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Universal Rules for Retirement

Universal Rules for Retirement

Universal Rules for Retirement

We have written a lot about retirement because it’s critically important for so many people. We have years of experience getting people prepared for retirement and beyond.

Here are nine things that people facing retirement need to know:

  1. When you retire your living expenses may not go down. In fact, the first few years after retiring you may spend more because you have more time for leisure activities such as travel and hobbies.
  2. Inflation is a very big problem for retirees. The cost of basic living expenses like housing, food, utilities, and clothing will go up over time but your retirement income may not keep pace. Inflation will erode the purchasing power of your savings and pensions. Most people will live decades in retirement. Create a plan to offset the effects of inflation.
  3. Try to determine how much of your basic living expenses are covered by Social Security and pension income. Fewer companies offer pensions today than ever before. This makes wise investment decisions more important than ever.
  4. Decide when to apply for Social Security. The longer you delay the higher your monthly payment. If instead of claiming at age 62 you wait until 70, their payments increase by more than 75%.
  5. It’s possible that both Social Security and pension benefits may face cutbacks in the future. Both are underfunded. These are serious concerns, especially for those who have many years before retirement.
  6. Everyone is eligible for Medicare at age 65. Read the Medicare rules carefully. If you don’t sign up during your initial enrollment window, you can face a 10% increase in Part B premiums for every year you don’t enroll unless you qualify for an exception. The average 65-year-old couple needs $285,000 to fund health care retirement costs. That does not include long-term care expenses.
  7. Be prepared for the possibility that your lifespan will be longer or shorter than the typical actuarial estimates. The median life expectancy for males is age 89 and for females is 91. 10% of males are still alive at age 98, 10% of females live to 100. Many elderly are concerned about outliving their savings.
  8. Make wise investment decisions to fill the gap between your guaranteed income and what you plan to spend. Avoiding major losses. Most people need investment advice. Find an Investment Advisor who is a fiduciary, preferably an independent fee-only advisor who is also a CFP® (Certified Financial Planner).
  9. HAVE A PLAN BECAUSE YOU ARE GOING TO BE RETIRED FOR MANY YEARS.

Check out our website to find out how a Korving & Co. Certified Financial Plannerprofessional can make your retirement plans a reality.

How Much Do I Need to Save Every Month to Retire a Millionaire?

How Much Do I Need to Save Every Month to Retire a Millionaire?

How Much Do I Need to Save Every Month to Retire a Millionaire?

In theory, $1,000,000 saved for retirement should allow you a pretty decent lifestyle during your golden years.  Getting there is not nearly as difficult as it looks, especially if you are young and smart about saving.  

Young people have an advantage that older folks don’t have: time is on their side and the magic of compounding allows them to put less money aside to reach that million-dollar goal.

Here’s how a 25-year-old can retire at age 65 with a million dollars:  put $322 each month into a tax-sheltered account, like an IRA or a 401(k), and if you invest it wisely and get 8% average annual return until you’re 65, you will be a millionaire.  Your total contribution to your retirement will be under $155,000, the rest is earning on your savings.

If you start later, here’s how much you will have to save monthly:

How Much Do I Need to Save Every Month to Retire a Millionaire?

Of course, this assumes that you invest to get an average annual return of 8%.  That’s not unreasonable if your portfolio is heavy in stocks and you have a long-term time horizon.  

If you play it too safe with your investments, you will see lower returns and therefore you will need to compensate by making larger contributions to have $1,000,000 accumulated by age 65:  

If you are like most Americans, you are a few years behind on your retirement savings.  However, please note that the examples assume that monthly contributions stay the same. In reality, as we get older and earn more, we can usually afford to put more money aside.  This may be a good time to meet with a financial planner to determine how to reach your retirement savings goal. Call or email us today.

8 Tips for a Better Retirement

8 Tips for a Better Retirement

8 Tips for a Better Retirement
1. Think about what you’ll do after retiring.
Today’s average age of retirement is 62. Remaining life expectancy at age 62 is over 23 years.
Give some serious thought to how you will spend your retirement years. Visualize your first day of retirement, and then six months, then a year in and then the years after that. Think about how you want to spend that time and have a rough plan that allows for financial wiggle room.
2. Get your priorities right.
Which is more important, retirement funding or college funding? Most parents want their children to do well and make sacrifices for them. However, if it comes to a choice between saving for retirement and saving for college, retirement should be your first obligation.
3. In two-income families, save the income of the lower-earning spouse.
Saving too little and spending too much is by far the biggest problem people have when preparing for retirement. It is common for many couples today to both have incomes. One of the best ways for these dual-income couples to save more is to live on the income of the higher paid spouse and save the income of the lower-paid spouse.
4. Delay taking Social Security income.
Filing for Social Security before full retirement age can reduce your benefit by up to 25%. Waiting until you have passed full retirement age (up to age 70) to file can increase your benefit by as much as 32%! While decisions about when to begin taking Social Security will depend on individual circumstances, if you have the ability to delay and are in good health, delaying can work to your advantage (and to that of your spouse).
5. Get a financial advisor.
Three times as many retirees without an advisor say health-care costs are preventing them from doing what they want in retirement. Additionally, retirees working with a financial advisor are more likely to say they are able to do the things they want in retirement than those who are not working with an advisor. Find one who is fee-only and has the appropriate qualifications, such as a CFP®️ designation. Working with a CERTIFIED FINANCIAL PLANNER professional assures that (s)he is a credentialed expert who is held to high ethical and professional standards.
6. Review your insurance policies. 
After a certain age – when the kids are grown, the house is paid off, and the retirement income plan is in place – the need for life insurance usually diminishes. However, this is the time to determine whether you want or need long-term care insurance or health insurance.
7. Update your estate plans.
Check your wills, trusts and other legal papers to make sure they are up-to-date. Your estate plan should be reviewed after any major family events or every 5 years, whichever comes first. You should also conduct an annual beneficiary review of all retirement and trust accounts (IRA, 401(k), etc.) to ensure that you have named the proper people.
8. Beyond wills and trusts. 
Most families we meet have only one person, usually the husband or wife, in charge of managing the family’s finances. If that person is incapacitated or dies, the spouse is often thrown into a panic because they aren’t familiar with bill-paying, online passwords, or even where the family’s money is and how it’s invested.
At the very least, take note of the steps you take in managing the family finances and write them down somewhere. Include any other information that might help your spouse and heirs in the event you can no longer manage it yourself. Then store it somewhere safe and let a trusted loved one know how to access it if something should happen to you. It will truly help save them from a lot of additional stress and grief when they most need comfort.
8 Steps to Choosing the Right Financial Advisor

8 Steps to Choosing the Right Financial Advisor

1. Hire an advisor who is a fiduciary. 

By definition, a fiduciary is always ethically bound to act in your best interest.  This obligation eliminates conflict of interest concerns and makes their advice more trustworthy.  If your advisor is not a fiduciary and is constantly trying to sell you products, find somebody who has your best interest in mind.

2. Don’t necessarily hire the first advisor you meet. 

While it’s tempting to hire the advisor closest to home or the first one listed in the yellow pages, you need to find the advisor who is most compatible with you.  Take time to interview a few advisors and pick the one who is the best match.

3. Choose an advisor who specializes in clients like you.  

Some advisors specialize in retirement planning, others focus on business owners or medical professionals.  Some are better for young professionals starting a family.  Ask the advisor what kinds of clients he focuses on and understand his strengths and weaknesses.

4. Pick an advisor whose strategy fits your personal style. 

Each advisor has a unique strategy.  Some focus on picking individual securities, while others use mutual funds.  Some are aggressive investors and try to beat the market, and others are conservative and focus on preservation of capital.  Choose the one with which you are comfortable.

5. Ask about credentials. 

Ask your advisor about their licenses, tests and certifications.  Financial advisor tests include the Series 7, Series 66 or Series 65.  Others have gone a step further and become a CERTIFIED FINANCIAL PLANNER™ practitioner, or CFP®.

6. Don’t assume that a major brand on the door is a seal of approval. 

Most advisors start their careers with one of the major brokerage firms like Merrill Lynch, Morgan Stanley, UBS or Wells Fargo.  What often happens is that new clients are referred to the newest rookie in the office.  In addition, the major firms view their advisors as their “salesforce” and provide them with incentives to generate fees and commission for the parent company.   Advisors working for the major firms generally are not held to fiduciary standards.

7. Understand clearly how your advisor is paid. 

Some advisors are “fee only.”  Others are paid commissions on the purchase of sale of securities, annuities or life insurance.  Still others receive fees, called “trailers,” from mutual funds.   Advisors who are paid from the sale of products have an inherent conflict of interest that you should be aware of before you enter a relationship with them.

8. Ask what happens if your advisor retires or leaves. 

An advisor should have a succession plan that makes sense for you.  Solo advisors could leave you without a trusted advisor at a critical time.  If you have an account with a solo advisor at a major firm, your account will be passed along to someone else, who will initially be unfamiliar with your goals and objectives.  If this is a potential concern for you, find an advisory team who will be there for you for the long term.

Why does the average investor lose so badly

Why Does The Average Investor Lose So Badly?

The average investor significantly underperformed the market in 2018.

Bad decisions caused the average U.S. investor to lose roughly twice as much as the S&P 500 in 2018 according to a new study from Dalbar, a financial services firm. While the S&P 500 declined 4.38%, according to Dalbar, the average investor lost 9.42%.  

This underperformance follows a pattern that is confirmed in study after study that shows that the average individual investor underperforms in both Bull and Bear markets.  

The primary culprit is trying to time the market and the tendency of individual investors to believe that they can predict when the market will go up or down. This causes them to buy when the market is high and they feel good about investing, and to sell when the market is low, believing it’s going to go lower.

The dramatic drop on April 13th triggered by fear of a trade war with China is a good example of how dramatic moves in the stock market can cause the typical investor to do the wrong thing at the wrong time. A combination of scary headlines in the press, combined with sharp drops in the stock market often causes investors to “move to the sidelines” until they feel safer. That means they miss the sharp rebound after locking in their losses.      

Professional investment managers realize that market timing is a losing proposition and develop strategies that allow them to remain invested through market cycles.

Another reason why the average investor loses badly is that they tend to buy yesterday’s winners. Reading popular publications like Money Magazine, poring over lists of last year’s “best” stocks or stock funds is a recipe for failure. While mutual fund prospectuses always say that past performance is no guarantee of future success, few investors take this to heart and, buying yesterday’s winners find themselves owning today’s losers.

Korving & Company creates investment portfolios that allow their clients to ride through the ups and downs of the market while sleeping well at night.

For more information, contact us at www.korvingco.com.

Warren Buffet and The Circle of Competence

Warren Buffet and The Circle of Competence

Warren Buffet and The Circle of Competence

Warren Buffett is known as “The Oracle of Omaha” and for being the third richest man in America because he knows his circle of competence. He made his fortune by using his ability to identify great companies and investing in them. Here is a piece of advice he provided in a 1996 shareholder letter:

“What an investor needs is the ability to correctly evaluate selected businesses. Note the word “selected.” You don’t have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital.”

Warren Buffett recently used the phrase circle of competence to explain why he didn’t invest in Amazon despite having known the founder, Jeff Bezos for 20 years. Evaluating the Amazon business model – and its start as an online book store – was outside his circle of competence.

So what does this legendary investor do when he realizes that there are investment opportunities outside of his area of expertise? He doesn’t venture into areas in which he is not an expert. He does what other smart people do. He hires people whose competence supplements his own. Charlie Munger, Warren Buffett’s partner explains it this way:  

“You have to figure out what your own aptitudes are. If you play games where other people have the aptitudes and you don’t, you’re going to lose. And that’s as close to certain as any prediction that you can make. You have to figure out where you’ve got an edge. And you’ve got to play within your own circle of competence.”

The problem most people have is that there is a big difference between what they think they know and what they know.

It’s a problem that gets so many people into trouble. They think they know more than they do. In fact, many believe they can predict the future and, in turn, the market’s ups and downs. Because no one really has a working crystal ball, it’s one reason why the typical investor does so much worse than the market.

If you’re an engineer, a doctor, a business owner, or an executive you will improve your odds of success in life if you operate inside your circle of competence. If you’re not a professional investor, investing is not in your circle of competence. We can provide that competence. We know what our circle of competence is and, like Warren Buffet, we stay within it. That’s how we help our clients succeed in life.

The Similarities Between Health and Wealth

The Similarities Between Health and Wealth

The Similarities Between Health and Wealth

Physicians have attributed poor health to diet since at least the times of Hippocrates and Galen. The authors of a comprehensive study published this month by The Lancet (a widely-respected medical journal) showed that among countries, the U.S. ranks 43rd in terms of a healthy population. Just because you’re wealthy does not mean you’re healthy. The study confirms what many believed: poor diet is responsible for more deaths than any other risk factor.

The Lancet study suggests that people need to eat a variety of nutritional sources and not overconcentrate in just one or two. It recommends eating more nuts, whole grains, and milk and decreasing the amount of sugar-sweetened foods you intake.  

Doesn’t that line of thinking also sound like good advice for investors? Studies in finance have shown that a portfolio’s investment allocation and diversification directly influence wealth outcomes.

Just as a healthy diet, consisting of a good variety of foods, leads to better health, a healthy portfolio that can withstand market shocks is the result of owning a variety of investments. Just as we should not overindulge in our favorite food, our investment portfolio should not be overly concentrated in just one – or a few – securities or types of securities. A healthy investment portfolio should not be overly focused on one asset class, one stock, or one country’s securities, even the U.S. alone.  

People who want a long and healthy life should gravitate toward healthy foods and limit unhealthy ones. In the same way, when building a portfolio, we should avoid gravitating towards things that give us a “sugar high.” For some, it is tech stocks; for others, it’s IPOs, or gold, or the stock of the company they work for. We need a variety of investments to maintain a healthy investment portfolio.

Just as we watch what we eat, we should look at our portfolios and see if we are gravitating toward things that may be unhealthy for us. Even long-standing winners like Apple stock may be less than ideal, as we saw in the fourth quarter of 2018. Question those things that you most desire in your portfolio. Everything in moderation.  

Over the decades as an advisor, I have observed clients who focused on their company’s stock. They did very well for many years…until the company lost its focus and made some bad business decisions. In the span of a few years, these investors lost over half their wealth.

Like a healthy diet, a portfolio that’s properly balanced between various types of investments – stocks, bonds, and cash – is likely to serve investors best.

The Ups and Downs of the Stock Market

The Ups and Downs of the Stock Market

The Ups and Downs of the Stock Market

Volatility is the price investors pay to get rich.

From 1989 through 2018 the Dow Jones Industrial Average (DJIA) generated an average return of 8.3% annually. I think anyone would be happy with these returns. But during those three decades, the DJIA never once had a year where the return was anywhere near that number. There were eight years when that index had losses, one year the loss exceeded 33%. There were 22 years when the DJIA was up. One year the market rose more than 33%, equal to the year of maximum loss. That’s quite a ride.

Every year you can expect the market to experience a significant correction. Since 1980, the S&P 500 has averaged a 14% decline at some point during the calendar year. For many people the ups and downs are terrifying. We all hear of the long-term average annual return over time, but for too many people the roller coaster ride is more than they can handle.

As portfolios grow, the gains – and losses – get bigger in terms of dollars. A $10,000 portfolio losing 14% means the investor is down $1,400. A $500,000 portfolio’s 10% loss is $70,000.  At $1 million, that same percentage loss means the investor is down $140,000 from its peak value. If that was your portfolio, how would you feel?

This is where investor psychology becomes critically important. Losing money is never fun but there will be times when – if you invest at all – you will find yourself in this situation. That’s why Registered Investment Advisors (RIAs) like Korving & Co. try to judge their client’s risk tolerance. In order to get the kinds of returns investors can get over the long term, it’s necessary to accept the fact that there will be years when the market goes down.

Investors hiring investment advisors sometimes assume that we can produce high, yet safe, returns.  That’s a combination that no one can provide. The only people who offer high returns with no risk are con men. One of our jobs is to warn our clients about how to spot promises that are “too good to be true.”

What a good investment advisor can do is create and monitor portfolios designed to make the bumpy ride a great deal smoother. We create diversified portfolios designed to cushion the downside risk during “Bear” markets. But there is always a tradeoff and that means we must give up some of the upsides during the “Bull” phase of the market. If we do our jobs properly, we will get our client a fair rate of return near their personal growth objectives over the long term.

Investors vary greatly in risk tolerance. We have some great tools, like Riskalyze, a tool used for measuring risk tolerance and with it, we can customize portfolios for nearly every investor. Contact us if you want to find your “risk number” and see if it matches your portfolio. What do you have to lose?

What to do when the spouse who handles the finances dies first

What To Do When the Spouse Who Handles the Finances Dies First

What to do when the spouse who handles the finances dies first

The Wall Street Journal printed a great article on a subject close to our heart. Because of decades of experience, we are the preferred advisor to many widows.

Many marriages have a division of labor where one spouse is the primary manager of the family finances. The article had this to say about this scenario:

“It’s common for surviving spouses who took a back seat on money matters to find themselves with an incomplete picture of their net worth or where the accounts are held.”

To prepare for this, married couples should take the following key steps:

  • Hire an estate attorney to draft or update wills and other estate-planning documents.
  • Hire a financial advisor both spouses like and trust.
  • Set up bank and other financial accounts that a surviving spouse will need immediate access to. These should be in both spouses’ names or as “transferable on death” from one spouse to the other.
  • Order a copy of Before I Go and Before I Go Workbook

A surviving spouse should

  • Order at least 15 copies of the death certificate. These will be needed to retitle financial accounts and settle the estate.
  • Contact the financial advisor, the estate attorney, and the accountant, in that order.

It is almost inevitable and completely understandable that the surviving spouse will be overwhelmed during this time, so you’ll want to prepare a list of things to do in advance should this happen.

Your financial advisor is the one individual that the surviving spouse will have the closest relationship with. They will guide your CPA through your taxes once a year and your estate plans, which should be reviewed every few years.  It is to be expected that financial issues are ongoing and conversations will be frequent so if you are experiencing this, understand that it is completely normal.

  • If you don’t have an advisor already, you need to hire one who understands the needs of the surviving spouse and will provide holistic advice and guidance.
  • Find an advisor you feel comfortable with. A large percentage of widows end up firing advisors they inherit because they are not comfortable with their husband’s advisor.  
  • Find a financial advisor who is a fiduciary, or legally obligated to put your interests first, one who is willing to discuss your needs and who is not simply an investment manager.
How Unsteady Is Your Retirement Strategy?

How Unsteady Is Your Retirement Strategy?

How Unsteady Is Your Retirement Strategy?

The government’s General Accounting Office (GAO) reports that 48% of people aged 55 and approaching retirement have nothing in retirement savings. That statistic is not quite right, but the reality isn’t too much better.

The GAO counts those who have nothing in an IRA or 401(k) plan as having saved nothing for retirement. But what they don’t know – or know and don’t take into account – is that retirees may have sources of income outside of their retirement plan savings.

Having a traditional pension that pays you a guaranteed income for life is the equivalent of hundreds of thousands in retirement savings. It’s one of the major benefits that public sector employees enjoy. Many corporations have eliminated pensions and offer 401(k) type plans called “defined contribution” plans. However, some businesses still do offer these.

That leaves about 29% of Americans without pensions or savings, but that’s not the complete story. People who have saved or invested in investment accounts that are not classified as “retirement accounts” are included in that 29%. Your home is an investment and many older Americans own their own homes. Unfortunately, a lot of older homeowners still have mortgages and carry credit card debt.

So that 48% number is not as bad as it seems. But it is a fact that too many older Americans are increasingly reliant on Social Security for retirement income. That’s a problem.

Social Security is shaky and getting shakier. Its reserves will be depleted in about 15 years. If Congress does not fix that, the Social Security Administration will have to reduce benefits. With the rise of health care costs, a large part of people’s Social Security check will go to Medicare. Medicare Part B premiums are automatically deducted from one’s Social Security check.

The bottom line for those over 55 and hoping to retire one day is to think ahead. Do some planning and don’t assume that retirement is going to take care of itself. Your retirement savings are your insurance policy against having to reduce your lifestyle after your paycheck stops.  

Take the time to get a comprehensive retirement plan. The benefit of a plan is that it tells you, in actual numbers, how much money you will need to retire and how much you will be able to spend during retirement. Find an advisor – an experienced Certified Financial Planner™ professional – who will guide you. Do it now before time slips away.  

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