Financial Planning | Financial Planner | Retirement Planning | Korving & Company Suffolk & Virginia Beach

What Is The Difference Between A Pension Plan And A 401(k)?

Both plans are designed to provide income for retirement. There are some very important differences.

A 401(k) is a type of retirement plan known as a “defined contribution plans.” That means that you know how much you are saving but not how much it is worth when you are ready to retire. That depends on your ability to invest your savings wisely. The benefit is that your savings grow tax deferred. Many employers match your contribution with a contribution of their own, encouraging you to participate.

A pension plan is known as a “defined benefit plan.” That means that you are guaranteed a certain amount of income by the plan when you retire. The responsibility of funding the plan and investing the plan assets are your employer’s.

Because your employer is liable for anything that goes wrong with the pension they have promised their employees, many employers have discontinued pension plans and replace them with 401(k) type plans. This shift the responsibility for your retirement income from the company to you.

If you have a 401(k) for your retirement and are unsure about the best investment options available to you, get the advice of a financial planner who is experienced in this field.

For more information, contact us.

What does planning mean for you?

Financial planning is about more than assets, investments and net worth. It’s about what you want to do with your money and why. It’s about identifying your concerns, expectations and goals. It’s about how you feel and what you want.

Financial planning helps address common fears and concerns such as health care costs, outliving your money and the best time to file for Social Security benefits.

The “Confidence Meter” helps you gauge how likely you are to reach your goals and whether you are on track instead of focusing on headlines.

Financial planning takes your risk tolerance into account. You will get a “Risk Number” that guides you to the kind of investment you should have.

Learn more about how financial planning can help you by contacting us at Korving & Company today.

Planning makes a difference

Happy senior couple walking on beach

Do you want to have fun in retirement? Planning can make the difference and it doesn’t have to be difficult. Working with a financial professional that understands your retirement goals can help you create a plan to make the most of your money – now and in retirement.

The partners at Korving and Company are Certified Financial Planning™ professionals – fiduciaries – who specialize in retirement. We help people plan their retirement and continue to work with them during retirement.

There are 5 reasons why you should work with a financial professional to create a retirement plan.

Focus on your goals in retirement and how you will pay for them.
Address your concerns and expectations for retirement.
Identify things that could pose a threat to your retirement and manage them.
Feel more educated, confident and in control of your financial future.
To help you navigate the complexity of financially moving into retirement.

Is your retirement plan a ticking time bomb?

In your mind’s eye, how do you see yourself living retirement? Does it include the activities that you enjoy now … without the time you spend at work? When you have the time, do you see yourself seeing the world? Retirement presents an opportunity for some life-changing experiences.

But there are a few things that can cause those retirement dreams to become nightmares.

If your retirement plan includes a pension, you may want to consider the risk. It is a fact that many private and public pension plans are sadly underfunded. Some public pension plans are the worst offenders. As an extreme example, the Illinois General Assembly Retirement System is only 13.5% funded.

A long period of very low interest rates means that pension plans with large bond investments have generated low returns. It has caused others to take greater risk. At some point that can affect the pensions of those who believed their Golden Years were paid for.

Living longer than you expected is another risk. In 1950 the average life expectancy was 68. That meant that the average worker retired at age 65 and died three years later.

Sixty years later, in 2010, the average life expectancy was 79 and many people are living longer. In 2010 there were 1.9 million people over age 90 and three quarters of those were women. One of the biggest concerns that retired people have is running out of money as savings are eroded by inflation. How would living past age 90 affect your retirement plans?

The third thing that is causing the average worker concern about retiring is insufficient savings. Fewer people are covered by pension plans. Many employers have replaced guaranteed pensions called “Define Benefit Plans” with 401(k)s and 403(b)s known as “Defined Contribution Plans.” This transfers the responsibility for retirement from the employer to the employee. Too few people are taking advantage of these programs, not saving enough, and making unwise investment choices. This can result in insufficient savings when the time comes to actually retire. One result is that more and more people continue to work well past the traditional retirement age of 65.

What is to be done?

We have to accept a greater responsibility for our own retirement. We have to be honest about how safe those pension promises are, whether we work of a large corporation or for a government entity. We have to start saving early and make wise investment choices. One of the wisest things people do as they prepare for retirement is get the services of a competent retirement professional who will guide them to a safe haven at the end of the road.

Three Smiling Men Discussing With Digital Tablet 2

Registerd Investment Advisors: 7 Services that a Registered Investment Advisor (RIA) Provides

Registered Investment Advisor Suffolk & Virginia Beach

Investing is serious business. How well you manage your investments can make the difference between a comfortable retirement and working ‘till you drop. Most people use a financial advisor of some kind.

Back in the day, people opened an account with a major investment firm and used a broker who would call and make recommendations to buy or sell. They were essentially stock and bond salesmen whose loyalty was to their firms.

That has all changed.

The trend now is away from the major firms and toward Registered Investment Advisors – RIAs. RIAs are fiduciaries whose duty is to put their clients’ interests ahead of their own. They help people plan their future and take over the every-day investing decisions for them.

Registered Investment Advisor

What can an individual expect from an RIA?

Asset management. This means creating a portfolio appropriate to the client, making changes in the best interest of the client, and reacting to market conditions.
Financial planning. Organizing a client’s financial affairs. Determining the best way of achieving the client’s objective. Reviewing the client’s insurance and estate planning needs.
Reporting and record keeping. Maintaining the organization of finances. Performance reporting. Maintaining cost and purchase data.
Life planning. Helping the client uncover what they really want to accomplish and creating a roadmap to getting there.
Retirement planning. Providing a path to living well once the paycheck stops and people are dependent on fixed income sources and their personal savings. Retirement is a major life change. RIAs typically offer comprehensive retirement plans that help people decide when to retire and what how well they can live.
Estate planning. Leaving money to heirs and charities must be carefully planned or large portions of an estate can go to taxes or the wrong individuals.
Concierge services. This can include attending meetings with attorney, accountants or bankers. It can include services such as buying cars, arranging for travel or hiring someone to pay bills. Relations between an RIA and a client are often so close that they are even consulted on issues such are marriage or divorce.

Call 757-638-5490 or use our contact page for more information!

Effective Retirement Plans Do Not End at Retirement

There are those fortunate individuals who, because of wise planning, are able to retire without having to worry about how much money they can spend after their paychecks stop. These people can afford their needs and wants from sources like pensions and social security that adjust for inflation. They have probably been saving all of their lives and have always lived below their means. Others are not so fortunate.

Most middle class retirees fund their retirement spending from Social Security, a pension (perhaps), and income from investments. Because people often live several decades after retirement, it’s vitally important to make estimates and projections about the future.

Here are just a few of the things that factor into how much it will cost to live once you retire:

Your basic living expenses; your “needs.”
The cost of your “wants” and “wishes” above your basic expenses
The age at which you want to retire.
The number of years in retirement.
Spousal income and, in two income families, the age at which each spouse retires.
Your pension benefits.
Life, disability and long-term-care needs.
The age at which you apply for Social Security.
The value of your investment assets at retirement.
The estimated return on your investment assets.
Your risk tolerance.
The rate of inflation during retirement.

Putting all these factors together is a complicated process that’s beyond the capability of most individuals who don’t work in finance. Complex planning programs have been developed that can provide answers. These answers typically provide a probability of success or failure via a procedure called “Monte Carlo” analysis.

We have found that people who begin planning early can make appropriate mid-course corrections while they still have time. It also provides them with the peace of mind. Having a well-thought-out plan for the future removes a great deal of worry an uncertainly.

If you are approaching retirement without a plan, give us a call for more information. We would be happy to meet with you to discuss your needs.

Even the “rich” can’t afford retirement.

Registered Investment Advisors (RIAs) deal with people at all wealth levels but most are upper income even if they are not billionaires. There is a retirement crisis and it’s not just hitting the working class.

The typical median wage earner making $50,000 a year and retiring at 67 can expect Social Security to pay him and his wife about $2400 per month. To maintain their previous spending levels this leaves a gap of about $1000 a month that has to be made up from savings. But many of these middle income people have not saved for their retirement. Which means working longer or reducing their lifestyle.

This problem is also hitting the higher income people. How well is the person earning over $200,000 a year going to do in retirement? The issues that even these so-called “rich” face are the same: increased longevity, medical care, debts and an expensive lifestyle are all issues that have to be considered.

“The $200,000+ executive expects a fine house, two cars, two holidays a year, private schools, to pay for his kid’s university tuition, and so it goes on. And this is not to mention the tax bill he’s paying on his earned income. A bunch of all this was really debt-funded, so effectively the executive spent chunks of his retirement money during his working days.”

When high income people are working, they usually don’t watch their pennies or budget. But once retired, that salary stops. That’s when savings are required to bridge the gap between their lifestyle and income from Social Security and (if they’re lucky) pension payments. At that point the need for advance planning becomes important.

Before the retirement date is set, the affluent need to create a retirement plan. He or she needs to know what their basic income needs are; the cost of utilities, food, clothing, insurance, transportation and other basic needs. Once the basics are determined, they can plan for their “wants.” This includes things such as replacing cars, the cost of vacation travel, charitable gifts, club dues, and all the other expenses that are lifestyle issues. Finally, there are “wishes” which may include a vacation home, a boat, a wedding, a legacy. The list can be a long one but it should be part of a financial plan.

If the plan tells us that the chances of success are low, we can move out our retirement date, increase our savings rate or reduce our retirement spending plans.

This kind of planning will reduce the anxiety that is typically associated with the retirement decision making.

The most common investment mistake made by financial advisors

Bill Miller beat the S&P 500 index 15 years in a row as portfolio manager of Legg Mason Capital Management Value Trust (1991-2005), a record for diversified mutual fund managers. He was interviewed by WealthManagement.com about active vs. passive management.
We have written a number of articles about the mistakes individual investors make. But what about mistakes that financial advisors make? We are, after all, fallible and make errors of judgment. And like all mortals we cannot predict the future.
Here’s Bill Miller’s assessment about traps that financial advisors fall into:

One problem is how they deal with risk. There is a lot more action on perceived risks, exposing clients to risks they aren’t aware of. For example, since the financial crisis people have overweighted bonds and underweighted stocks. People react to market prices rather than understanding that’s a bad thing to do.
Most importantly, most advisors are too short-term oriented, because their clients are too short-term oriented. There’s a focus on market timing, and all of that is mostly useless. The equity market is all about time, not timing. It’s about staying at the table.
Think of the equity market like a casino, except you own it: You’re the house. You get an 8-9 percent annual return. Casinos operate on a lower margin than that and make money. Bad periods are to be expected. If anything, that’s when you want more tables.

We agree. That’s one of the reasons we are choosy about the clients we accept. One of the foremost regrets we have is taking on clients who hired us for the wrong reasons. One substantial client came to us as the tech market was heating up in the late 1990s. He asked us to create a portfolio of tech stocks so that he could participate in the growth of that sector. We accepted that challenge, but it was a mistake. When the tech bubble burst and his portfolio went down and we lost a client. But it taught us a valuable lesson: say no to clients who focus strictly on short-term portfolio performance. Our role is to invest our clients’ serious money for long term goals.
Like Bill Miller, we want to have the odds on our side. We want to be the “house,” not the gambler. The first rule of making money is not to lose it. The second rule is to always observe the first rule.
To determine client and portfolio risk we use sophisticated analytical programs for insight into prospective clients actual risk tolerance. That allows us to match our portfolios to a client’s individual risk tolerance. In times of market exuberance we remind our clients that trees don’t grow to the sky. And in times of market declines we encourage our clients to stay the course, knowing that time in the market is more important than timing the market.

Advantages of Financial Advisors

What is the real value to hiring a financial advisor, and who uses them? What is the value proposition? What makes one car with four doors and wheels worth $300,000 and other $30,000? Although we might have an answer, the answer differs from person to person.

Why People Use Financial Advisors

People use financial advisors for many reasons. Some use them because they absolutely need them, others because they want them. Paying a fee for advice and guidance to a professional who uses the tools and tactics of a CFP™ (CERTIFIED FINANCIAL PLANNER™) and an experienced Registered Investment Advisor who is a fiduciary can add meaningful value compared to what the average investor experiences.

Anxious About Finances

Many middle-class investors are anxious about their finances and are not interested in learning the details of managing their money. This anxiety often results in money left on the sidelines because they don’t know what to do or are afraid of making mistakes. That means earning a fraction of 1% at the bank when the Dow Jones Industrial Average (DJIA) is up over 25% in the last 12 months.

Coaching

There are others who are interested in learning about investing and may want to hire an advisor to “look over their shoulder.” They want to hire an “investment coach.”

Too Busy For Investing

A third category are people who hire professionals because they are busy doing things that are more important to them: building a career or a business, being with family, or living an active retirement. They hire an expert to manage their money the same way they hire a lawyer for estate planning, a CPA to prepare their taxes, and a doctor to keep them healthy.

Mistakes

A fourth category is people who were making their own investment decisions but ended up making a huge financial mistake. This leads me to a story about a really smart, highly paid high tech executive who is very knowledgeable about investing; but he hired an advisor:

It’s not because he lacks the knowledge or interest, obviously. Rather, he figured out he had behavioral blind spots and understood he was at risk of great financial loss. He’s paying someone just to take that risk off his plate.

Determining your goals, controlling risk, managing portfolios well, and knowing your limitations – knowing you have “blind spots” – has led many smart people to hire an advisor.

Vanguard, the hugely successful purveyor or no-load mutual funds (that appeal to do-it-yourselfers) estimates that a financial advisor is worth about 3% net in annual returns. They attribute this to the seven services that a good advisor provides:

Creating a suitable asset allocation strategy.
Cost-effective implementation.
Rebalancing
Behavioral coaching
Asset location
Spending strategy.
Total return versus income investing.

How Korving Can Help

If you have an advisor but he is not meeting your objectives, ask us for a second opinion. If you don’t have an advisor but may want one, we offer a free one-hour consultation to see if we are compatible.

A good Registered Investment Advisor is a “Life Coach.”

People who are not familiar with Registered Investment Advisors (RIAs) too often view them as stock brokers. They are not; they are held to a higher standard and are focused on the client, not the money. RIAs are trusted advisors who put their clients ahead of themselves. They are fiduciaries that are skilled in the art making good financial decisions.

The Financial Advisor as a “Life Coach”

Younger professionals who are building careers would do well to find an RIA as their financial guru, a “Life Coach.” It takes time, experience, and a high level of expertise to manage money well. The young lack that expertise but have the biggest advantage of all: time. They are in a perfect position to build wealth with the least amount of effort if they can lean on experts who can show them how to navigate the risky ocean of investing. Just as important, they need a wise guide who can advise them on managing their income. Too many people, even those with six figure salaries, live paycheck to paycheck. Knowing what to spend and how to save is the role of the advisor.

a life coach can be found in a financial advisor.

This is very important for the independent professional – the doctor or lawyer. Focused on building a practice, they need someone to advise them on managing their money wisely.

For The Business Owner

For the business owner, the entrepreneur, it’s even more important. There is no career track and the challenge of building a business often results in poor money management. Excessive debt can lead to bankruptcy, a common result in many industries that depend on debt financing. A good advisor can help the business owner create a personal portfolio that’s independent of his business. At the same time he can advise the owner the best way of financing his growth.

Once the business is established the owner needs guidance setting up retirement and benefit plans for himself and his employees. This all part of the RIA’s skill set. And finally, as the business matures and the owner starts thinking of retirement, the advisor provides the guidance to transition the individual and his family to life beyond work.

That’s the point at which the coach gets the pleasure of knowing he’s done a good job as part of a winning team.

Conclusion

For more information on how a financial advisor can act as a coach for you, reach out to us through our contact page today.

The Financial Planner as a Healer

[This is the most popular post we have published; it’s worth posting again]

Money is a significant source of stress for most people. In many studies, it ranks above issues such as work, children and family. Chronic financial stress is often the leading cause of family break-ups.

How A Financial Planner Can Help You Physically and Emotionally

Chronic stress is also associated with all sorts of health problems, psychological problems, marriage conflicts and behavior issues such as smoking, excessive drinking, depression and overeating.

Men and women under stress have often relied on medical and mental health professionals. However, financial planners are uniquely positioned to help people address what is likely the number one source of stress in their lives – their relationship with money. Dealing with these issues head-on with a financial planner can lead to improved emotional and physical health, an improvement of work-related problems and improved relationships with family and friends.

A competent and caring financial planner does a great deal more than manage investments or create a financial roadmap. He listens and empathizes with the conflicting issues that people face when attempting to manage their personal finances.

Discussing the issues that cause worry with a financial planner can lead to setting realistic goals, analyzing alternatives, prioritizing actions and implementing an easy-to-follow plan. Just as important, it allows the client and the planner to review progress on a regular basis.

As a result the client gets a sense of personal control over his or her finances. Someone who is in control of their life has much lower stress than someone who feels that events and outside agents control them.

For a relationship between a client and a Virginia Beach financial planner to work well together, they must have shared views and expectations of financial planning, financial markets, investment philosophy, and managing risk. An initial meeting between a client and a financial planner should establish a comfort level and determine whether the planner is actually interested in the client, or just the client’s money.

Financial Planner’s Goal For You

The planner’s goal should be to help their clients organize their financial affairs, and to discuss the client’s past, present and future – including death. The planner should create a level of trust that allows him to keep the client from self-injury, which often results from fear surrounding money. The financial planner should provide a sort of reality check to the client, reducing both excessive pessimism and irrational optimism. A client should feel able to discuss money honestly and openly with their planner without a fear of judgment.

In many ways, a financial advisor can be the confidant to whom you can take your financial concerns … and make it all better. For more information or to speak with a financial advisor, contact us today!

A reader asks: what’s the difference between risk tolerance and risk capacity?

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That’s an interesting question and it depends on who you ask. The investment industry measures risk in terms of volatility, taking the opportunity for both gains and losses into consideration.

I will answer with a focus on losses rather than gains because, for most people, risk implies the chance that they will lose money rather than make money.

Risk tolerance is your emotional capacity to withstand losses without panicking. For example, during the financial crisis of 2008 – 2009 people with a low or modest risk tolerance, who saw their investment portfolios decline by as much as 50% because they were heavily invested in stocks, sold out and did not recoup their losses when the stock market recovered. Their risk tolerance was not aligned with the risk they were taking in their portfolio. In many cases they were not aware of the risks they were taking because they had been lulled by the gains they had experienced in the prior years.

People who bought homes in the run-up to the real estate crash of 2008 were unaware of the risk they were taking because they believed that home prices would always go up. When prices plunged they were left with properties that were worth less than the mortgage they owed.

This exposed them to the issue of risk capacity.

Risk capacity is your ability to absorb losses without affecting your lifestyle. The wealthy have the capacity to lose thousands, millions, or even billions of dollars. Jeff Bezos, founder of Amazon, recently lost $6 billion dollars in a few hours when his company’s stock dropped dramatically. Despite this loss, he was still worth over $56 billion. His risk capacity is orders of magnitude greater than most people’s net worth.

The unlucky home buyer who bought a house at an inflated price using creative financing found out that the losses they faced exceeded their net worth. As a result many people lost their homes and many declared bankruptcy.

There are some new tools available to measure your risk tolerance and determine how well your portfolio is aligned with your risk number. Click HERE to get your risk number.

Category: Financial Planning