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Thursday, August 20, 2015

Three key decisions to make before you retire
When to take Social Security, how to pay for health care, and how to generate income.
As retirement nears, you will have three big decisions to make: when to take Social Security, how you will pay for health care, and how will you generate cash flow. The three are interconnected and will make a difference in your budget and lifestyle in retirement, and even on deciding when to retire.
How and when will you claim Social Security?
Waiting to age 70 to claim can significantly increase your Social Security benefit.
Social Security Administration data: Fast Facts and Figures about Social Security, 2014; Social Security Basic Facts (April 2, 2014); Annual Statistical Supplement 2014; and Annual Statistical Supplement 2015 (In Progress). FRA = full retirement age.
You can claim Social Security as early as age 62, but that may not be in your best interest financially. Why? Because Social Security payments increase if you delay claiming your benefits; your monthly benefit can go up until age 70. The difference between your check at 62 and 70 could be as much as 75%. For example, a monthly benefit of $1,500 if claimed at 62 could increase to more than $2,600 each month at age 70.1
Your Social Security benefit is guaranteed for as long as you live, and it will go up over time to keep up with inflation. So even though delaying means you would pass up some extra money in hand during your 60s, having a larger guaranteed source of inflation-protected monthly income for life is a big benefit for most people.
Of course, delaying isn’t always better—or always possible—for everyone, particularly for people with health issues, because it can take years to reach the breakeven point. Other families may need the Social Security income right away. But if you can defer until age 70, and you live a long life, you will collect more by waiting to start your benefits.
Figuring out when to collect benefits isn’t always as simple as deciding how long to wait. Married couples have a number of options to potentially boost their lifetime benefits by as much as $250,000, according to Fidelity research.1
How will you pay for health care?
It probably won’t surprise you that health care costs tend to go up as you get older. What may be surprising is by just how much: Our research suggests that the average couple retiring in 2014 could expect to spend about $220,000 on out-of-pocket health care costs during their retirement.2
You probably can’t escape health care costs, but you can plan for them. That starts with the government’s retiree health care insurance program—Medicare. No matter when you claim Social Security, Medicare won’t kick in until 65. So if you retire early, you will need to buy health insurance privately. Fidelity estimates that a couple retiring at age 62 instead of age 65 might have to spend an extra $17,000 on health care before they are eligible for Medicare.3
While you are still working, you should also consider a health savings account (HSA), in conjunction with a high-deductible health plan, to save for health care costs in retirement. You may want to buy supplemental health insurance or long-term care insurance to pay for expenses not covered by Medicare. Finally, it pays to be a choosy consumer of health care services, ask a lot of questions about the cost and necessity of services, and compare prices from different providers.
How will you generate cash flow once you stop working?
In retirement, Social Security will likely just be one of several sources of income. Others may include your savings, pension, annuities, rental income, or working part time. So how do you come up with a plan to make sure your money lasts?
There are many approaches, but it starts with a budget that identifies your needs—essential expenses like food, housing, and health care—and your wants—discretionary expenses like travel, eating out, and entertainment. The definitions between needs and wants will be different for everyone, but once you have your list, it makes sense to match essential expenses with guaranteed income—money that you can’t outlive—like Social Security, pensions, and lifetime annuities (which let you convert savings into guaranteed income). Then use your other savings and income for discretionary expenses.
One practical test to see whether you are financially ready for retirement is to try living off your retirement budget before you retire. If it’s too tight, you still have time to make adjustments. For instance, you can work longer, use home equity, or find part-time work.

Monday, July 27, 2015

Stock Market Volatility: How Safe Is Your Retirement?

If you have been reading the headlines lately, then you probably know that Greece was on the verge of default , the Chinese Shanghai composite has lost over 30%, the Dow Jones Industrial Average is down -1% on the year, the Fed is considering raising interest rates for the first time in seven years, and on top of all that, our debt in the United States has now exceeded 18 trillion dollars.
When it comes to investing there is an old saying that “a rising tide lifts all boats” but Warren Buffet really nailed it when he said, “When the tide goes out you find out who has been swimming naked.”

When it comes to retirement planning I’ve seen too many people make the mistake of assuming a constant rate of return on their money (around  7-10% per year) without considering how the sequence of those returns can impact their retirement cash flow and investment portfolio. A significant loss the first couple of years of retirement could devastate a entire retirement withdrawal strategy. When it comes to retirement income it is not just the rate of return that matters but the timing of those returns.
The solution to this problem is actually pretty simple: TIME. Time is the cure to the volatility of the stock market. The more time you have, the more risk you can afford to take. When you are drawing money out of a portfolio for retirement income, you want to make sure that income source is safe from market volatility. Taking money out of an account that is falling in value is like donating blood when you have been stabbed and are bleeding. You have a bad situation that is going to get worse.
Diversification of your portfolio in retirement should include two steps: Step one is to diversify your time horizon; Step two is to diversify your investments. Some people call this a bucket approach to retirement income while others refer to it as laddering your cash flow. Essentially income you need for the first five years is safe secure and guaranteed. The more time you have the more risk you can afford to take. If you create a retirement income plan that diversifies time first and then uses the best financial vehicle for that time segment, then you can create a retirement income plan that delivers a great deal of confidence. 

The key is to start with a plan, not an investment strategy.  It is important that you stick with the plan in the good times and the bad. Unfortunately too many people make projections based on the good times. When the market is going up and the tide is rising, everyone is comfortable with risk. When the tide is going out and people begin to realize their plan is very vulnerable to the whims of the market, those who do not have a good retirement income strategy can begin making emotional decisions, which are usually bad decisions. The best time to buy something is when it is on sale. The best time to sell something is when it is at it’s peak price. When you do not have a good retirement cash flow plan to start with many people end up making the exact opposite decisions. They sell assets when they are on sale, and they buy them when they are expensive.
Stock market volatility is nothing new.  It has always been with us and it will always be with us.  It is the risk that we are willing to assume that allows us to have the potential to earn a return greater than we might get in a bank certificate of deposit.
When you have diversified your retirement income plan by time and conservatively solved for your cash flow needs, then you won’t have to worry about people seeing you naked when the tide is going out.

Monday, June 15, 2015

Before You Retire: 3 Important Considerations

One of the advantages of being a financial adviser who specializes in working with pre-retirees and retirees is I get unique insights into both the benefits and regrets of retirement planning. Based on those insights please consider the following before you retire. 1) Purchasing or refinancing a home Remember banks lend money based on your income not your assets. I recently met with some folks who retired in their mid 50s. They will be living primarily off their savings until their pensions and social security income starts in their 60s. Unfortunately, they did not refinance their home while they were working and had good income. Even though interest rates have dropped, they are not in a position to refinance their mortgage because banks want to see a history of income before making a loan. Drawing interest and dividends from an investment portfolio is not looked upon favorably by lenders unless you have at least two years of income history from that source. So be sure to refinance or purchase your retirement home while you still have good income. If you have already retired, then you might consider using a single premium immediate annuity (SPIA) to generate income over a five-year period of time. The banks will look more favorably at income from a guaranteed SPIA contract than they would monthly draws from a money market account. 2)Budgeting for individual health insurance One of the biggest expenses facing people who retire early is the monthly expense for health insurance. Not too long ago, I met with a couple who retired in their late 50s; who did not research and understand the full cost of health insurance before they retired. Many people’s employers provide their health insurance so they are not aware of the cost for individual health insurance plans. Currently, a married couple in their late 50s, in Kitsap County, could be looking at monthly premiums for a high deductible HSA-qualified health plan that would start at $920 per month based on an $8,000 family deductible per year for the couple. The premiums would increase as deductibles decrease. Federal health insurance premium tax credits do exist that may help reduce your out-of-pocket insurance premiums when you purchase the insurance through the government healthcare exchange. For example, if we use the same information for the couple above, then they would be eligible for a health insurance premium tax credit based on their modified adjusted gross income (MAGI). If their MAGI for the year was $55,000, then they would receive a $704 per month tax credit toward their premiums, and their out-of-pocket insurance premium would be reduced to $219 per month. If their MAGI was $63,000, then they would have to shoulder the entire $920 per month since they would not eligible for any of those tax credits. Click here to learn how to estimate your income for the marketplace. Remember that income from a Roth IRA is tax free and is not counted toward your MAGI. If you are over age 59.5, have met the 5 year holding requirement and the distribution counts as qualified (non-taxable), then you may want to consider taking some of your retirement income from your Roth IRA instead to ensure your MAGI remains below the threshold to qualify for the premium tax credit. Click here to see a chart of the current income ranges that qualify for the premium tax credit. Also if you have health insurance through an employer plan (or former employer) or buy it privately then there is no credit to be had. 3) Creating a cash flow plan Retirement is all about cash flow not your net worth. Without income you do not have retirement. Your income will determine your lifestyle in retirement so you need to understand exactly how you will meet your income needs. A good retirement cash flow plan should start with a good budget to fully understand how much money you spend every month/year. You should make conservative assumptions about future inflation and the rate of return at which your money will grow. Remember the sequence of returns within your portfolio can make or break your plan. If you experience a significant loss in the year you retire, then it may be devastating to your overall future cashflow. You should also take into consideration your health and your family’s history of longevity to make informed decisions about when and how to start social security and pension income. If you are married, then you also consider the impact on your cash flow if one spouse were to pass away or have an extended medical issue that required ongoing treatments or care not covered by traditional health insurance or medicare. I’ve learned the more conservative an income plan that covers that gap between your guaranteed income and your budget, the more confidence people have as they transition through retirement. We can all learn from one another. There is a collective intelligence in specialization. You do not have to plan for retirement alone. Find someone who you can trust who specializes in retirement planning, and get a second opinion. “An ounce of prevention is worth a pound of cure.” Sometimes an outside perspective can help you see things that you may not be trained to see. What are some of the things you have learned as you prepare for or transition into and through retirement?

Friday, December 12, 2014

Guarding Against Fraud

In a survey of American adults aged 40 and older, 84% revealed that they had been solicited to participate in a potentially fraudulent offer, and 11% had lost money after engaging in such an offer.1
The root of this problem — besides the endless efforts of criminals — seems to be naiveté and unwarranted trust on the part of those who are deceived. A large percentage of respondents were unable to spot fraudulent sales pitches and found the unrealistic promises appealing (see chart). Although people of any age can be victims of fraud, criminals are more likely to target those who are 65 and older; this age group is also more likely to lose money when they are targeted.2

Fraud is complex, and a list of fraudulent schemes could fill many pages. Here are three basic principles to keep in mind.
If an investment sounds too good to be true, it probably is. Investing is a long-term process that requires research, patience, and rational decision making. Investments with the potential for higher rates of return typically have a higher degree of risk and the potential for loss of principal.
Never send money based on the promise of getting money. This type of scam may take many forms. Common examples include: (1) an email or letter promising a large amount of money in return for a small up-front fee; and (2) an authentic-looking check that you are asked to deposit in your account, keep a percentage as a fee, and wire the balance to an address. Even if your bank initially credits your account, you could be liable for the money if the check is found to be fraudulent.
Just because it looks official doesn’t mean it is. You might receive a letter, email, or phone call that appears to be from the IRS or a federal, state, or local government agency, either demanding a payment or seeking personal information. You might even be directed to an official-looking website. If you have any doubt, contact the agency directly. Never provide personal information until you’re satisfied that you’re dealing with a legitimate agency that needs the information.
Regardless of how a fraudulent scheme is presented, your best defense may be a good dose of skepticism and common sense.
1–2) FINRA Investor Education Foundation, 2013
The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2014 Emerald Connect, LLC.

Wednesday, November 12, 2014

Tips for Your 2014 Taxes

The end of the year will be here before you know it, but there’s still time to take steps that may help reduce your 2014 tax liability. Here are some ideas to consider.
Increase tax-advantaged retirement contributions. If you participate in a workplace retirement plan, the deadline to make 2014 contributions is December 31. Your employer’s plan may allow you to increase or decrease contributions at any time. IRA contributions for 2014 can be made up to the April 15, 2015, tax filing deadline. (See chart for retirement plan contribution limits.)
Consider deferring income. Depending on your situation, consider deferring income (including investment income) to next year. Because the tax rates on income, dividends, and capital gains are permanent, it should be easier to strategize from one year to the next. Keep in mind that if your modified adjusted gross income exceeds $200,000 ($250,000 if filing jointly), you might be affected by the 3.8% unearned income tax on net investment income.

Contribute to charity. Contributions of cash and noncash items to qualified charitable organizations are generally deductible if you itemize deductions. Be sure to keep all receipts and other documents required by the IRS.
Make January payments early. If you itemize, paying your January mortgage payment this year could increase your interest deduction. If possible, consider making other payments before the end of the year, such as business expenses if you are self-employed.
Use your FSA. Although this probably won’t change your tax liability, be sure to use funds from health-care and dependent-care flexible spending accounts (FSAs) by December 31. Depending on how they’re set up, some plans may allow a carryover or grace period to use any leftover funds. 
Even if you began tax planning earlier in the year, you may have a clearer picture of your financial situation now, so it might be worthwhile to reexamine your strategy. Before you take any specific action, be sure to consult with your tax professional.

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2014 Emerald Connect, LLC.

Tuesday, September 30, 2014

Global Static: Geopolitics and U.S. Markets

When a Malaysia Airlines jet crashed over Ukraine on July 17, 2014, due to a suspected missile attack by pro-Russia separatists, the U.S. stock market dropped sharply, with the S&P 500 declining by 1.2%.1 The next day, with no new information regarding the crash, strong corporate earnings caused the market to rebound, regaining most of its losses from the previous day.2 By the following week, the S&P 500 had surpassed its level before the airliner crash.3
On August 14, the market closed strong, due in part to conciliatory remarks regarding the Ukrainian conflict by Russian President Vladimir Putin.4 Yet the following day, when news broke that Ukrainian forces had attacked a Russian convoy that crossed the border from Russia, the S&P 500 dropped more than 1% over an hour-and-a-half period, only to bounce back by the end of the day.5
As these examples illustrate, the U.S. stock market tends to react quickly to geopolitical events, but recently such reactions have been short-lived. Over the longer term, the market generally moves on more fundamental domestic economic issues. With this in mind, it might be helpful to consider some current geopolitical issues and what effect, if any, they could have on the U.S. economy.

Is Russia an Economic Threat?
The ongoing Ukrainian conflict is serious, and it’s natural for Americans to be concerned about a resurgence of Russian militarism. However, direct trade between the United States and Russia is minimal, amounting to about 1% of U.S. foreign trade.6 The larger issue is Europe’s dependence on Russia’s natural gas and the potential consequences if Russia were to cut off the supply. This worst-case scenario could have a major impact on Europe and might reduce U.S.-European trade, but it seems unlikely because
of its potentially destructive impact on Russia’s economy.7

Moreover, it appears that tough economic sanctions imposed on Russia by the United States and the European Union have begun to have an effect, as evidenced by the fact that the largest Russian oil company asked the government to help bail it out of massive debt.8
Reduced trade with Russia in the short term may slow the still-struggling European economy. While U.S. gross domestic product (GDP) rose by 4.0% in the second quarter, eurozone GDP was flat. Germany, which maintains an important trade relationship with Russia, saw GDP drop by 0.2%.9–10 However, Germany’s economic minister predicted that Europe’s largest economy should show growth by the end of the year.11
What About Iraqi Oil?
The escalation of armed insurgence in Iraq has raised concerns about oil supplies and further involvement by U.S. forces. The major Iraqi oil fields are far from the fighting, and world oil supplies are sufficient to withstand a decline in Iraqi production. Oil prices spiked briefly in mid-June when the Iraq insurgency flared, but have declined through July and August.12 Though the situation remains volatile, recent gains on the ground and the transition to a new, more moderate Iraqi prime minister appear to be hopeful signs.13

Should You Cry for Argentina?
On July 31, 2014, after Argentina defaulted on a debt payment to U.S. creditors, the S&P 500 lost 2% of its value and took more than two weeks to regain its losses.14–15 Considering that Argentina accounts for less than 0.4% of U.S. trade, the reaction seems overblown.16 In fact, some investors who thought the U.S. market was due for a correction might have used the Argentina default as an “excuse” to sell stocks.17 If so, this only affirms the principle that investment decisions should be based on long-term fiscal trends rather than on events in a single country or region.

Focus on Your Own Strategy
As this brief overview demonstrates, there are always international flash points, and the market may rise and fall on news from abroad. But geopolitical events tend to create temporary “noise” rather than having a lasting effect.

Over the long term, U.S. stocks are driven primarily by the U.S. economy, and thus far in 2014 the economic news has been mostly positive: Corporate earnings have been strong, and more people are finding jobs.18 It’s generally wise to downplay the global noise and maintain an appropriate investment strategy based on your personal situation, risk tolerance, and long-term goals.
The return and principal value of stocks fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost.
The S&P 500 is an unmanaged group of securities that is considered to be representative of the U.S. stock market in general. The performance of an unmanaged index is not indicative of the performance of any specific investment. Individuals cannot invest directly in an index. Past performance is no guarantee of future results; actual results will vary.
1) MarketWatch, July 17, 2014
2) Associated Press, July 18, 2014
3, 5, 15) Yahoo! Finance, August 18, 2014
4) Reuters, August 14, 2014
6, 16) U.S. Census Bureau, 2014
7) Business Insider, August 11, 2014
8) Bloomberg, August 14, 2014
9) U.S. Bureau of Economic Analysis, 2014
10–11) Reuters, August 14, 2014
12) Fox Business, August 18, 2014
13) The Washington Post, August 18, 2014
14, 17) USA Today, July 31, 2014
18) CNNMoney, August 19, 2014

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.

Monday, September 8, 2014

Creative Ways to Cut Your 401(k) Fees

This story appears in the September 8, 2014 issue of Forbes.                                                                    
What’s your 401(k)’s composite expense ratio? Higher than 0.1% a year? Then you should be looking for an escape hatch. It could save you a pile of money.
If the mere question about ratios leaves you flummoxed, you have company. Plenty of employees don’t pay attention to what they are losing to fund fees. They should.  The difference between high-cost funds and low-cost funds could easily add up over the course of a career to several hundred thousand dollars.
The operators of retirement plans and even employers do not necessarily mind the state of confusion that prevails. One way or another the considerable paperwork cost of a 401(k) must be paid, and the most common way to do that is to extract it via fund expense ratios. The plan may offer a few bargain funds, yet still depend for its economics on having most of the workers wander blindly into higher-fee options.
To get your costs down, you may have to be a bit creative. Consider these real-life cases.
X, 23, has just joined a fast-growing West Coast technology firm. The pay is high, but the 401(k) plan is bad. There’s no employer match, and most of the funds on offer are expensive. Employees who sign up but neglect to make an investment choice are deposited into a balanced fund (a mix of stocks and bonds) that costs a rapacious 1.28% of assets annually.
Not wanting to pass up the valuable tax deferral, X is contributing the maximum $17,500 a year. She wants a mix of stocks and bonds. There’s one cheap stock fund available, an S&P 500 index fund at 0.09% a year. But the cheapest bond fund, American Century Ginnie Mae, costs 0.55%.
Solution: She will put her entire 401(k) contribution into the stock index fund. Then she will restore her balance by adjusting other assets. She has an inherited IRA at low-cost Vanguard. She’ll shift some of that money from stocks to bonds. With an investment of $10,000 or more, she is eligible for the bargain share class of the Vanguard Total Bond Market Index mutual fund. Annual cost: 0.08%.
Y, 37, is a new partner in a medical practice. There are all manner of compliance costs for retirement plans, and those costs must be recouped. The best the three docs could do was a menu drawn from the American Funds collection, priced at 0.58% to 1.13% a year.
The doctor’s plan has an escape hatch. For a $100 transaction fee, a participant can use a “brokerage window” to buy just about any security. When his balance gets big enough, it will make sense for him to pay the fee and buy a dirt-cheap exchange-traded fund on the New York Stock Exchange. Schwab and Vanguard have ETFs costing as little as 0.05% a year.
Suppose Dr. Y moves $100,000 over to the Schwab U.S. Aggregate Bond ETF, with an expense ratio of 0.06%. His annual portfolio cost will go from $580 (or worse) to $60. He’ll gladly pay the $100 transaction fee, a brokerage commission and a bid/ask spread of a few cents per ETF share.
Z is a 61-year-old manager at a nonprofit with a Fidelity-managed 403(b) plan, something very similar to a 401(k). The menu includes some low-expense stock index funds. But the cheapest fixed-income choice is the Fidelity Intermediate Bond Fund at 0.45% a year.
The $500 million plan has a brokerage window with a $75 fee. This window is opened just a crack: Z may not buy ETFs, and when he gets a Vanguard fund he is herded into the expensive share class.
Last year Z crawled through the window with $172,000, putting the money into the Vanguard bond market index fund at an expense ratio of 0.2%. His savings will run to $430 a year.
A survey by benefits consultants Aon Hewitt found that 76% of large employers have workers pick up all the costs of 401(k) administration. Among employers that push all or some of the costs onto employees, a rising minority (now 26%) assess account administration fees, such as $25 per account per year. The rest continue the tradition of burying costs in overpriced funds, a practice that helps youngsters with tiny balances but hurts workers who have been around long enough to accumulate respectable sums.
The game seems to be tilting to the older workers. Two in five large-company plans have the brokerage escape hatch .