Objective information about financial planning, investments, and retirement plans

A Pre-Retirement Financial Checklist

Share

Are you within a few years of retirement? It’s time to get your financial house in order. 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 deserved its own section.  You might have several decisions to make with regard to 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, 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 of 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 a number of sophisticated strategies surrounding couples and whose benefits to take and when so planning is very critical here.

Review all of 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 401(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    

Well prior to commencing your retirement it is a good idea to review all of your anticipated assets and determine how they can be best utilized to support your anticipated 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.  Further you will need to do some planning in terms of which financial resources and accounts to tap at various stages 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 at 847-506-9827 for a complimentary 30-minute consultation to discuss all of your investing and financial planning questions. Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services.

The Chicago Financial Planner is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com. If you click on my Amazon.com links and buy anything, even something other than the product advertised, I earn a small fee, yet you don’t pay any extra. Click on the Amazon banner below to go directly to the main site or check out the financial planning related selections in our Book Store.

 

Enhanced by Zemanta

How Confident Are You About Retirement?

Share

Retirement Paradise

The Employee Benefit Research Institute (EBRI) recently published their annual Retirement Confidence Survey.  A few highlights from the survey:

  • The number of workers who say they are confident that they will have enough money to live comfortably in retirement improved to 18% from 13% in the prior survey.
  • The percentage of retirees indicating that they were very confident that they would have enough money to live comfortably in retirement jumped from 18% to 28%.
  • Workers having money in a retirement plan such as an IRA, 401(k), or pension were more than twice as confident that they would have enough money in retirement (24% vs. 9%) than those not participating in a retirement plan of some sort.
  • Worker confidence decreased with higher levels of debt.
  • Worker confidence was higher among workers with higher levels of income. 

Surveys and overall statistics are great, but the reality is that your level of retirement confidence should be driven by your level of retirement readiness.

Retirement readiness questions 

In assessing your level of retirement readiness, ask yourself these questions:

  • How much do I have saved for retirement?
  • How much am I saving each year for retirement?
  • How much will I need to have accumulated by the time I retire to ensure a comfortable retirement?
  • How much will I spend annually in retirement?
  • What resources will I have available to fund retirement other than my nest egg?  This would include items such as a pension and Social Security. 

The impact of debt

According to the survey those workers carrying high debt loads were less confident about their ability to accumulate enough money for a comfortable retirement than those workers with more modest levels of debt.  This is no surprise in that money that goes to service your debts is money that cannot be saved and invested for retirement.

Once you are retired excess debt payments can be a real burden for those on a fixed or semi-fixed income which is a high percentage of retirees.  If the debt, such as a mortgage, is at a manageable level given your retirement cash flow, that’s fine.

What can you do to boost retirement confidence? 

There are any number of things you can do to boost your retirement readiness and your retirement confidence level.  Here are a few:

  • Manage your spending and make cuts where possible.
  • Take full advantage of your 401(k) plan or other workplace retirement plan.
  • Start and fund a self-employed retirement plan if you are self-employed.
  • Manage all of your old retirement plans as well as those of your spouse as part of your overall portfolio.  Consider an IRA to consolidate several old plans in one place.
  • Get a financial plan in place to assess where you stand and to determine any shortfalls regarding where you need to be.  Tools such as the calculator at the end of this post can help as well. 

If it looks like you might come up short relative to being able to fund your desired lifestyle you have some choices to make:

  • Delay retirement or plan to work at least part-time during retirement.
  • Ramp up you savings now.
  • Revise your planned standard of living in retirement. 

In a prior post on this blog Is a $100,000 a Year Retirement Doable? I worked through the math of a hypothetical retiree.  This methodology might be helpful to you as well.

You may or may not like the answer you get when you do the planning and the math for your retirement but at least you will know where you stand.  Knowing where you stand is powerful and can go a long way to improving your confidence about your retirement.

Please contact me at 847-506-9827 for a complimentary 30-minute consultation to discuss  all of your investing and financial planning questions. Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services. 

The Chicago Financial Planner is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com. If you click on my Amazon.com links and buy anything, even something other than the product advertised, I earn a small fee, yet you don’t pay any extra. Click on the Amazon banner below to go directly to the main site or check out the selections in our Book Store.

 

Loading Financial Calculator...

 

Photo credit:  Flickr

Enhanced by Zemanta

What I’m Reading – March Madness Edition

Share

It’s a bit of a lazy Sunday here and I am half surfing the web and half watching the NCAA Men’s basketball tournament.  I’m not the college basketball fan that I once was, but I still love March Madness and watch every game that I can.

In 1939, H.V. Porter of the IHSA coined the te...

Here are some financial articles that I’ve read lately that you might find interesting and useful:

The Ultimate Guide to Understanding Your 401(k) A great piece loaded with information for those who might be new to 401(k) investing or who just want to learn a bit more by Harry Campbell on his blog Your Personal Finance Pro.

Five strategies to get the most Social Security another excellent and informative piece by Robert Powell at Market Watch.

And You Thought Just Tuition Was Expensive a nice piece on the Morningstar site that discusses how college expenses other than tuition can really put a strain on parents and students trying to pay for college.

Are You Paying Too Much For Mutual Funds?  Dana Anspach does a good job of addressing this important question at U.S. News.

The IRS Releases Their “Dirty Dozen” Tax Scams for 2014 was featured on Jim Blankenship’s excellent blog Getting Your Financial Ducks in a Row.

Americans and Retirement: 3 Worrying New Findings discusses EBRI’s most recent Retirement Confidence survey on Wall Street Cheat Sheet.

If you are new to The Chicago Financial Planner here are the three most popular posts over the past 30 days:

Your 401(k) is not Free

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

7 Retirement Investing Tips

Well that’s it I hope you enjoy some of these articles and the rest of your Sunday.  I’ve watched a couple of good tournament games so far with hopefully more to follow.  Cool and sunny here today, but none the less good grilling weather, chicken is on the menu for tonight.

Please contact me at 847-506-9827 for a complimentary 30-minute consultation to discuss  all of your investing and financial planning questions. Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services. 

The Chicago Financial Planner is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com. If you click on my Amazon.com links and buy anything, even something other than the product advertised, I earn a small fee, yet you don’t pay any extra. Click on the Amazon banner below to go directly to the main site or check out the selections in our Book Store.

Photo credit:  Wikipedia

Enhanced by Zemanta

Time Well Spent: Choosing an IRA or a Restaurant?

Share

Actually both can be a good use of your time in the right amount.  Living near a major city like Chicago, the dining choices are innumerable.  The worst that can happen is you have a bad meal should you choose the wrong restaurant.  Contrast this with choosing the wrong place for your IRA account and/or the wrong investments and you may end up with less in retirement than you had hoped for.

According to a recent survey by TIAA-CREF:

  •  Americans are more likely to spend two hours selecting a restaurant for a special occasion (25 percent), buying a flat screen TV (21 percent) or tablet computer (16 percent) than on planning an IRA investment (15 percent).
  • Fewer than one in five (17 percent) Americans are contributing to an IRA – a decline from 22 percent in 2012 – potentially missing tax and savings benefits.
  • What’s more, fewer than half (47 percent) of those not contributing say they would consider an IRA, down from 57 percent in 2013.
  • Even among those who already have an IRA, more than half (55 percent) said they spent an hour or less planning for the investment.

201921-409710_IRA_Info_Graphic_730px

 

According to the TIAA-CREF survey:

“An IRA can be an incredibly powerful savings tool that can boost retirement security and offer immediate tax and savings benefits. IRAs can also serve as a valuable supplement to an employer-sponsored plan and help fund a first home or education,” said Doug Chittenden, Executive Vice President, Individual Business at TIAA-CREF. 

Despite these benefits, the survey found that fewer than one in five (17 percent) of those surveyed currently contribute to an IRA, a decline from 22 percent in 2012. 

The survey reveals that the number of Americans who would consider an IRA as part of their retirement strategy has fallen sharply since 2013. Fewer than half (47 percent) of those not contributing say they would consider an IRA, down from 57 percent in 2013. 

It is possible that a lack of understanding is responsible for low IRA contribution levels. More than one-third (35 percent) of respondents do not understand what an IRA is or the difference between an IRA and an employer-sponsored plan. This percentage is even higher among the Generation Y (age 18-34) population surveyed (45 percent). 

“More and more people are unaware of the ultimate value an IRA can have in a building a stable and secure retirement,” said Chittenden. “Americans today bear much more responsibility for their retirement savings than previous generations did. There is a pressing need to educate Americans from all age groups and income levels on the long-term retirement benefits that IRAs provide through compounded investment growth and tax savings.” 

Even among those who already have an IRA, more than half (55 percent) said they spent an hour or less planning for the investment. 

Sixty percent of those who are contributing to an IRA also have an employer-sponsored plan such as a 401(k) or 403(b). Among those with both plans, more than half (53 percent) say they contribute to their IRA regardless of whether they have reached the contribution or matching limit of their employer-sponsored plan. This means they could be leaving money on the table if they are diverting money to their IRA before contributing enough to get their employer match. 

How does an IRA fit with my retirement planning strategy? 

TIAA-CREF is absolutely right in that an IRA can be a great tool in your retirement planning strategy.  If someone has access to a 401(k) or similar workplace retirement plan I generally suggest they contribute at least enough to capture any employer match offered.  This is true even if their 401(k) plan is lousy.

Beyond that it makes sense to contribute more than the amount needed to receive the match if your employer’s plan offers a menu of low cost solid investment choices.  Although 401(k) plans receive a lot of bad press, in fact there are many excellent plans out there.  One advantage to investing for retirement via a workplace retirement plan is the salary deferral feature.  This makes regular savings and retirement investing painless.

An IRA can be a great retirement savings vehicle in a number of situations:

  • You don’t have access to a retirement plan via your employer.
  • You have maxed out your contributions to your 401(k) and want to make additional retirement contributions.
  • You are a non-working spouse and your working spouse makes at least income to cover the amount of your contribution.
  • You are self-employed.  Note there are a number of retirement plan options for the self-employed including a Solo 401(k) and SEP-IRA.
  • You are looking to roll over your 401(k) after leaving a job and also possibly to consolidate several old 401(k) plans in one place to make managing these assets a bit easier. 

Considerations in choosing an IRA account 

In a recent post on this blog 3 Considerations When Opening an IRA Account I suggested the following things to consider when opening an IRA account:

When looking at the cost of an account at a particular custodian consider any annual account fees and transaction costs related to the types of investments you are likely to make.  For example:

  • How much is it to trade stocks, closed-end funds, ETFs or other exchange-traded vehicles?
  • Does this custodian offer a large number of mutual funds on a no transaction fee (NTF) basis? 

While researching a good restaurant can take some time and potentially yield some tasty rewards, time spent on finding the right IRA and on retirement planning in general can pay off handsomely down the road.  This can lead to many fine restaurant meals as well.

Please contact me at 847-506-9827 for a complimentary 30-minute consultation to discuss  all of your investing and financial planning questions. Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services. 

The Chicago Financial Planner is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com. If you click on my Amazon.com links and buy anything, even something other than the product advertised, I earn a small fee, yet you don’t pay any extra. Click on the Amazon banner below to go directly to the main site or check out the selections in our Book Store.

Enhanced by Zemanta

Your 401(k) is not Free

Share

Several studies in recent years have highlighted the fact that a significant percentage of 401(k) plan participants don’t realize that their company retirement plan is not free.   Further they were not aware that they often pay all or a portion of these expenses out of their plan accounts.

401K - Perfect Solution !?

2011 study by AARP showed that 71% of the 401(k) participants that were surveyed were unaware there were expenses associated with their retirement plan.  The survey also showed a high level of misunderstanding of plan fees even by those who were aware of them.  More recent studies have also shown significant levels of both participants who are unaware of the fees and a high level of misunderstanding, even with the advent of required 401(k) fee disclosures in 2012.

Typical 401(k) plan fees and expenses

There has been an emphasis on the negative impact that high cost 401(k) plans have on the ability of participants to save for retirement via media.  The 2013 PBS Frontline program The Retirement Gamble, for example did a nice job of highlighting the negative impact of high fees on retirement savers.  Some of the expenses that are typical of a 401(k) plan include:

  • Investment expenses.  Here I am primarily referring to the expense ratios of the mutual funds, collective trusts, annuity sub-accounts, or ETFs offered as investment choices by the plan.  Using mutual funds as an example, all mutual funds have an expense ratio whether you invest within a 401(k) plan or outside the plan.  The key is whether the expense ratios of the choices offered by your plan are reasonable.
  • Administration and record keeping.  This includes keeping track of plan assets, participant assets, ensuring that salary deferrals and matching contributions are invested in line with the participant’s elections, generating quarterly statements, as well as various testing and external reporting functions.
  • Custody of plan assets.  This is where the money invested and the mutual funds (or other investment vehicles) are housed.  Examples of custodians might be Fidelity, Vanguard, Schwab, Wells Fargo, etc.
  • Investment advisor.  The fees here are for an outside investment advisor who provides advice to the plan sponsor in areas like investment selection and monitoring and the development of an Investment Policy Statement for the plan.  However, sometimes these charges are simply the compensation for a registered rep who sells the plan to company and may offer little or no actual investment advice. 

Other than mutual fund expense ratios (investor returns are always net of expenses) these expenses may be paid from plan assets (your money), by the company or organization sponsoring the plan, or a combination of both.  For example the plan sponsors who engage my services as advisor to their plan pay my fees from company assets so the plan participants bear none of the cost.

Additionally the delivery of these various functions can be fully bundled, partially bundled, or totally unbundled.  Generally (and hopefully) the outside investment advisor is independent of the other service providers.

Providers like Fidelity, Vanguard, or Principal are example of bundled providers.  They provide the investment platform, custody the assets, and do all of the administration and record keeping.  In an unbundled arrangement, the custodian, record keeper, and the investment advisory functions are all separate and provided by separate entities.

Neither arrangement is inherently good or bad, it is incumbent upon the organization sponsoring the plan to monitor the costs and quality of the services as part of their Fiduciary duty to you the plan participant.  Plan sponsors should insist on transparency regarding all provider expenses.

BrightScope 

BrightScope is a service that independently rates 401(k) plans on a number of criteria.  Check to see if your company’s plan is ranked by them at their site. 

Mutual Fund expenses 

The required fee disclosures that I mentioned above focus on the plan’s investment options and their expenses.  You should start seeing them in the near future.

While they may not look particularly informative and don’t delve into the plan’s total costs, the investment expenses can be telling none the less.

If your plan is via a large employer, you may see institutional share class mutual funds with very low expense ratios.  As an example my wife works for a division of a Fortune 150 company and some of the index funds available to her have expense ratios less than 0.05% which is very low.

In fact looking at the fund share classes offered by your plan is also revealing.

The American Funds offer six share classes for retirement plans ranging from R1 to R6.  Using the popular American Funds EuroPacific Growth fund as an example you can see the differences in the expenses and the impact on return below.

Ticker Expense Ratio 12b-1 5 Year return
R1 RERAX 1.61% 1.00% 15.35%
R2 RERBX 1.60% 0.74% 15.35%
R3 RERCX 1.14% 0.50% 15.90%
R4 REREX 0.85% 0.25% 16.24%
R5 RERFX 0.55% 0.00% 16.58%
R6 RERGX 0.50% 0.00% 16.62%

Source:  Morningstar as of 3/14/14

Looking at this another way, $10,000 invested in the R1 and R6 share classes would have grown to the following amounts by February 28, 2014:

R1  $20,915

R6  $23,022

I think you will agree that this is a rather significant difference.

The 12b-1 fees are included in the fund’s expense ratio and generally go to compensate the plan provider, the registered rep or broker who sold the plan or other service providers.  In the case of the American Funds you generally see the R1, R2, and R3 shares in higher cost, broker sold plans.

Similar share class comparisons can be made with other mutual funds in many other families including Fidelity, T. Rowe Price, and even low-cost Vanguard.

According to Morningstar* data as of 12/31/13 here are the median expense ratios for the following investment styles:

Large Blend 1.07%
Large Growth 1.15%
Large Value 1.07%
Mid Cap Blend 1.16%
Mid Cap Growth 1.24%
Mid Cap Value 1.24%
Small Cap Blend 1.23%
Small Cap Growth 1.36%
Small Cap Value 1.31%
Foreign Large Blend 1.23%
Intermediate Bond 0.79%

 

While these are median expense levels I would say that for the most part if the funds in your plan are at these levels they are too expensive.  Index funds across these categories should be 0.25% or less.

Several studies have concluded that the biggest determinant in retirement success is the amount saved.  None the less having access to a solid, low cost 401(k) plan as vehicle for retirement investing is a big plus.

Please contact me at 847-506-9827 for a complimentary 30-minute consultation to discuss  all of your investing and financial planning questions. Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services. 

The Chicago Financial Planner is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com. If you click on my Amazon.com links and buy anything, even something other than the product advertised, I earn a small fee, yet you don’t pay any extra. Click on the Amazon banner below to go directly to the main site or check out the selections in our Book Store.

* Affiliate link, I may be compensated if you enroll in Morningstar’s premium service at no extra cost to you.

Photo credit:  Flickr

Enhanced by Zemanta

Is Fear the Ultimate Financial Sales Tool?

Share

If you are like me you may have noticed a preponderance of TV and radio ads where fear is used to pitch various financial products.  If seems that these are overwhelmingly from providers of products such as annuities, insurance or other commissioned financial and investment products.   Recently I heard commercial for a variation of the insurance product called Be Your Own Banker.  Their pitch was the inevitability of a 50% loss in the stock market.  Really, come on.

Fear Is the Mindkiller

My personal pet peeve is that far too often these fear mongers seem to target seniors afraid of losing their nest eggs.

Should fear be a financial motivator? 

Ameriprise has been running a commercial asking folks if they would outlive their money in retirement.  A valid question and one in part based upon fear.

In fact many folks in their 50s or 60s looking for financial planning help as they approach retirement are asking this question.  Whether it’s fear-based or born out of a desire to be prepared it is a good lead-in to the financial planning process for folks in this age range.

On the other hand scaring people, especially seniors, into purchasing a financial product that may or may not be right for them strikes me as sleazy.

In a prior post on this blog, 5 Steps to a Lousy Retirement, I listed making financial decisions based on emotions as one of the steps to take on the road to a lousy retirement.  This especially true when you are being sold annuities or insurance products because so many of them come with onerous surrender charges meaning that it will cost you dearly to move your money elsewhere over the first 5-10 years of ownership.

Planning should precede the sale of financial products 

The logic, other than the desire to earn a sales commission, of pitching a financial product instead of a financial plan to a client escapes me.  In my world a financial planning strategy generally comes first, the implementation of that strategy including the use of appropriate financial products comes afterwards.

Inflation vs. investment loss 

Many of these fear-based product pitches cropped up in the wake of the financial crisis of 2008-09 and the corresponding drop in the stock market.

In my opinion, however, retirees should fear the impact of inflation on their purchasing power vs. losing money in the stock market.  Even a relatively benign 3% inflation rate will cut your purchasing power in half over a 24 year period.

Yes the stock market was hammered in 2008 and if you use the SD&P 500 as a benchmark the market gained very little during the decade 2000-2009.  However a diversified portfolio did reasonably well even during this “lost decade.”

Ask questions and do your homework  

Many successful financial sales types are very personable individuals.  In some cases the sales person might be your neighbor, a member of your church, or a fellow member of the local Rotary club.  This shouldn’t disqualify them as an advisor, however you should also be prepared to scrutinize their credentials and the products they may be trying to sell you with the same tough standards that you would hopefully apply to a stranger in the same situation.

As an example, with the Be Your Own Banker (or any of its variations) sales pitch that I mentioned at the outset, you need to dig very deep before writing a check for this type of insurance policy.  I went to the site and found much of the presentation confusing and found little or no information about the associated policy costs and expenses.

Whether an insurance policy, an annuity, or commissioned investment products you need to ask many, many questions of the agent/registered rep.

  • At the very least understand ALL associated fees, expenses, and restrictions on moving your money.
  • How does this individual get paid?
  • With an insurance related product how solid is the company behind the policy or annuity contract?  

Fear must be a very effective tool in selling financial products, otherwise we would not see so many fear-based product pitches.  Don’t fall for this type of sales pitch.  The only financial products that you should consider are those that are right for your situation, not those that you are scared into buying.

Please contact me at 847-506-9827 for a complimentary 30-minute consultation to discuss  all of your investing and financial planning questions. Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services. 

The Chicago Financial Planner is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com. If you click on my Amazon.com links and buy anything, even something other than the product advertised, I earn a small fee, yet you don’t pay any extra. Click on the Amazon banner below to go directly to the main site or check out the selections in our Book Store.

Photo credit: Wikipedia

Enhanced by Zemanta

3 Considerations When Opening an IRA Account

Share

As we head toward April 15 it is now high IRA season for the major brokerage and financial services firms.   You will undoubtedly see many TV commercials and ads by these firms touting the benefits of opening an IRA with their firm.  Here are 3 things to consider as you evaluate your best IRA account options.

Understanding your retirement

How much will this cost me? 

Some firms may charge a fee just to have the account.  This might be on the order of $25 or $50 annually.  If your balance is relatively low this can be a significant bite.  Sometimes these fees are based on the size of your account balance.

Additionally you will want to understand any and all transaction fees.  This might include trading fees for buying and selling stocks, ETFs, or other exchange-traded investment vehicles.  Certain mutual funds might carry a transaction cost as well.

If you are working with a commission-based financial advisor understand how he or she is compensated.  Will the funds in the IRA account they are advocating carry sales charges or high internal fees to compensate them?

Is this custodian a good fit with my investing needs? 

This runs the gamut.  Certainly the fees mentioned above are part of this.  Beyond this look at how you invest and the vehicles in which you invest.

For example if you use ETFs extensively does this custodian offer any commission-free ETFs?  If so are these the ETFs that you would use?

As an example if you were planning on using Vanguard mutual funds exclusively it might make sense to house your IRA there.  On the other hand if you were looking to use funds from a variety of families perhaps a custodian that is more of a fund supermarket like Schwab or Fidelity is more appropriate for you.

Beyond an IRA account is this custodian a good fit for my needs in terms of other types of accounts such as a taxable brokerage account?  Do they offer the full array of services that I might need?  In my experience having an IRA at one custodian plus other accounts scattered around several other custodians is rarely a good idea.

Should I roll my 401(k) to an IRA or leave in my old employers plan? 

One of the primary reasons that investors open an IRA during the year is to roll their old 401(k) account over when leaving a job.

If you are leaving your employer whether to roll your 401(k) balance over to an IRA, leave it in your old employer’s plan, or roll it to your new employer’s plan (if applicable) is a critical decision.

There are good  reasons to move your account balance to an IRA which could include:

  • Your old employer’s 401(k) plan is lousy (as is your new employer’s if applicable).
  • A desire to consolidate all of your various retirement accounts into a single IRA to make management of your investments easier.
  • Access to a wider selection of quality investment options than might be available via your old employer’s plan.
  • Perhaps you are working with a trusted financial advisor and the rollover with allow them to better integrate this money with your overall investment strategy. 

On the other hand two reasons to consider either leaving your money in your old employer’s plan or rolling it into your new employer’s plan (if applicable):

  • The plan offers a menu of low cost institutional investments that might not be available to you via a rollover IRA.  This is often the case with very large employers with tremendous buying power, but also with smaller plans who use a competent outside investment advisor.
  • Similar to the last bullet, the plan offers specific investment options that you would be unable to match in an IRA. 

An IRA, either Traditional or Roth, is a great vehicle to help you win the retirement gamble.  Before opening an IRA account you need to do your homework just as with any investing decision.

Please contact me at 847-506-9827 for a complimentary 30-minute consultation to discuss  all of your investing and financial planning questions. Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services. 

Please check out  
for books on financial planning and retirement as well as any Amazon shopping needs you may have.  
 

Check out:

The Chicago Financial Planner is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com.  If you click on my Amazon.com links and buy anything, even something other than the product advertised, I earn a small fee, yet you don’t pay any extra.

Photo credit:  Flickr

Enhanced by Zemanta

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

Share

Tim Armstrong

AOL’s recent announcement that they were moving to a year-end once per year match on their 401(k) plan has sparked a lot of discussion on this issue.  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.  None the less other firms, notably 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.” 

According to the Vanguard study, assuming 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 have to 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 which could lead to the plan not passing it’s 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.  Also note that 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 the VP of Human Resources of one of my 401(k) plan sponsor clients 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.  Note that 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 vs. reducing or eliminating a match is preferable. 

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 either because they feel this is the right thing to do and/or because 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.  In many cases the year-end or annual match simply makes it just that much tougher on employees, which is not a good thing.

Please contact me at 847-506-9827 for a complimentary 30-minute consultation to discuss  all of your investing and financial planning questions. Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services. 

Please check out  
for books on financial planning and retirement as well as any Amazon shopping needs you may have.  
 

The Chicago Financial Planner is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com.  If you click on my Amazon.com links and buy anything, even something other than the product advertised, I earn a small fee, yet you don’t pay any extra.

Photo credit:  Wikipedia

Enhanced by Zemanta

Retirement: Will You Outlive Your Money?

Share

If you’ve been watching the Olympics, you may have noticed several new Ameriprise Financial commercials with their star pitchman Tommy Lee Jones.  One commercial asks the question on the mind of many folks looking to retire:  

retirement

This isn’t about whether Ameriprise Financial is the right firm to help you answer this vital question.  Rather I wanted to discuss some of the factors that will go into the answering this question from the perspective of someone looking to retire.

Your resources 

A good first step is to determine your resources to generate spendable cash once you retire.  Depending upon your situation these may include some or all of the following:

  • 401(k) or similar retirement plan such as a 401(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  

The list above is not exhaustive and you may have other assets or sources of income that you will be able to tap in retirement.

How much have you accumulated? 

This is an important question at all ages for those saving for retirement.  It is critical the closer you are to retirement and this is certainly true if you are within 10 years or less of retirement.

How much will you spend in retirement? 

While this might vary over the course of your retirement you need to take a stab at a spending plan for retirement if you are close to retirement.  Some of the issues to consider:

  • Where will you live?
  • Will you have a mortgage or other debts as you enter retirement?
  • What types of activities will you engage in?
  • What are your costs for medical insurance and medical care?
  • Will you need to provide support for children?  Grandchildren?  Aging parents?
  • What will your basic living expenses entail?  

These questions just scratch the surface, but I think you get the idea.  One other point to remember is that you might spend more on travel and activities in the earlier part of your retirement and less as you age.  However, any savings here might be offset by increased costs for medical care.

Another approach is to figure out what level of expenditure your savings and other resources will support and either work backwards to a budget within that spending level, try to ramp up your retirement savings to close the gap, or perhaps plan to work a few years longer before retiring.  This can be done using the retirement calculator tool below or any number of retirement planning calculators available online.  With any such tool it is important that you pay attention to the assumptions inherent in the calculator’s model and that you think through any assumptions that you are allowed to input.

A qualified financial planner can help you through this process and this is a key element in a financial plan.

Whatever route you take the issue of outliving your money in retirement is a vital one for you to address.  In my opinion this is the biggest risk retiree’s face and is a biggest risk than losing money in the next market downturn.

Please check out our Book Store for books on financial planning and retirement as well as any Amazon shopping needs you may have.  The Chicago Financial Planner is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com.  If you click on my Amazon.com links and buy anything, even something other than the product advertised, I earn a small fee, yet you don’t pay any extra.

Please contact me at 847-506-9827 for a complimentary 30-minute consultation to discuss  all of your investing and financial planning questions. Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services.

Loading Financial Calculator...

Photo credit:  Flickr

Enhanced by Zemanta