors do now? 

None of us knows what the future will hold. The bull market may be getting long of tooth. There are factors such as potential actions by the Fed, China’s impact on our markets, the threat of terrorism and countless others that could impact the direction of the stock market. It seems there is always something to worry about in that regard.

That all said, my suggestions for investors are pretty much the same “boring” ones that I’ve been giving since I started this blog in 2009.

  • Control the factors that you can control. Your investment costs and your asset allocation are two of the biggest factors within your control.
  • Review and rebalance your portfolio This is a great way to ensure that your allocation and your level of risk stay on track.
  • When in doubt fall back on your financial plan. Review your progress against your plan periodically and, if warranted, adjust your portfolio accordingly.
  • Contribute to your 401(k) plan and make sure that your investment choices are appropriate for your time horizon and risk tolerance. Avoid 401(k) loans if possible and don’t ignore old 401(k) accounts when leaving a company.
  • Don’t overdo it when investing in company stock.
  • If you need professional financial help, get it. Be sure to hire a fee-only financial advisor who will put your interests first.

The Bottom Line 

The now seven-year bull market since the bottom in 2009 has been a very robust period for investors. Many have more than recovered from their losses during the market decline of 2008-09.

Nobody knows what will happen next. In my opinion, investors are wise to control the factors that they can, have a plan in place and follow that plan.

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.

3 Financial Planning Lessons from the Cincinnati Bengals

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Long-time readers of The Chicago Financial Planner know that I am a die-hard football fan and avid supporter of the Green Bay Packers. Come playoff time, I try catch all of the games as they are often memorable. The game this past Saturday between the Pittsburgh Steelers and the Cincinnati Bengals was memorable for the wrong reasons if you are a Bengals fan.

Rarely, if ever, in my 50 years of watching NFL games have I ever seen a team give away a game (especially a playoff game) in such a bonehead fashion as did the Bengals. Besides some just plain dumb moves, the level of dirty play and bad sportsmanship was disgusting.

What can we learn from the Bengals about financial planning? Here are 3 financial planning lessons from the Cincinnati Bengals.

Protect your downside 

The Bengals had gained the lead in the final quarter after being held scoreless for the first three quarters of the game. On what should have been a routine running play, (in the Steelers end no less) to try to run the clock out, the Bengals’ running back fumbled. In this situation ball security should have been his first priority, not gaining any yardage.

Unless you are very young, most investors are wise to diversify their portfolios in order to dampen the impact of market declines like the financial crisis or even the market volatility that we’ve seen since the start of the new year.

Keep your emotions in check 

Cincinnati linebacker Vontaz Burfict made a key interception that looked like it might seal an improbable comeback win for the Bengals. After the fumble mentioned above, he proceeded to make one of the absolute dumbest and dirtiest hits to the head of a Steelers receiver resulting in a key 15-yard penalty.

His teammate (and I’m sure fellow Mensa member) Adam Pacman Jones then garnered another 15-yard penalty for shoving a Pittsburgh assistant coach during an on-field altercation that set-up a chip-shot game winning field goal for the Steelers.

Burfict is known as a loose cannon and has been fined in the past and Jones is not a choir boy either. Both personal fouls can be attributed to a combination of bad judgment and a failure to keep their emotions in check in a key situation.

Investors need to stay calm during periods of upheaval in the economy and the financial markets. So far 2016 has started off with roughly a 5% loss in some the major market averages.

Back in 2008 and early 2009 the financial press was filled with stories of investors who panicked and sold out of their stock holdings, including mutual funds and ETFs, at or near the bottom of the market. Many of these investors stayed out missing all or most of the six plus year rally we’ve seen since the lows of March 9, 2009. Sadly, for those who were near retirement they booked substantial losses and never gave their portfolios a chance to recover.

Investors need to stay calm. One way to help in this area is to have a plan. Have an asset allocation that that reflects your situation including your time horizon for the money and your risk tolerance. Review your portfolio at regular intervals and rebalance as needed. A plan does not eliminate market volatility or the stress that it can bring, but it can help to prevent you from acting on your emotions, usually to your detriment. 

Build a team that you can depend on 

While both Burfict and Jones are talented players, both have a history of issues. Jones has been in trouble with the NFL for off-field activities and has been suspended by the league in the past. Burfict was suspended for this hit and has been fined for prior transgressions. He was undrafted, many say as a result of a reputation for being hard to deal with.

As a viewer of the game I would say these two players let their teammates and fans down at the most critical point in the most important game of the season. The Bengals have not won a playoff game since 1991 and their comeback to take the lead and put themselves into a position to win was heroic, only to be destroyed by the lack of self-control of these two.

In the course of accumulating money for goals such as retirement and college for your kids, many of you will seek advice along the way. In doing so it is important to build a team of advisors and partners that you can trust.

If a financial advisor is needed be sure to choose a fee-only advisor. This isn’t to say that one who derives some or all of their compensation from the sale of financial products isn’t competent, but someone who doesn’t have the conflict of interest inherent in the sale of financial products starts out as more objective.

Find an investment custodian who has reasonable fees and offers the types of investments and accounts that meet your needs. Free ETF platforms are nice, but who cares if the ETFs on the platform are not the ones that are right for you.

Other advisors might include a CPA or an attorney to handle estate planning matters.

In all cases don’t be afraid to ask questions. In the case of a financial advisor it is important to understand if they have worked with clients in similar situations as you and to understand what you will receive for the fees paid.

The Bottom Line 

As I’ve written here in the past, football and the world of financial planning and investing have some similarities. Learn from the Cincinnati Bengals and be sure to protect your financial downside, keep your emotions in check and build a team that you can trust. These steps will put you on track towards achieving your financial goals.

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.

Open Enrollment Exploring Your Employee Benefits

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This post was written by Katie Brewer, CFP®.  Young, smart financial planners like Katie bode well for the future of the financial planning profession. Her bio and contact information are provided at the end of the post. This post is timely for those of you who are in the midst of open enrollment via your employers and Katie offers some solid tips to consider.

Is that email from HR about open enrollment buried in your inbox? If you wait until the last minute and then race through your choices, you’re not the only one. Almost half of all employees spend 30 minutes or less choosing their benefits every year. And 90% of employees choose the same benefits every year, even though your family and your benefits are constantly changing.

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Employee benefits are a large part of your compensation, and it pays to make the right choices for your family. Forty-two percent of employees believe they waste up to $750 a year due to open enrollment mistakes. We’ll explore a few common employee benefits so you can feel confident that you’re making the right choice for you and your family during open enrollment.

Save for Your Future with Your Employer Retirement Plan

Many employers offer a retirement plan to help you save for a comfortable life in your later years. The name of the plan will depend on your employer. Do you have a 401(k), Thrift Savings Plan (TSP), 403(b), or SIMPLE IRA? All of these plans allow employees to contribute to a retirement account on a tax-deferred basis.

You’ll also want to look into the details to see if your employer offers a Roth option. With these plans, you pay tax now, but you’ll be able to take your contributions — and all your earnings — out tax free. It’s nice to have options about how to take money out in your retirement.

Some employers also provide a generous match to employee contributions. If your employer provides a match, you’ll want to take advantage of it. If you get a 50% match on your contributions, that’s a huge return on your money that’s tough to get anywhere else.

Protect Your Income with Disability Insurance

If you review your benefits package, you’ll probably also see some mention of long-term disability insurance coverage. This group coverage is an inexpensive way to make sure you are protecting your income. If you rely on your salary to pay your bills and save for your future, you need insurance to protect against a loss in income. Understanding the finer details will help you make the best choice for your policy.

First, what’s the elimination period (or waiting period)? You’ll want to have enough cash in your emergency fund to bridge the waiting period if you need to file a claim.

Second, is there a way to easily increase coverage? It’s a good idea to cover at least 50% of your income.

Third, do you have the option to pay tax on the premium? If so, that’s usually a good choice. It’s very inexpensive, and it means you’d receive your disability payments tax-free when you need the money the most.

Some employers offer short term disability coverage as well. You should have an emergency fund that will help you ride out any short periods away from work. But if you’re still building up your emergency fund, it can make sense to pay for a short term disability policy.

Look After Your Loved Ones with Life Insurance

Another common employer benefit is to provide some amount of life insurance for employees. It’s usually on the order of 1 to 2 times your annual salary. For most families, this is not enough.

Your employer might offer the option to buy additional life insurance without needing a medical exam at a reasonable cost. If you have medical conditions that make it difficult to get life insurance, this is a great way to increase your coverage.

Now that you know how much life insurance you have, you can also purchase your remaining life insurance on the open market. This is usually a better option as you can take it with you if you leave your job.

Cushion Your Budget with Health Insurance

Health insurance is an important part of your benefit package. You might have several options to choose from, and what plan is the right one for you will change as your family changes.

A low deductible and small co-pay plan with a wide range of specialists is important if you or your spouse are facing health problems.

If you are in good health and have the financial means, a high-deductible health plan might be the right choice. This plan has a high out of pocket deductible, but you’ll pay less in premiums, and you can take advantage of a health savings account.

Health savings accounts (HSA) are a fantastic way to build wealth. With a HSA, you contribute pre-tax money into the account to be invested. The money rolls over from year to year so you can build a balance. You can withdraw the money, including any earnings, tax-free on qualified medical expenses. Very few things are completely income tax-free! This is different than a Flexible Spending Account (FSA) or Health Reimbursement Account (HRA), so make sure you know exactly what type of plan you have.

You might also have the option to participate in a health care Flexible Spending Account (FSA). With a FSA, you put away pre-tax money to cover healthcare costs like co-pays, deductibles, and medications. These plans are “use it or lose it,” so be careful about how much you put in the account. While there’s usually a grace period for spending your funds, you can’t rollover much (if any) to the next year. If you’re at the end of your FSA year, check your balance so you aren’t wasting money.

Be On the Lookout for Other Benefits

Many employers also offer a dependent or daycare flexible spending account (FSA). This lets you put away pre-tax money to pay for expenses related to caring for dependents like kids or an elderly parent. Many parents use a dependent FSA to get a tax break on day care. If you decide to skip the FSA, you might be able to claim a credit on your taxes instead.

Some employers also offer the option of pre-paid legal services. If your family needs estate planning documents or other legal services, this can be an inexpensive way to get these papers in place. Other employers offer free or reduced tuition to college or training programs. Benefits like these can add up to a significant sum.

There’s such a wide variety in employee benefits that it’s difficult to name all the possible benefits you might receive. Read the fine print of your package to make sure you’re taking advantage of every benefit you can.

Make this year the year that you take the time to understand your employee benefits. Employee benefits are an important part of your compensation. Be sure to get what you deserve by making the most of open enrollment.

Katie Brewer, CFP® is a financial coach to professionals of Gen X & Gen Y and the President of Your Richest Life. She has accumulated over 10 years of experience working with clients and their money. Katie has been quoted in articles in Money, The New York Times, Forbes, and Real Simple. Katie resides in the Dallas, Texas area, but works virtually with clients across the country. You can find Katie on Twitter at @KatieYRL and email her at info@yrlplanning.com. 

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.  

What I’m Reading – Super Bowl I Rematch Edition

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This week’s Monday Night Football match-up features my Green Bay Packers hosting the Kansas City Chiefs at beautiful Lambeau Field.

This is a rematch of the first Super Bowl (actually called the NFL-AFL Championship) played in the LA Coliseum in January of 1967. I was nine and even at that point a Packer fan for life. There were 30,000 empty seats and neither network (the game was televised by both NBC and CBS) preserved a recording of the game. An old tape copy from an individual was recently restored. This is a far cry from the hype that surrounds the Super Bowl today.

The Packers had 10 future Hall of Famers plus Coach Lombardi. The Packers won 35-10. let’s hope for a similar result this time around as well.

Here are a few good financial articles to read while waiting for the kickoff:

Christine Benz discusses Dos and Don’ts for Mutual Funds Capital Gains Season at Morningstar.com.

Barbara Friedberg shares the 20 Dumbest Moves First-Time Investors Make at Go Banking Rates.

Sarah O’ Brien tells us that Financial planning is beyond investments, retirement plans at CNBC.com. 

Jim Blankenship warns us about Identity Theft Protection  at Getting Your Financial Ducks in a Row.

Elizabeth O’ Brien discusses When financial ‘advice’ is really a sales pitch at Market Watch.

I continue to write for Investopedia, here are a few of my recent contributions:

Betterment’s all-ETF Online 401(k) plan

Restricted Stock Units: What to Know

Closed-End Funds: A Primer

Enjoy the game. Go Pack Go!

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