Objective information about financial planning, investments, and retirement plans

Investing Seminars – Should You Attend?

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It must be the season for investing and retirement dinner seminars. I’ve received a number of these invitations in the mail recently.

Typical was one from a local investment firm “___ Cordially Invites You to Attend an EXCLUSIVE Dinner Gathering!” Wow, me invited to anything that was exclusive?  The only brokerage sponsored investment “seminar” that I have ever attended featured legendary market guru Joseph Granville who among other things played the piano in his boxer shorts. It was in a movie theater in Milwaukee back in grad school, no food was involved.

Opening the invitation, it was from a well-known brokerage firm. The topic of the seminar is “Strategies for helping build a stronger portfolio.” The areas to be covered include:

  • Outlook for Domestic/International Stock & Bond Markets
  • Focus on distributions:  strategies for managing your retirement income
  • Developing a systematic process to help GET and STAY on the right financial track
  • Strategies to help take advantage of upside market potential while planning for a possible downside

So far this all sounds great. Reading on I noticed that while the session is sponsored by two brokers from the firm, the featured speakers were from a mutual fund company that offers funds that are often sold by commissioned reps while the other speaker was from an insurance company who is big in the world of annuities.

Should you attend? 

Clearly the objective is to sell financial products to the attendees, this is reinforced by the choice of speakers. That said there might be some good information available, the topics are certainly timely especially for Baby Boomers and retirees.

Consider attending one of these seminars only if you feel that you can resist a sales pitch. In the case of this session, the restaurant is a pretty good one that is close to my home. I am often tempted to check out one of these seminars out of professional curiosity, a free meal at a good restaurant would be an added bonus.

What are you hoping to gain from attending? The brokers are likely spending a fair amount of money on this session and expect a return on their investment. There will be a good deal of sales pressure at the very least to schedule a follow-up session with them.

Think about your real objective 

If you want a good meal and perhaps a little bit of knowledge, go ahead and attend.

If you are serious about finding a financial advisor to guide you to and through retirement, perhaps you should forego the meal and try to find someone who is a good fit for you. I strongly urge that you seek a fee-only advisor who sells only their knowledge and advice. NAPFA (a professional organization for fee-only advisors) has published this excellent guide to finding a financial advisor.

A free meal is great, but in the end as they say, there are no free lunches.

Approaching retirement and want another opinion on where you stand? Not sure if you are invested properly for your situation? Check out my Financial Review/Second Opinion for Individuals service.

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 the Hire Me tab to learn more about my freelance financial writing and financial consulting services.  

Year-End 401(k) Matching – A Good Thing?

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Tim Armstrong

I was reminded of the issue of year-end 401(k) matching by employers when I learned that the employer of a close relative was changing their match to the end of the year.

A few years ago, AOL announced that they were moving to a year-end once per year match on their 401(k) plan. AOL subsequently rescinded this change due to the public relations disaster caused by the firm’s Chairman tying this change to both Obama Care and specifically to two high-risk million dollar births covered by the company’s health insurance in 2012. Many major companies, including IBM, have gone this route in recent years. What are the implications of a year-end annual 401(k) match for employees and employers?

Implications for employees 

Ron Lieber wrote an excellent piece in the New York Times entitled Beware the End-of-Year 401(k) Match about this topic.  According to Lieber:

“AOL’s chief executive, Tim Armstrong, drew plenty of attention earlier this month when he seemed to attribute a change in the company’s 401(k) plan in part to a couple of employees whose infants required expensive care. But what was mostly lost in the discussion was just how much it would cost employees if every employer tried to do what AOL did. 

The answer? Close to $50,000 in today’s dollars by the time they retired, according to calculations that the 401(k) and mutual fund giant Vanguard made this week. That buys a lot of trips to see the grandchildren — or scores of nights in a nursing home.” 

The Vanguard study assumes an employee earns $40,000 per year and contributes 10% of their salary for 40 years, the investments earn 4% after inflation and the employee receives a 1% salary increase per year. The worker would have a balance that was 8.7% lower with annual matching than with a per pay period match. Of note, the Vanguard analysis assumes that this hypothetical worker missed 7 years’ worth of annual matches due to job changes over the course of his/her career.

Lieber also discussed the case of IBM’s move to year-end matching that also proved controversial. IBM, however, offers all employees free financial planning help and has a generous percentage match.

Additional implications of an annual match from the employee’s viewpoint:

  • One of the benefits of regular contributions to a 401(k) plan is the ability to dollar cost average. The participants lose this benefit for the employer match.
  • Generally, employees must be employed by the company as of a certain date in order to receive their annual match.  Employees who are looking to change employers will be impacted as will employees who are being laid off by the company.
  • If the annual match is perceived as less generous it might discourage some lower compensated workers from participating in the plan. This could lead to the plan not passing its annual non-discrimination testing, which could lead to restrictions on the amounts that some employees are allowed to contribute to the plan. 

Note employers are not obligated to provide a matching contribution. The above does not refer to the annual discretionary profit sharing contribution that some companies make based on the company’s profitability or other metrics. Lastly to be clear, companies going this route are not breaking any laws or rules.

Implications for employers 

I once asked a VP of Human Resources why they chose a particular 401(k) provider. His response was that this provider’s well-known and respected name was a tool in attracting and retaining the type of employees this company was seeking.

While not all employers offer a retirement plan, many that do cite their 401(k) plan as a tool to attract and retain good employees.

There are, however, some valid reasons why a plan sponsor might want to go the annual matching route:

  • Lower administration costs (conceivably) from only having to account for and allocate one annual matching contribution vs. having to do this every pay period. In many plans the cost of administration is born by the employees and comes out of plan assets, in other plans the employer might pay some or all of this cost in hard dollars from company assets.
  • Cost savings realized by not having to match the contributions of employees who have left the company prior to year-end or the date of required employment in order to receive the match.
  • Let’s face it the cost of providing employee benefits continues to increase. Companies are in business to make money. At some point something may have to give. While I’m not a fan of these annual matches, going this route is better for employees than eliminating the match altogether.

Reasons a company wouldn’t want to go this route:

  • In many industries, and in certain types of positions across various industries, skilled workers are scarce.  Annual matching can be perceived as a cut in benefits and likely won’t help companies attract and retain the types of employees they are seeking.
  • Companies want to help their employees to retire at some point because they feel this is the right thing to do. Additionally, if too many older employees don’t feel they can retire this creates issues surrounding younger employees the company wants to develop and advance for the future. 

Overall I’m not a fan of these annual matches simply because it is tough enough for employees to save enough for their retirement under the defined contribution environment that has emerged over the past 25 years or so. The year-end or annual match makes it just that much tougher on employees, which is not a good thing.

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 the Hire Me tab to learn more about my freelance financial writing and financial consulting services. 

Photo credit:  Wikipedia

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A Pre-Retirement Financial Checklist

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Are you within a few years of retirement? It’s time to get your financial house in order. We are now almost eight years into a bull market for stocks that has seen the S&P 500 move from 677 at the lows of the financial crises to a recent intraday high of over 2,350. Hopefully these stock market highs have favorably impacted your retirement readiness?

Here are several items to include on your pre-retirement financial checklist.

Review your company benefits  

Your 401(k) plan might be your largest and most significant employee benefit, but there may be others to consider as well. Does your company offer any sort of retiree medical coverage? Are there other benefits that you can continue at reduced group rates?

In the case of your 401(k) you will have choices to make at retirement. You will need to determine if you want to leave it with your soon-to-be-former employer, roll it into an IRA, or take a distribution. The last choice will likely result in a hefty tax bill, so this is generally not a good idea for most folks.

Do you have company stock options that you haven’t exercised? Check the rules here. Speaking of company stock, there are special rules called net unrealized appreciation to consider when dealing with company stock held in your 401(k) plan.

Do you have a pension from your current or former employer?

While a pension is certainly an employee benefit, I feel that it deserves its own section. You might have several decisions to make regarding your pension benefit if you are fortunate enough to be covered by one.

  • Do you take the benefit immediately upon retirement, or wait?
  • If you have the option, do you take the pension as a lump-sum and roll over to an IRA or take it as a monthly annuity?
  • Generally, there will be several annuity payment options to consider, which one is right for your situation?

These decisions should be made in the context of your overall financial situation and your ability to effectively manage a lump sum. Since any lump-sum would be taxable if taken as a distribution, it is usually advisable for you to roll it over into a tax-deferred account such as an IRA. If you have earned a pension benefit from a former employer, be sure to contact your old company to get all the details and to make sure they have your current address and contact information so there are no delays or glitches when you want to start drawing on this pension.

Determine your Social Security benefits and when to take them

While you can start taking Social Security at age 62, there is a significant reduction in your monthly benefit as opposed to waiting until your full retirement age. Further, if you can wait until age 70 your benefit level continues to grow. If you are married the planning should involve both spouses’ benefits. There are several planning opportunities for married couples around when each spouse should claim their benefit.

Review your retirement financial resources 

Over the course of your working life you have likely accumulated a variety of investments and other assets that can be used to fund your retirement which might include:

  • Your 401(k)or similar retirement plan such as a 403(b) or other defined contribution plan.
  • IRA accounts, both traditional and Roth.
  • A pension.
  • Stock options or restricted stock units.
  • Social Security
  • Taxable investment accounts.
  • Cash, savings accounts, CDs, etc.
  • Annuities
  • Cash value in a life insurance policy
  • Inheritance
  • Interest in a business
  • Real estate
  • Any income from working into retirement

In the years prior to retirement it is a good idea to review all your anticipated assets and retirement resources to determine how they can be best utilized to support your desired retirement lifestyle.

Determine how much you will need to support your retirement lifestyle 

While this might seem intuitive you’d be surprised how many folks within a few years of retirement haven’t done this. Basically, you will want to put together a budget. Will you stay in your home or downsize? What activities will you engage in? What will your basic living expenses be? And so on.

Compare this to the income that your various retirement resources might generate for you and you will have a good idea if you will be able to support your desired lifestyle in retirement. If there is a gap, you still have some time to make adjustments to close that gap.

You will need to do some planning in terms of which financial resources to tap and the sequencing of these withdrawals over the course of your retirement.

This is a very cursory “checklist” for Baby Boomers and others within a few years of retirement. This might be a good point to engage the services of a fee-only financial advisor if you’ve never done a financial plan, or if your plan is out of date. Retirement can be a great time of life, but proper planning is required to help ensure your financial success.

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 the Hire Me tab to learn more about my freelance financial writing and financial consulting services.  

Approaching retirement and want another opinion on where you stand? Check out my Financial Review/Second Opinion for Individuals service.

Stock Market Highs and Your Retirement

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As I write this the Dow Jones Industrial Average has surpassed the 20,000-milestone intraday today. This comes some seven months 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 16 + 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 both 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 and we are approaching the eighth year of this bull market. 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. Don’t miss any future posts, please subscribe via email. Please check out the Hire Me tab to learn more about my freelance financial writing and financial consulting services.  

Photo credit:  Phillip Taylor PT

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. The maximum for 2017 is $54,000 Contributions are deductible as a business expense and are not required every year. For 2016, employer plus employee combined contribution limit is a maximum of 25% of compensation up to $53,000 ($59,000 if the employee is age 50 or older).  For 2017 the maximums are $54,000 and $60,000, respectively. Employer 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. The limits are unchanged for 2017.
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.
  • The SEP-IRA contribution is calculated as a percentage of compensation.  If your compensation is variable the amount that you can contribute year-to year will vary as well. 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 and 2017 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 

Approaching retirement and want another opinion on where you stand? Not sure if you are invested properly for your situation? Check out my Financial Review/Second Opinion for Individuals service.

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 the Hire Me tab to learn more about my freelance financial writing and financial consulting services.  

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Should You Accept a Pension Buyout Offer?

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Corporate pension buyout offers have been in the news in recent years with companies like Hartford Financial Services offering lump-sum payment options to vested former employees and with Boeing offering a choice of lump-sum or annuity payments to a similar group. Note these offers are not available to retirees who have already taken their pension benefit.

The answer to the question of whether you should accept a pension buyout offer versus taking your pension as a lifetime stream of monthly payment is that it depends upon your situation. Here are a few things to consider.

Are they sweetening the deal? 

Perhaps the lump-sum is a bit larger, and in the case of the Boeing offer the annuity payments were a bit better as well. Or perhaps there normally wouldn’t be a lump-sum option available from the pension plan so this in and of itself is an incentive.

Remember the incentive for the companies offering these deals is to get rid of these future pension liabilities. The potential cost savings and impact on their future profitability is huge. 

Can you manage the lump-sum? 

The decision to take your pension as a lump-sum vs. a stream of payments is always a tough decision. A key question to ask yourself is whether you are equipped to manage a lump-sum payment. Ideally you would be rolling this lump-sum into an IRA account and investing it for your retirement. Are you comfortable managing this money?  If not are you working with a trusted financial advisor who can help you?

There has been much written about financial advisors who troll large organizations (both governmental and corporate) looking for large numbers of folks with lump-sums to rollover. In some cases, these advisors have moved this rollover money into investments that are wholly inappropriate for these investors. As always be smart with your money and with your trust.  Be informed and ask lots of questions.

Do you have concerns about the company’s financial health? 

Do you have doubts about the future solvency of the organization offering the pension? This pertains to both a public entity (can you say Detroit?) and to for-profit organizations like Hartford Financial and Boeing. In the latter case pension payments are guaranteed up to certain monthly limits set by the PBGC. If you were a high-earner and your monthly payment exceeds this limit you could see your monthly payment reduced.

While I am not familiar with the financial state of either Hartford Financial or Boeing I’m guessing their financial health is not a major issue. If you receive a buyout offer you might consider taking it if you have concerns that your current or former employer may run into financial difficulties down the road.

Who guarantees the annuity payments? 

If the buyout offer includes an option to receive annuity payments make sure that you understand who is guaranteeing these payments. Generally, if a company is making this type of offer they are looking to reduce their future pension liability and they will transfer your pension obligation to an insurance company. They will be the one’s making the annuity payments and ultimately guaranteeing these payments.

This is not necessarily a bad thing but you need to understand that your current or former employer is not behind these payments nor is the PBCG. Typically, if an insurance company defaults on its obligations your recourse is via the appropriate state insurance department. The rules as to how much of an annuity payment is covered will vary.

The impact of inflation

An additional consideration in evaluating a buy-out option that includes annuity payments of this type is the fact that most of these annuities will not include cost of living increases. This means that the buying power of these payments will decrease over time due to inflation. 

What other retirement resources do you have? 

If you will be eligible for Social Security and/or have other pension plans it quite possibly will make sense to take a buyout offer that includes a lump-sum. Review all of your retirement accounts and those of your spouse if you are married.  This includes 401(k) plans, 403(b) accounts, IRAs, etc. This is a good time to take stock of your retirement readiness and perhaps even to do a financial plan if don’t have a current one in place.

The Bottom Line

I’m generally a fan of pension buyout offers, especially if there is a lump-sum option. As with any financial decision it is wise to look at your entire retirement and financial situation and to have a plan in place to manage this money.  Where an annuity is also available you need to understand who will be behind the annuity and to analyze whether this is a good deal for you. Be prepared to deal with an offer if you receive one.

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.  

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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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.

Photo credit:  Wikipedia

Brexit and Your Portfolio

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As you are most likely aware, the U.K. voted to leave the European Union. The so-called Brexit vote was a surprise to many and caused a swift, severe and negative reaction in the world financial markets.

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On Friday June 24, the S&P 500 lost about 3.6% and the Dow Jones Industrial Average lost about 3.4% of its value. There may be more pain in the days ahead, only time will tell.

As an individual investor what should you do when the stock market drops?

This isn’t new 

While the Brexit is a new issue, we’ve seen plenty of market disruptions before. The stock market crash of October 19, 1987 saw the market drop 22.61%. The correction following the Dot Com bust and 9/11 was severe as was the market decline in the wake of the 2008 financial crises. The markets recovered nicely in all cases and even with Friday’s declines the S&P 500 is about three times higher than it was at the depths of the market in March of 2009.

A good time to do nothing 

While everyone’s situation is different, the vast majority of investors would be wise to do nothing in the wake of these market declines. Panicking and withdrawing money from your accounts may feel good now, but you’ll likely regret it down the road.

Investors nearing retirement who sold their equity holdings near the depths of the financial crises in late 2008 or early 2009 realized large losses, then sat on the sidelines during some or all of the ensuing market recovery. Their retirement dreams are in shambles because they panicked.

Some strategies to consider 

Once the dust settles a bit, here are a few things you might consider:

Rebalancing your portfolio. Especially if the markets continue their downward trend for a few more days or weeks it is likely that your portfolio will become underweight in equities. This is a good time to rebalance back to your target asset allocation. Rebalancing forces a level of discipline on investors, in this case buying when equities have fallen.

Tax-loss selling. In the course of rebalancing and reviewing your portfolio, you may have some holdings in your taxable account that have dropped below their cost basis. Look to sell some of them to realize the loss. Be sure to understand the wash-sale rules if you intend to buy these holdings back. Above all ensure that any asset sales make good investment sense, as the saying goes “…don’t let the tax tail wag the investment dog…”

Recharacterize a Roth conversion. If you have converted traditional IRA dollars to a Roth IRA and the value of these converted dollars has fallen you are entitled to a do-over or recharacterization. You generally have until October 15 of the year following the year in which the conversion took place. The assets that are recharacterized cannot immediately be converted back to a Roth, there is generally at least a 30 day waiting period. In other words if you did a conversion in 2015 you would have until October 15, 2016 (or the latest tax filing date including extensions).

If the value of the assets that you converted has fallen appreciably, there can be significant tax savings to be realized here. These rules are complex so be sure that you know what you are doing or that you seek the advice of a knowledgeable tax or financial advisor.

The Bottom Line 

Event-driven market declines such as we’ve seen (and may continue to see) via the Brexit vote are often swift and severe in nature. For most investors the best course of action is no action. Once the dust has settled a bit review your portfolio and make adjustments and tweaks that make sense in a thoughtful, controlled fashion.

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.