Objective information about financial planning, investments, and retirement plans

Review Your 401(k) Account

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For many of us, our 401(k) plan is our main retirement savings vehicle. The days of a defined benefit pension plan are a thing of the past for most workers and we are responsible for the amount we save for retirement and how we invest that money.

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Managed properly, your 401(k) plan can play a significant role in providing a solid retirement nest egg. Like any investment account, you need to ensure that your investments are properly allocated in line with your goals, time horizon and tolerance for risk.

You should thoroughly review your 401(k) plan at least annually. Some items to consider while doing this review include:

Have your goals or objectives changed?

Take time to review your retirement goals and objectives. Calculate how much you’ll need at retirement as well as how much you need to save annually to meet that goal. Review the investments offered by the plan and be sure that your asset allocation and the investments selected dovetail with your retirement goals and fit with your overall investment strategy including assets held outside of the plan.

Are you contributing as much as you can to the plan?

Look for ways to increase your contribution rate. One strategy is to allocate any salary increases to your 401(k) plan immediately, before you get used to the money and find ways to spend it. At a minimum, make sure you are contributing enough to take full advantage of any matching contributions made by your employer. For 2016 the maximum contribution to a 401(k) plan is $18,000 plus an additional $6,000 catch-up contribution for individuals who are age 50 and older at any point during the year.

Are the assets in your 401(k) plan properly allocated?

Some of the more common mistakes made when investing 401(k) assets include allocating too much to conservative investments, not diversifying among several investment vehicles, and investing too much in an employer’s stock. Saving for retirement typically encompasses a long time frame, so make investment choices that reflect your time horizon and risk tolerance. Many plans offer Target Date Funds or other pre-allocated choices. One of these may be a good choice for you, however, you need to ensure that you understand how these funds work, the level of risk inherent in the investment approach and the expenses.

Review your asset allocation as part of your overall asset allocation

Often 401(k) plan participants do not take other investments outside of their 401(k) plan, such as IRAs, a spouse’s 401(k) plan, or holdings in taxable accounts into consideration when allocating their 401(k) account.

Your 401(k) investments should be allocated as part of your overall financial plan. Failing to take these other investment assets into account may result in an overall asset allocation that is not in line with your financial goals.

Review the performance of individual investments, comparing the performance to appropriate benchmarks. You shouldn’t just select your investments once and then ignore them. Review your allocation at least annually to make sure it is correct. If not, adjust your holdings to get your allocation back in line. Selling investments within your 401(k) plan does not generate tax liabilities, so you can make these changes without any tax ramifications.

Do your investments need to be rebalanced?

Use this review to determine if your account needs to be rebalanced back to your desired allocation. Many plans offer a feature that allows for periodic automatic rebalancing back to your target allocation. You might consider setting the auto rebalance feature to trigger every six or twelve months.

Are you satisfied with the features of your 401(k) plan?

If there are aspects of your plan you’re not happy with, such as too few or poor investment choices take this opportunity to let your employer know. Obviously do this in a constructive and tactful fashion. Given the recent volume of successful 401(k) lawsuits employers are more conscious of their fiduciary duties and yours may be receptive to your suggestions.

The Bottom Line

Your 401(k) plan is a significant employee benefit and is likely your major retirement savings vehicle. It is important that you monitor your account and be proactive in managing it as part of your overall financial and retirement planning efforts.

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.

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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.

Photo credit:  Flickr

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.

My Top 10 Most Read Posts of 2015

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I hope that 2015 was a good year for you and your families and that you’ve had a wonderful holiday season. For us it has been great to have our three adult children home and to be able to spend time together as a family. We saw the movie Sisters on Christmas day and I highly recommend it.

My Top 10 Most Read Posts of 2015

Hopefully you find many of the posts here at The Chicago Financial Planner useful and informative as you chart your financial course. Whether you do your own financial planning and investing or you work with a financial advisor my goal is to educate and provide some food for thought.

In the spirit of all of the top 10 lists we see at this time of year, here are my top 10 most read posts during 2015:

Life Insurance as a Retirement Savings Vehicle – A Good Idea?

7 Tips to Become a 401(k) Millionaire

4 Signs of a Lousy 401(k) Plan

Is a $100,000 a Year Retirement Doable?

4 Reasons to Accept Your Company’s Buyout Offer

401(k) Fee Disclosure and the American Funds

Is My Pension Safe?

My Thoughts on PBS Frontline The Retirement Gamble

7 Reasons to Avoid 401(k) Loans

YOU RECEIVED A PINK SLIP AND SEPARATION AGREEMENT – NOW WHAT?

I continued to write elsewhere as well, most notably Investopedia and Go Banking Rates.

I want to thank you again for your readership.  I invite you to contact me ( or thechicagofinancialplanner at gmail dot com) to ask any questions that you might have, to tell me what you like or don’t like about the site and to suggest topics that you would like to see covered here in the future. Don’t miss any future posts, please subscribe via email.

I wish you and your families a happy, healthy and prosperous 2016.

5 Reasons 401(k) Lawsuits Matter to You

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Several 401(k) lawsuits against major employers have been in the news this year. These suits are about high fees, conflicts of interest and plan sponsors failing to live up to their fiduciary obligations.

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Ameriprise Financial settled a suit that alleged that the firm offered a number of its own proprietary mutual funds in the company’s 401(k) plan and collected revenue sharing payments on these funds from an Ameriprise subsidiary.

The U.S. Supreme Court ruled in Tibble vs. Edison International that the large utility company had a duty to monitor the investments offered in the plan no matter how long along they were initially added to the plan. One of the issues here surrounds the fact that lower cost share classes of these funds became available but the plan stayed with the higher cost retail share class.

Most recently Boeing settled a lawsuit that was first filed in 2006 for $57 million. The suit alleged that the company had breached its fiduciary duty to its employees by using high cost and risky investment options in the plan and by allowing the plan’s record keeper to charge employees and retirees excessive fees.

While all of this may be interesting, you may be asking what does any of this have to do with me? Here are 5 reasons 401(k) lawsuits matter to you.

Plan Sponsors have a fiduciary obligation 

These and a growing number of 401(k) related lawsuits have reaffirmed that retirement plan sponsors have a fiduciary obligation to act in the best interests of the plan participants. This includes:

  • The selection and monitoring of the mutual funds (or other investment vehicles) offered in the plan.
  • The selection and monitoring of the service providers selected for the plan.
  • All costs and fees associated with the plan.

Moreover plan sponsors should have a process in place to manage all aspects of the plan.

Mutual Fund share classes 

Several of the lawsuits centered on plan sponsors offering expensive retail share classes of funds when lower cost share classes were available. These higher cost share classes might throw off more revenue sharing and other fees to the plan but they are more expensive for the plan participants. It behooves plan sponsors more now than ever to offer the lowest cost share classes of a given fund available to them.

Numerous studies have shown the connection between lower investment costs and investment return. Well-run 401(k) plans strive to keep investment costs down and one way to do this is to ensure that the plan offers the lowest mutual fund share classes available.

Duty to monitor 

As shown in the Tibble versus Edison ruling the Supreme Court said plan sponsors have a duty to continue to monitor the investments offered in the plan long after they may have been initially offered. This dovetails into an ongoing duty of plan sponsors to monitor the investments offered to you to ensure the costs are reasonable and that they meet a set of criteria.

Typically a 401(k) that is well-monitored and managed via a consistent investment process will tend to offer a better investment line-up to their participants.

Manage plan expenses 

Boeing recently settled the second largest 401(k) suit in history at $57 million. In part the allegations included that Boeing allowed its outside record keeper to charge employees and retirees excessive fees.

This and other suits underscore the responsibility of plan sponsors to manage 401(k) plan costs and the activities of plan providers such as an outside record keeper. To the extent that administrative expenses are paid out of plan assets plan sponsors who strive to keep these expenses low are doing the right thing for their employees.

Plan Sponsors are getting it 

While this is not a blanket statement as there are still plenty of lousy 401(k) plans out there, there is evidence that plan sponsors are getting the message that they have a responsibility to the plan’s participants.

As an example mutual fund expenses in 401(k) plans have been declining for the past 15 years. Fewer companies are mandating the use of company stock in their 401(k) plans and a 2014 Supreme Court ruling will certainly help keep this trend going.

The Bottom Line 

Retirement plan sponsors have a fiduciary obligation to act in the best interests of the plan’s participants. A number of 401(k) lawsuits in recent years have served to reinforce this duty and this is a good thing for those participating in 401(k) plans. As a plan participant become knowledgeable about the investments offered in your plan and how much the plan is costing you. If you have concerns raise them in a constructive fashion to your employer.

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.

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.