Objective information about retirement, financial planning and investments

 

Discover the Secret to Living Tax-Free in Retirement

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

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

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

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

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

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

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

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

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

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

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

The Bottom Line

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

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

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

Should You Wait Until Age 70 to Collect Social Security?

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This post was written by financial planner Daniel Zajac. 

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

Perplexed? Stay with me.

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

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

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

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

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

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

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

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

But the 8% isn’t the only reason:

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

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

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

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

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

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

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

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

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

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

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

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

Which Plan is Right for You?

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

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

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

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

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

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

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

American’s Attitudes About Their Money

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Americans have varying attitudes about their money. The infographic below sheds light on our attitutudes about our finances across various demographic lines including age and income level.

Please take a look and see how your attitudes about your finances compare.

It’s never too late to get started on your financial plan.  Its never to late to move forward and to take the actions needed to get your financial situation on track whether you need to prepare for retirement or beef up your emergency fund.

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

personal finance
Source: Masters-in-Accounting.org

 

Reader Question: Do I Really Need a Financial Advisor?

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This question came from a reader who is around 60, works for a major corporation and has retirement assets in neighborhood of $1 million.  He indicated he is looking to either retire or be able to retire in the near future.  His question was in response to my recent request for story ideas and I appreciate this suggestion.  I will address this question largely from the perspective of this person’s situation as this is the type of client I am quite familiar with.

Do I really need a financial advisor? 

Do I really need a financial advisor? The only answer of course is that it depends.  There are many factors to consider.  Let’s take a look at a few of them.

How comfortable are you managing your own investments and financial planning issues? 

This is one of the main factors to consider.  The reader raised the point that the typical fees for ongoing advice on a portfolio of his size would likely be $8,000-$10,000 per year and wondered if the fee is worth it.

Certainly there is the issue of managing his portfolio.  It sounds like he has a significant 401(k) plan balance.  This will involve a decision whether to leave that money at his soon to be former employer or roll it to an IRA.  Beyond this decision is the issue of managing his investments on an ongoing basis.  And taking it a step further the fee level mentioned previously should include ongoing comprehensive financial planning advice not just investment advice.

Since it is likely that his 401(k) contains company stock (based upon who he works for) he has the option of electing the Net Unrealized Appreciation (NUA) treatment of this stock as opposed to rolling the dollars over to an IRA. This is a tactic that can save a lot in taxes but is a bit complex.

Can you be objective in making financial decisions? 

The value of having someone look at your finances with a detached third-party perspective is valuable.  During the 2008-09 stock market down turn did you panic and sell some or all of your stock holdings at or near the bottom of the market?  Perhaps a financial advisor could have talked you off of the ledge.

I’ve seen many investors who could not take a loss on an investment and move on.  They want to at least break-even.  Sometimes taking a loss and redeploying that money elsewhere is the better decision for your portfolio.

Can you sell your winners when needed and rebalance your portfolio back to your target allocation when needed?

Do you enjoy managing your own investments and finances?

This is important.  If don’t enjoy doing this yourself will you spend the time needed not only to monitor your investments but also to stay current with the knowledge needed to do this effectively?

In the case of this reader I suggested he consider whether this is something that he wanted to be doing in retirement.

What happens if you die or become incapacitated?

This is an issue for anyone.  Often in this age bracket a client who is married may have a spouse who is not comfortable managing the family finances.  If the client who is interested and capable in this area dies or becomes incapacitated who will help the spouse who is now thrust into this unwanted role?

Not an all or nothing decision

Certainly if you are comfortable (and capable) of being your own financial advisor at retirement or any stage of life you should do it.  This is not an irreversible decision nor is there anything that says you can’t get help as needed.

For example you might hire a financial planner to help you do a financial plan and an overall review of your situation.  You might then do most of the day to day work and engage their services for a periodic review.  There are also financial planners who work on an hourly as needed basis for specific issues.

Whatever decision that you do make, try to be as objective as possible.  Have you done a good job with this in the past?  Will the benefits of the advice outweigh the fees involved?  Are you capable of doing this? 

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.  

Robo Advisors – A Brave New World?

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The piece below is written by Doug Dahmer and originally appeared under the title “Robo-Advisors” – rise of the machines on Jon Chevreau’s site Financial Independence Hub.  Jon is at the forefront of a movement he calls “Findependence.”  This is essentially looking at becoming financially independent so that you can pursue the lifestyle of your choosing.   Jon is a Canadian author and journalist, check out his book Findependence Day.  Jon has contributed several prior posts here as well. 

I know Isaac Asimov’s Three Laws of Robotics, I read Arthur C. Clarke’s 2001: A Space Odyssey and I love the Terminator movies (I’ll be back!).

From all this I know three things: Robots are very smart. Robots always start off to help you. Robots have a tendency to turn on you.

One of the newest crazes and buzzwords in personal finance is: “Robo-Adviser.” If you’re not familiar with the term, it refers to investment management by algorithm in the absence of human input.

With a “Robo” you are asked to complete an on-line risk assessment questionnaire. Your responses determines the prescribed portfolio of ETFs (Exchange-Traded Funds) with a built-in asset allocation best suited to your needs. Once a year the portfolio is rebalanced to this prescribed asset allocation recipe. 

Dynamics change as shift from Saving to Spending

The “Robo” approach relies heavily upon a basic “buy/hold/rebalance” investment strategy. This passive strategy can work to your advantage during your accumulation years. These are the years when time is your friend, and dollar cost averaging through market cycles offers the opportunity to give your returns a boost.

However, as we get older and begin to prepare for and transition into our spending years, things change. Unfortunately, too few people realize that the investment strategies that served us well during our savings years turn on their head and work to our disadvantage as the flow of funds reverses and savings turns to spending. 

Dollar Cost Ravaging

Suddenly time changes from friend to foe where “dollar cost averaging” turns to “dollar cost ravaging” or what we call, the Mathematics of Catastrophe. (More about which in our next Hub blog). During the second half of your life the simplistic money management approach followed by “Robo- Advisers” can start to look like a “deed of the devil.”

Another concern is that “Robos” are unable to deal with the reality of expense variability. If you believe that in retirement, a fixed, annual withdrawal rate from a diversified portfolio will address your income needs I can with confidence suggest you are at best short-changing yourself and at worst setting yourself up for a cataclysmic financial failure.

I have been in this business a long time and know beyond a shadow of a doubt that a properly constructed life plan is very important in the second half of your life. It is only when you know what you want to do, when you want to do it and what it will cost to do it, that you can start to build the financial framework to make it happen.

Only through your life plan are you able to anticipate years of surplus and years of deficits and take the steps to bend them to your benefit. You need to bring together cash flow optimization, tax management and pension style investment management to make it happen and in the process add hundreds of thousands of dollars to your lifetime assets and cash flow. 

Robos ill equipped to link life to investment plan

Linking your life plan to your investment plan is the secret to success, but “robo investing” is not equipped to handle the nuances of that linkage. A Retirement Income Specialist knows that the type of money management you need is much more complex where the cash-flow demands outlined in your life plan need are linked to your investment plan. Tax planning, income optimization and risk mitigation means it is dangerous to leave your investment management running on auto-pilot.

Isaac Asimov’s first law of robotics holds that: A robot may not injure a human being or, through inaction, allow a human being to come to harm.

“Robo-adviser” firms would do well to review this law. When it comes to investors heading into the second half of their lives, “Robo Advisers” may well be about to break it. 

Doug Dahmer, CFP, is founder and CEO of Emeritus Retirement Income Specialists. With offices in Toronto and Burlington, Emeritus’ C3 process is one of the industry’s most comprehensive retirement planning processes. 

Online financial advisors or Robo Advisors are popping up all over the place and if you believe the financial press they are the future of financial advice.  In part I believe they are or will at least shape the future of financial advice.  I weighed in on this topic recently via  Is An Online Financial Advisor Right For You? for Investopedia.

Please feel free to contact me with your questions.  

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.

7 Reasons to Avoid 401(k) Loans

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One of the features of many 401(k) plans is the ability for participants to take a loan against their balance.  There are rules governing what the loans can be used for, the number of loans that can be outstanding at one time, and the percentage of your account balance that can be borrowed.  Additionally there is a time limit by which these loans need to be repaid.

It is the decision of the organization sponsoring the plan whether or not to allow loans and also as to what they can be used for.  Typical reasons allowed are for college expenses for your children, medical expenses, the purchase of a home, or to prevent eviction from your home.

The flexibility offered by allowing loans is often touted as one of the good features of the 401(k).  However taking a loan from your 401(k) also carries some downsides.  Here are 7 reasons to avoid 401(k) loans.  

Leaving your job triggers repayment 

If you leave your job with an outstanding loan against your 401(k) account the balance can become due and payable immediately.  This applies whether you leave your job voluntarily or involuntarily via some sort of termination.  While your regularly scheduled repayments are deducted from your paycheck, you will need to come up with the funds to repay the loan upon leaving your job or it will become a taxable distribution.  Additionally if you are under 59 ½ a 10% penalty might also apply.

Opportunity costs in a rising market

While loan repayments do carry an interest component which you essentially pay to yourself, the interest rate might be much lower than what you might have earned on your investments in the plan during a rising stock market.  Obviously this will depend upon the market conditions and how you would have invested the money.  This can lead to a lower balance at retirement resulting in a lower standard of living or possibly necessitating that you work longer than you had planned.

There are fees involved 

There are often fees for loan origination, administration, and maintenance which you will be responsible for paying.

Interest is not tax deductible 

Even if the purpose of the loan is to purchase your principal residence interest on 401(k) loans is not tax-deductible.

No flexibility in the repayment terms 

The loan payments are taken from your paycheck which all things being equal will reduce the amount of money you bring home each pay period.  If you run into financial difficulty you cannot change the terms of the loan repayment.

You might be tempted to reduce your 401(k) deferrals 

The fact that you now have to repay the loan from your paycheck might cause you to reduce the amount you are saving for retirement via your salary deferral to the plan.

You will have less at retirement 

A loan against your 401(k) plan will result in lower nest egg at retirement.  Given the difficulty many in the United States already have in accumulating a sufficient amount for retirement this only adds to the problem.

You should especially avoid 401(k) loans if:

  • You are near retirement
  • You feel that your job security is in jeopardy
  • You are planning to leave your job in the near future
  • You are already behind in saving for retirement
  • You have other sources to obtain the money you need
  • You feel that repaying the loan will be financial hardship 

Look life happens and sometimes taking a loan from your 401(k) plan can’t be avoided.  The economy has been tough for many over the past few years.  However if at all possible avoid taking a 401(k) loan and rather let that money grow for your retirement.  Down the road you will be glad you did.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Also check out our Resources page for more tools and services that you might find useful.

Are You Ready For Retirement?

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To my readers:

The infographic that was originally included in this post was taken down as was the link to the firm that supplied it due to a malware warning on their site.  Please check out the many other posts on this site in the retirement category and other categories that may interest you.  I apologize for any inconvenience but your online safety in viewing my site is of the utmost importance to me.

Original post without reference to the infographic

Happy Thanksgiving to all of you and to your families.  We are thankful for having all five of us home together and the time we get to spend as family. For anyone with adult kids you know that doesn’t happen as often as we might like sometimes.

As I write this we are sitting out Black Friday as we always do and looking forward to a weekend filled with family, great leftovers, and football. Especially on Sunday when I am hoping for a Packer victory over the Partriots at Lambeau Field.

Retirement is a journey.  I can’t think of a better time to get started or to gauge your progress than now no matter what your age.  Why not take some time over the last month of year to ensure that you hit the ground running in 2015?

7 Retirement Savings Tips to Help Avoid Regret

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

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

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

Start early 

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

Increase your contributions 

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

Start a self-employed retirement plan 

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

Contribute to an IRA 

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

Don’t ignore old retirement accounts 

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

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

Beware of toxic rollovers 

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

Avoid high cost financial products

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

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

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

NEW SERVICE – Do you have questions about retirement planning and making the financial transition to retirement? Schedule a coaching call with me to get answers to your questions.

Approaching retirement and want another opinion on where you stand? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for more detailed advice about your situation.

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. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.