Category: Financial Planning

6 Things to Consider When Creating Retirement Plans

From Financial Planning magazine:

As 75 million Baby Boomers stand at the edge of retirement, most will have to look beyond government programs to sustain their standard of living.  Here are six things those boomers should be aware of when getting ready to retire.

1. Time Your Retirement Carefully

A retiree withdrawing money from his or her retirement account during a bad investment market might leave them vulnerable in the latter stages of their lifetime. To best ensure sufficient funds for a lifetime, delaying retirement and continuing earning income during down markets is worth thinking about.

2. Fixed-income Investments are Only Part of the Picture

While many investors rely of fixed-income investments for a steady stream of income, it may not always be enough to sustain a retiree’s standard of living. Inflation, today’s low interest rate economy, and the rare occasion of defaults may bite into the purchasing power of regular payments. It is important to have some allocation of stocks.  The younger you are the more important this is.

3. Withdraw Based on your Needs

Withdrawing money from your investments based around your needs will often put you in a better position for the long term. Discuss with a CFP professional to match your withdrawal rate to your unique circumstance of life.  Also keep in mind that you can spend capital appreciation as easily as dividends and interest.  That is why we focus on “total return.”

4. Don’t Fear Spending Retirement Portfolio Funds

Retirement portfolios are meant to be spent during one’s lifetime, and doing so under the guidance of a CFP professional can enable a more comfortable and secure retirement.  However, we never know how long we are going to live, so planning to spend your last dollar the day you die is a risky proposition.

5. Understand Your Tax Obligations

Making use of taxable and tax-deferred accounts can help control amount of tax owed per year, and ultimately aid in sustaining a retirement portfolio.

6. Spending Matters More Than Investments

Contrary to popular belief that getting the investments right in a portfolio will lead to a stable retirement, withdrawals from an account actually matter more. Focusing on expense management is an effective way to ensure sustainability of resources.  We have much more control over our spending that  we do over stock market returns and interest rates.  Focus more on the things we can control and less on the ones we can’t.

A look at 5 unusual ways to boost income in retirement

In the Retirement Planning section of the Wall Street Journal we found some “different” ideas about generating retirement income.  Frankly, some of these, like the wood lot, probably require more physical effort than most retirees are prepared to spend, but we bring them to you for your enjoyment.

1. Grow Trees 

If you live in an area where people routinely burn wood to heat their homes, you might consider buying some woodland. Not only can you use the wood to heat your home, you can sell logs to others.

2. Make Loans

You’re probably getting less than 1% on your bank deposits—but your bank, using your money, can get as much as 15% for an unsecured loan. Suddenly lending seems appealing.  The problem is that the people who typically want to borrow your money are probably your relatives, and relatives are notorious for not paying back the money they have borrowed, even if you have a signed note.

3. Rent Out a Room

If your kids have left the nest, you might have a spare room. Instead of downsizing to a smaller home in a weak housing market, consider renting out a room to a lodger.  But are you really ready to have a stranger live in your house after you have finally said goodbye to the last child?

4. Tutor Students

Anyone who has reached retirement age should have amassed a wealth of knowledge on a variety of topics, all of which could provide the basis for a part-time career.  This may actually be a good idea.  I know someone who retired and went on to teach classes in using computers.  Teaching math classes to students struggling in school may be a good part-time job for retired engineers.

5. Preferred Stock

Buying preferred stock is not at all unusual, but like any investment you have to know what you are doing and what the pitfalls are (and there are many).   The preferred stock market is a specialized area of the financial universe that you should only explore with the help of an experienced RIA.

 

Where do you get advice on your 401(k)?

In the corporate world, the “defined benefit” pension plan is dying.  This is the old pension plan that promised you a specific dollar amount each month for as long as you lived.  Even in local and state government, the cost of pension obligations has exploded to the extent that retiree benefits are threatening the solvency of cities and states across the nation.  “Defined contribution” plans like 401(k)s, 403(b)s and TSPs have already begun to be incorporated there, and it probably won’t be long until they are the only retirement plan option offered by municipalities.

401(k) plans often represent the biggest financial asset that an individual has.  Yet, often very little guidance is given to workers who make contributions to these plans.  Most employees simply get a list of mutual funds that are available in the plan and are asked to select one or more of these funds.   Further, due to liability concerns, corporate benefits departments are not equipped or allowed to advise employees on an appropriate mix of investments.

However, these employees do have a source of information and advice available to them.  RIAs (Registered Investment Advisors) can provide investment guidance on retirement plans.  If you or someone you know would like advice on how to invest the money in your 401(k), 403(b), TSP or other retirement plan, simply click on this link and send us a message.  We’ll get back to you within one business day.

Role of the Advisor during the investor’s life journey

If we view retirement planning as part of a three stage cycle it helps define the role of the financial advisor at each stage of life.
The pre-retirement stage is one where wealth accumulation is the primary focus.  At this point the primary responsibility of the advisor is to

  • Build portfolios
  • Grow investments
  • Discuss retirement and education (college) goals.

As we get to the point of actually retiring the role of the advisor changes:

  • Know the retirement date
  • Develop income plan
  • Refine estate plan

After you retire the advisor is responsible for:

  • Manage income plan
  • Facilitate legacy plans
  • Develop ties with heirs

Why dividends matter

A company that is successfully generating free cash flow can do several things with it:

  • Invest internally (research & development) or externally (mergers & acquisitions), to grow the company.
  • Pay down debt, which many companies have already done since the recent financial crisis.
  • Buy back stock.
  • Initiate or increase dividends.

Therefore, by investing in companies that pay a dividend, shareholders not only receive income from a quarterly cash payment, we believe they are also typically investing in quality companies that have the potential to grow profits. Dividends provide a source of income for many people seeking to supplement their earned or retirement income.

Most American companies that pay dividends pay them quarterly.   Unlike many foreign companies that will change their dividend payments based on current levels of profitability, American companies try to maintain the amount of dividends they pay unless they face severe economic distress, as many banks did during the financial crisis of 2008.

Federal tax policy has an impact on the amount of dividends that corporations are willing to pay.  If taxes on dividends are meaningfully higher than taxes on capital gains, investors prefer to invest in stocks that increase in value rather than those that pay dividends at the expense of growth.  When dividends and capital gains taxes are more nearly equal,  dividends become more attractive since they are less subject to volatility and provide a return even if stock prices don’t rise.

In today’s low interest rate environment, with CDs and Treasury securities paying very little, dividend paying stocks are looking increasingly attractive to many looking for current income.

Is your college fund investment mix making the grade?

With college costs climbing faster than the general rate of inflation, many parents feel the pressure of saving for their children’s education.  Many parents don’t want to see their children saddled with debt when they graduate from college, but spiraling costs and “easy credit” have result in student loan debt in excess of $1 trillion.

One of the programs that allow parents (and grandparents) to save money for college is a “529 plan.”  A 529 is a tax-advantaged plan operated by a state or educational institution designed to help families set aside funds for future college costs. Created in 1996, it’s named after Section 529 of the Internal Revenue Code.

College savers typically have about 18 years if they start early to save for college.  Finding the right balance of investments in a 529 depends largely on the child’s age and your tolerance for risk.  If the child is young, the focus should be on growth and growth-an-income funds according to experts.  As the child gets older, the portfolio should become more conservative since there is less time to recover from a market downturn.

Each state sponsors its own 529 plan which differ in the investments they offer.  Some states also offer a modest tax benefit to those who contribute to 529 plans.  For more details, consult your RIA or check your state’s website  for more information.

Things a Financial Plan Should Tell You – and Things It Won’t

A financial plan is like a road map.   A map will tell you where you are, where you want to go, and the route to take to get to your destination.  But the map is not the territory and sometimes the roads on the map are potholed or washed out, so alternate routes are required.  And sometimes you can’t get there at all.

So what should a financial plan tell you?

1.  What is my net worth?  A plan that doesn’t tell you where you are is no plan at all.  It’s the starting point where all plans begin.

2. What is my goal?  If you don’t know where you’re going, any road will take you.  Goals are usually described as the income it will take to provide you with the lifestyle you desire.

3. How much money will I need to retire?  Keep in mind that there are a lot of assumptions built into this number such as your other income sources, your estimated spending during retirement, the withdrawal rate that will not deplete your money during your lifetime,  the rate of return you can expect on your money during retirement, and many others.

4. What rate of return will I need to meet my retirement asset goal?  As you put money aside for retirement there are two components that influence how much you will retire with: the amount you put aside and the growth of those assets.   You have more control over the amount you save than the rate of growth you can expect.   That is one reason risk control is vital.  You don’t want investment decisions to negatively affect your savings rate.

5. What is a safe withdrawal rate?  There are academic studies that use historical data that provides some guidance.  But the rate your money grows at the beginning of your retirement has a disproportionate effect on on the amount of money in your retirement account.

6.  What is the probability that I will run out of money during retirement?     Some plans use Monte Carlo simulation to give you a probability of your running out of money, but beware of assumptions built into these simulations that may give you a false sense of security.

Smart Ways to Manage a Windfall

Whether you have received an inheritance or won the lottery, before you splurge, take time to consider all the financial angles and come up with a solid plan.  There is a reason most lottery winners wind up broke.  Shady financial advisers may shower you with dubious investment schemes. Long-lost relatives could reappear with hard-luck stories. You might be tempted to quit your job, buy a more expensive house or make other costly decisions that could make your jackpot quickly disappear.  The bigger the jackpot, the greater the chances that you will be the victim of bad decisions.

Many people view a windfall as “found money” and treat it differently than money they’ve earned.  They’re much more likely to use it in a way they’d regret.

Win or inherit enough and banks will lend you enough money to put you in debt.  Yacht brokers will call, as will Realtors will call who have your dream home on the market.

Some financial planners advise waiting  until you give yourself time to come up with a solid plan for how you’ll use the money.   If your inheritance includes an IRA, there are special rules that you will want to consult with financial planners on.

The biggest mistake people make with a windfall is not figuring out how to make the money last.  If the money is big enough, assemble a financial team that includes a financial planner, a CPA (certified public accountant) and perhaps a lawyer.  If you are unaccustomed to handling large amounts of money, a financial planner is the most important part of the team.  You will want to do a search of planners who have a CFP™ (Certified Financial Planner) in their title, and someone with whom you are comfortable discussing your personal financial needs and goals.

How to Consolidate Your Investment Accounts

Keeping tabs on multiple investment accounts can be a hassle. Moving all of your assets to one firm “seems like an easy process, but it depends on what assets you’re moving where and to what types of accounts”   says Jason Butler, of T. Rowe Price Investment Services.

The firms try to make a transfer easy — you usually fill out a form and send a copy of your statement to the new broker. But first ask your current firm about potential tax consequences, transaction fees (including redemption fees) and transfer charges if you move your money. You can avoid most charges if you transfer assets “in kind” to your new account. But you may have to sell shares in a fund that the new firm doesn’t offer, which could trigger a commission or redemption fee. …

If you can, roll 401(k) funds directly into an IRA. Some plans will mail you a check payable to the new firm, however, and you’ll have to deposit it yourself. Done incorrectly, this could make you liable for income tax and a 10% penalty if you’re under age 59½.

When you shift assets, your old firm must forward the cost basis of your stocks to your new firm. The catch: This applies only to stocks bought on or after January 1, 2011; to funds, ETFs and dividend reinvestment plans bought on or after January 1, 2012; and to bonds bought on or after January 1, 2014.

Via Kiplinger’s

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