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Avoid These Common Retirement Account Rollover Mistakes

If you are one of the people who are uncertain of the basic financial steps to take when you retire, you are not alone. Author and public speaker Ed Slott recently recounted how little most people really know about what to do with their 401(k)s, IRAs and other retirement assets when it comes time to leave work.

Most people do not know what to do with their retirement plans (commonly referred to with obscure names like 401(k), 403(b), 457, and TSP) once they retire. Many people simply leave the plan with their former employer because they don’t know what else to do. But that could end up being a mistake. Others know they can roll their plan into a Rollover IRA, but are not aware that if they don’t do it exactly right, they could be faced with a big tax bill.

Handling IRAs is often fraught with danger. There is a big difference between a rollover and a direct transfer. Rollovers are distributions from a retirement plan. Sometimes they are paid directly to you via check. You then have 60 days to move the assets into a new IRA or you will be taxed. If the rollover is paid directly to you, it is customary to have 20% automatically withheld for taxes. Counter-intuitively, you have to replace the 20% withholding when you fund the new IRA or that amount will be considered a taxable distribution and you will owe tax on the amount withheld. You can only make one rollover per 12 month period. If you make more than one rollover per year, you will be taxed.

A direct transfer is one where your IRA assets are moved from one custodian to another without passing through your hands. Under current law you can make as many direct transfers per year without triggering a tax penalty and there is no withholding.

When you are retired and reach the age of 70 ½, you will encounter Required Minimum Distributions. If these are not handled correctly, they can trigger huge tax consequences. If an individual fails to take out the Required Minimum Distribution (RMD) from a retirement plan, there is a 50 percent penalty tax on the shortfall.

Even many people in the investment industry do not understand the rules well. Slott notes that many financial companies do not provide advice on these topics because they are so focused on accumulating assets that they do not train their advisors on “decumulation.” Decumulation is a term that applies to retirees once they begin to take money from their retirement plans to supplement their other income sources.

“Every time the IRA or 401(k) money is touched, it’s like an eggshell; you break it and it’s over…. You mess up with a rollover and you can lose an IRA.”

Retirement is a time when people want to relax and pursue their leisure activities. Unfortunately, the rules actually get even more complicated. Make sure that you take time to learn the rules, or find a professional that does, before you move money from a retirement account.

Women and Financial Advice

Glass ceilings continue to be broken! Two women are currently vying for the office of President of the United States. More women are attending college than men, and those women are graduating in larger numbers. Affluent women are handling more money than ever before and are becoming their families’ primary breadwinner in increasing numbers.

Women are willing and able to hire financial advisors. However, according to a number of studies, many women are unhappy with their financial advisors because of disrespectful and condescending attitudes from many in the advisor community.

Many women do not feel they are getting what they need or want because their advisors don’t listen. Women don’t necessarily need different or unique investments. But they do want to have more detailed conversations about their goals and their concerns. Women want a “deep, meaningful advisor relationship” according to one major research study of affluent women. Women are generally more willing to share their personal information and concerns. These things actually allow financial advisors to do a better job! For instance, women who have family members battling medical problems or drug addiction may find that these issues can have long-term financial implications on themselves and their families.

These women owe it to themselves and their families to interview a number of financial advisors until they find the right fit, depending on what they value most. We work with a large number of affluent women clients. Generally these women value that we listen to truly understand their aspirations, concerns, and fears; come up with solutions that address those issues; continuously monitor and manage of their portfolios; and provide proactive outreach.

Setting Realistic Financial Goals

How realistic are your goals? Some people work hard and exceeded the goals they had when they were young. Others find their goals forever out of reach. For example, most people want to retire in their mid-sixties. That’s a goal, but is it realistic? Are they going to have a pension when they retire and, if so, how much is it? When are they going to apply for Social Security, and how much are they going to get? Will they need a retirement nest egg, and how much will be in it?

Career choices will have a big impact on these answers. A financial plan will also provide many of these answers. But a plan is only as good as the assumptions we put into it. As the old saying goes: “Garbage in, garbage out.”

The rate of return you get on the money you put aside has a huge impact on whether you reach your goals. Studies have shown that many people have an unrealistic expectation of the returns they can expect on their savings and investments. With interest rates near zero percent, putting your money in the bank is actually a losing proposition after taxes and inflation. Investing in the stock and bond markets may lead to higher returns. But the long-term returns that many people assume they can get often leads to taking unreasonable risks.

There is nothing wrong with having high goals. The best way to check to see if your goals are high, but attainable, is to talk to a fee only financial advisor. Preferably one that is a CERTIFIED FINANCIAL PLANNER™. They have the experience and the expertise to let you know if your goals are reasonable and what you can do to reach them.

Protecting yourself against financial fraud.

Bernie Madoff isn’t the only fraudster preying on the unwary. There are a number of scam artists in the financial services business.

There’s the case of Malcolm Segal. According to the SEC:

Segal allegedly promised his clients 12{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93} returns on CDs bought through Aegis. But he’s alleged in some cases to have either bought the CDs but redeemed them early or not bought them at all. Citing the SEC, the Philadelphia Business Journal says he raised about $15.5 million from at least 50 investors in this fashion.

It puzzles me how people can actually fall for something like this. Perhaps I have been in the investment business so long that I have seen too many of the ways people are fleeced out of their money.

How do you protect yourself against financial fraud? The first thing to do is to be suspicious of offers that are too good to be true. No actual, legitimate bank is offering 12{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93} CDs in a 1{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93} interest rate environment.

Another thing to do is to make sure that your assets are held in custody be a third party; a custodian like Charles Schwab, Fidelity or a major bank trust department. The reason that Madoff was able to fool his clients for so many years is that he printed his own statements. These statements “showed” that he was trading for them and that they were making money. In reality, he was not trading and their account statements were fabrications.

At Korving & Company we use Schwab as our custodian and our clients receive trade confirmations and statements from directly from Schwab. We encourage our clients to view their accounts on-line at Schwab.

We had an experience with a client who had an account with another advisor. He suddenly dropped his custodian and began producing his own account statements. That’s a wake-up call. They asked us to look at their statements and when we noticed that their end-of-year tax reports did not include taxable income from CDs that he claimed to have bought for them, we knew he was defrauding them.

If you have any concerns about your financial advisor, feel free to contact us for a second opinion.

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How Well Do Couples Communicate About Money?

A recent research report by Fidelity Investments studied how well couples communicated. The majority said they communicated very well. However, the study found that couples don’t communicate very well at all on finances, and many disagree on investing. The study included a wide range of ages. The couples were either married or in committed relationships. They ranged in age from 25 to retired.

Here is what the study showed:

43 didn’t know how much their partner earns.
10 were off by over $25,000.
36 don’t know how much they had in investable assets.
Nearly half had no idea how much they should to save for retirement.
60 didn’t have any idea how much Social Security would provide for their retirement.

This proves to us that financial planning is very important; especially for achieving peace of mind and helping couples get on the same page about their finances. If you have any questions about creating a financial plan or saving for retirement, contact us today!

Income vs Spending in Married Couples

Most couples think they communicate well, but research indicates otherwise when it comes to finances. Of course, talking about finances can be a minefield. If one partner is frugal and the other spends freely, tensions can be high. Disagreements about money are one of the leading causes of divorce.

More than four out of ten couples did not know how much their partner makes. Many were off by over $25,000! This can have serious effects. If you don’t know how much income you make as a couple, how do you know how much you can reasonably spend?

Unless couples lead totally separate financial lives, not knowing how much they are earning together can lead to a lack of savings or even debt. This issue could be behind the alarmingly high amount of debt that people carry, often at exorbitant rates.

More than one-third of couples disagree on the amount of investable money they have. This usually happens when there is a division of labor between couples, where one partner is in charge of the investments.

However, our experience indicates that couples also disagree on the kinds of investments that are appropriate. In general, men tend to prefer riskier investments that women. This can lead to a good deal of stress and disagreement.

How Much Will You Need?

Most couples think they communicate well, but when it comes to their finances research indicates otherwise. Our previous essays on the subject have shown just how poor it typically is.

On the issue of retirement, nearly half of the couples surveyed had no idea how much they needed to save in order to maintain their current lifestyle once they retire.

Nearly half disagreed on the amount they need. Even more startling, those who were nearest to retirement – when changing course is the most difficult – disagreed the most!

Over half of the respondents had “no idea” what they would receive in monthly retirement income. Asked about Social Security, 60 percent either did not know or were not sure, what they would receive. That includes the about-to-retire Baby Boomers.

Roughly one-third of couples disagreed on their retirement lifestyle. Half could not even agree on when they would retire.

Our next section on this series will have a look at what financial issues couples worry about financially.

Financial Worries Couples May Have

Most couples think they communicate well, but research indicates that communication about finances is often not good. In our previous essays we have discussed common financial disagreements.

In this essay we will discuss some of the financial worries couples have.

Nearly three-quarters of couples worry about unexpected health care costs. For more than half, it’s their top concern. With people living longer than ever before, advances in medical technology and the skyrocketing cost of health care, this concern comes as not real surprise.

After health care, the next biggest concern for couples was outliving their retirement savings.

The negative effects of inflation and concerns that Social Security may run out were the next biggest concerns.

Despite these worries, only 20 percent of couples actually have a plan in place to address these issues! And over one-third haven’t even thought about planning!

Our next essay will take a look at those couples who have taken the time to create a financial plan.

Why You Should Have a Financial Plan

Most couples think they communicate well, but research indicates otherwise when it comes to finances. Communication on financial issues between couples is especially poor, as we have discovered. Despite concerns about medical costs, running out of money, inflation and Social Security, most couples have not created a plan to deal with these worries.

The 20 percent of couples who have created a plan get the benefit of peace of mind, less stress, and a more cohesive relationship. Uncertainty and doubt around important financial issues creates stress within relationships.
Couples who have a retirement plan in place:

Are twice as likely to live a very comfortable retirement.
Are 50 more likely to be “completely confident” in assuming responsibility for retirement.
Are much more confident that their partner will be OK in retirement.
Are twice as likely to know how much they will need in retirement.
Are less concerned about unexpected health care costs.
Are much less likely to be concerned about outliving their savings.

Having a plan to reach your goals is much like going to the grocery store with a shopping list. You know what you need and are less likely to forget important items, nor are you as likely to buy things you don’t need.

Creating a plan forces couples to be open with each other about their goals, their finances, and the issues that may keep them from achieving those goals. Working with a Certified Financial Planner™ (CFP) to create a plan also brings an important measure of reality to the process. Professional guidance creates realistic assumptions about how much should be saved and the rate at which it should grow. A CFP can also help mediate differences between couples when issues arise.

Newly Wed Financial Mistakes

Couples were asked what advice they would give to newlyweds and young couples about finances. Newlyweds usually do not put frank talk about finances at the top of their “to-do” list. That may be a big mistake.

The most common suggestions for young couples starting out in life together were:

Save as early as possible for retirement.
Make all financial decisions together.
Make a budget and stick to it.
Make sure you have an emergency fund.
Don’t hide expenditures.
Disclose income, debts and assets early.

One of the easiest ways of accomplishing all of these objectives is for young couples to consult a financial advisor as soon as possible. By doing so they will reveal their finances to each other, develop a budget that matches their income, agree on an investment strategy, and be given a roadmap to long-term financial peace.

Our final essay on this subject will summarize what we have learned.

Creating a Retirement Plan

Most happy couples think they communicate well. However, on the subject of finances, studies and experience has shown that they don’t communicate nearly as well as they think.

Many couples don’t know what their partner earns, how much they have invested, what it takes to retire and where their retirement income will come from.

Couples often disagree on the way their money should be invested and in too many cases one partner is in charge of investing and the other is kept in the dark.

Retirement is another issue in which there is a great deal of confusion. Many do not know what it takes to retire, have nebulous goals about retirement and even disagree about when to retire.

The lack of good communication leads to worries about financial disasters. Issues include health care costs, the effect of inflation on buying power, outliving their savings and the possibility that Social Security may not be there for them prey on their minds.

In the face of so much uncertainty, only one-in-five couples have a plan. One of the benefits of having a plan is that it makes it much more certain that they will achieve their goals. And that bring peace of mind.

Of course the earlier that people start to plan, the higher the probability that they will achieve their goals and have a healthy and frank discussion about financial issues. The best time to start is when you are young and it’s an excellent way for newlyweds to begin life together.

Thanks for your interest and we hope you will share this with your friends.

Korving & Company, the 2015 Suffolk Small Business of the Year is a family owned investment management and financial planning firm. We deliver a very personal level of service to guide, empower and assure our clients that their money is carefully managed to meet their long-term life goals.

What makes us different?

When most people think about investment firms with tens of thousands of “investment advisors” they think of people who call them up with recommendations to buy a stock or bond for their account.

But what’s the objective? What are you trying to accomplish? Will his recommendation take you closer to your goal, or farther away? What’s his motivation for the suggestion?

Think about getting on an airplane. You want to go the Phoenix. Does the pilot ask you what route you would prefer? How fast he should fly? How about a detour to Minneapolis? If he did, you would probably get off the plane. It’s his job to pick the best route in the shortest time and with the least risk. That’s what you’re paying him for. You want him to do the flying, you expect him to get you there without your input.

That’s what a real financial advisor does for you. He doesn’t suggest buying or selling stocks, bonds or mutual fund. He picks the best investments that will lead you to your goal and keeps you advised of your progress. He’s not selling investment products, he’s taking you to your destination in the best way possible.

At Korving & Company we ask you what your destination is, what your goals and dreams are and then put together a plan … and a portfolio that’s designed to get you there with the least risk in the time of your choosing. We are Certified Financial Planners (CFP)™

That’s what makes us different from the Big Box stores. Check us out on the web.

8 Common Reasons for Retirement Failure

1. Overspending.

-You won’t spend less in retirement. The old saw that retirees only spend 80% of their pre-retirement income is a myth.

2. Elder Fraud.

-Seniors are becoming the favored victims of swindlers.

3. Health care.

-As we age the cost of medical care goes up. Medicare is covering less and premiums are going up.

4. Starting a business.

-Investing capital in a business that fails can devastate retirement finances.

5. Adult children.

-Helping your children through a “rough patch” can become is one of the most common ways of ending up broke.

6. Second homes.

-The cost of maintaining that vacation home when you’re no longer working can drain your resources when your income drops.

7. Divorce.

-Couples sometimes wait until the children leave home to divorce. When assets are split 50/50, retirement becomes a problem for both parties.

8. Investment mistakes.

-Making poor investment choices is one of the most common ways of ruining your retirement lifestyle.

If you are nearing retirement, don’t enter into it without a plan.

Successful and investing and emotional control

One of the big benefits of professional money management is “emotional control.”

Emotional control is the ability to control one’s emotions in times of stress. Napoleon once said that “The greatest general is he who makes the fewest mistakes.” There is a similarity between war and successful investing. Both require the ability to keep a cool head at times of high stress.

There is another old saying in the investment world: “Don’t confuse brains with a Bull Market.” When the market is going up, it’s easy to assume that you are making smart investment decisions. But your decisions may have nothing to do with your success; you may simply by riding the crest of a wave.

That’s when people become overconfident.

When the market stops going up, or the next Bear Market begins, the amateur investor allows fear to dominate his thinking. The typical investor tend to sell as the stock market reached its bottom. In fact, following the market bottom in early 2009, even as the stock market began to recover, investors continued to sell stock funds. Since then the market has doubled.

Professional investors are not immune to emotion, but the good ones have developed investment models that allow them to ride through Bear Markets with moderate losses and ride the rebound up as the market recovers. It is that discipline that allows them to make fewer mistakes and, like Napoleon’s general, come out ahead.

Protecting Elderly Clients

Much has been written about the vulnerability of the elderly to scams that are perpetrated on them. Because seniors are concerned about health care, con artists prey on the elderly to get them to buy fraudulent products or services. Home improvement scammers prey on the elderly by providing shoddy or unnecessary repairs. Stories about unscrupulous financial advisors are frequently in the news. Funeral homes have been known to get the elderly to spend more than they want or need. Some scammers will read the obituaries and pretend that the deceased ordered products or owed a debt to try to get money from the surviving spouse.

Very often the people preying on the elderly are relatives. Because most of us trust our relatives, it gives them an opportunity to take advantage. Children have been known to move back into the family home and physically abuse their elderly parents. They may employ emotional blackmail. They may threaten to stop visiting or calling. They may tell their parents that not giving them money means that they don’t love them. Often a demand for money is disguised as help with bills, or presents to grandchildren.

Of course parents make gifts to children and grandchildren all the time. But there is a line beyond which it becomes clear that children are looking to get their “inheritance” early. This can lead to an impoverished parent who loses his independence, or even his home.

It can be very difficult for a concerned financial advisor to protect his client from predatory relatives. Often the parents want give money to their children and may be unaware of the financial consequences. As fiduciaries we have to keep in mind that our obligation is to our client; not her children, grandchildren or any other relatives. You may have to tell your client “I know you love your son, but you should not give him the house because you may need to sell it so that you can move into a senior living facility.” Of course this can create a conflict with the relatives who will not appreciate what you are doing.

At some point it may be necessary to get an attorney involved, one who specializes in elder care. This is particularly important if the heirs don’t get along. If the elderly become incapable of managing their own affairs they can assign power-of-attorney to a third party. If the children are not competent, or if there is a conflict, appointing an attorney as the executor of the estate may be preferable to appointing a relative.

Providing financial guidance to the elderly is much more than managing their portfolio. There is often much more going on that is critical to the well-being of the client, and avoid the chance that they run out of money before they run out of time.

Are You an "Affluent Worker?"

Forbes magazine recently had an article about some of our favorite clients. They call them the “High Net Worker.” These are people who are successful mid-level executives in major businesses. They range in age from 40 to the early 60s. They earn from $200,000 per year and often more than $500,000. They work long hours and are good at their jobs.

According to the Forbes article, many have no plans to retire. Our experience is different; retirement is definitely an objective. But many have valuable skills and plan to begin a second career or consult after retiring from their current company.

At this time in their lives they have accumulated a fair amount of wealth, own a nice home in a good neighborhood, and may be getting stock options or deferred bonuses. That means that at this critical time in their lives, when they are focused on career and have little time for anything else, they have not done much in the way of financial planning.

When it comes to investing, most view themselves as conservative. But because of their compensation their investments are actually much riskier than they think. It is not unusual for executives of large corporations to have well over 50% of their net worth tied to their company’s stock. Few people realize the risks they are taking until something bad happens. For example, the industrial giant General Electric’s stock lost over 90% of its value over a nine year period ending in 2009. The stock of financial giant UBS dropped nearly 90% between May 2007 and February 2009. These companies survived. There are many household names, like General Motors and K-Mart whose shareholders lost everything.

The affluent worker’s family usually includes one or more children who are expected to go to college. Many of these families have a 529 college savings plan for their children. Most have IRAs and contribute to their company’s 401k plan, but because many don’t have a financial planner they do not have a well thought out strategy for this part of their portfolio.

At a time when many less affluent families are downsizing, many families in this category are either looking to upgrade their homes, buy a bigger home, or buy a second – vacation – home. They may even help their adult children with down-payments.

If you are an Affluent Worker, give us a call and see what we can do for you. If you already have a financial advisor, it may be time to get a second opinion.

How to connect with your spouse about finances

Too many spouses don’t share enough information about family finances. It’s not unusual for one spouse to take care of investments and pay the bills. The other spouse may not be interested or may be too busy. It’s a fact that not everyone is interested in investing, budgeting or banking.

But this can lead to a bad outcome in case of death, divorce or separation. In fact, money is one of the top 10 reasons for marriage breakdown.

Money or anything related to finances can be a possible cause of disagreement between many people – including couples. Married couples, whether they are happy or not, may have disagreements over little financial issues to much bigger shared financial responsibilities or unequal monetary status. Money may not always be the principal cause but in fact is usually combined with other forms of reasons for divorce. In any case, it is still a significant contributor and should be managed with fairness from both sides, mutual understanding and a tiny dose of compromise.

But even couples that are financially compatible should sit down from time to time to review their financial situation. Our books: BEFORE I GO and BEFORE I GO WORKBOOK were written to help people do this.

If there is a difference in the financial mind-sets of a couple, a financial advisor may be able to act as a facilitator to reconcile the differences.

A financial advisor can educate the couple about investing, budgeting and retirement planning. Regular meetings with a couple’s financial advisor provide them with the opportunity to share critical family financial issues, keep everyone informed and help resolve issues before they lead to conflict.

Having a trusted financial advisor in place, one who is already familiar with a couple’s finances, can also help in case you find yourself “suddenly single.”

What to look for when getting financial help

What should you look for when you are searching to financial guidance? Finding the financial advisor that is right for you can be difficult. You want someone you can trust; a fiduciary, someone who will put your interests ahead of his own. In some respects, it’s like getting married because a good relationship is open and long-lasting.
To help you in your search, here are a few things to look for.

Compatibility: like a spouse, you want someone you can talk to and who shares your view of life. If you are not compatible, you will always be on the lookout for someone else.
Philosophy: what is your advisor’s investment philosophy? Is it capital preservation, beating the market, getting a fair return? Is that compatible with what you’re looking for?
Strategy: how does your advisor go about achieving your objectives? Do you understand it? If not, ask more questions.
Experience: how many years has he been in business? Try to avoid having a rookie learn on the job with your money.
Certifications: does your financial advisor have a certificate from the International Board of Standards and Practices for Certified Financial Planners? The CFP™ designation means that he has completed the coursework and passed the test to become a Certified Financial Planner™ certificant.
Affiliation: is your advisor an employee of a large financial firm or is he Independent RIA (Registered Investment Advisor). Employees of large financial firms work for their company, an RIA works for you.
Compensation: how is your advisor paid? Fees, commissions, a combination of fees and commissions? It’s important for you to know this ahead of time.
Reputation: does your advisor have a good reputation in the community? You can also check to see if he has any mark on his record by checking with FINRA.
People like you: does your advisor deal with other people like you? This can make a difference in his understanding of the issues you are dealing with.

Finding a good advisor can make the difference between your financial success and failure. He can keep you from making major investment errors and bring you peace of mind. Twice as many people who get professional advice feel very secure about their financial future as opposed to those who do it on their own. Korving & Company is an RIA whose principals are Certified Financial Planners™ (CFP™). We are fiduciaries who put our clients’ interests first. Our objective is to get a fair return. We have decades of experience. We are fee-only. We are proud of our reputation in the community. Are we right for you? Find out.

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