You probably get a regular health checkup, you get your teeth cleaned twice a year, you get a second opinion for major health issues. You may even get a second opinion when you buy a boat or a vacation home!
The second reason is the potential to obtain better guidance in adjusting the asset allocation to a more appropriate level that takes into account your own individual goals and risk tolerance. Although 401(k) plans may offer appropriate investments and some educational information about those options, 401k plan sponsors do not usually make available truly personalized advice to plan participants.
Regardless, there are mistakes that you need to avoid in the process of rolling over your 401(k). To avoid those mistakes, it is important to be able to recognize them. (Click here to receive the Top Mistakes in 401(k) Rollovers fact sheet.)
It should be noted that one reason to keep your retirement assets in your 401(k) plan is that costs are often, but not always, lower in 401(k)s. However, without an appropriate investment plan, lower costs may not bear fruit.
In general it is a good idea to get advice from a Financial Planner who is a fiduciary. You may think that your financial advisor is obligated to do what is best for you, the client. However, not all are not obligated to act in your best interest (whereas a fiduciary would be), and may advise higher fee products, or proprietary products sold by the firm he or she represents or products that do the job.
In April 2016 the Department of Labor rolled out a new regulation that is to take effect in 2017 mandating that all investment professionals working with retirement plan participants and IRA owners shall adhere to a fiduciary standard for all retirement accounts for which they provide investment advice. For purposes of the DOL rule, retirement accounts include 401(k)s, IRAs, and Roth IRAs among others. The Department of Labor estimates that the investing public would save $4 billion a year with the new fiduciary rule. As you might expect, the fiduciary rule is opposed by affected Wall Street interests that are seeking to water it down or eliminate it entirely.
The Trump administration issued an executive order on February 3, 2017 to review the rule. While the Trump administration would like to roll it back, the industry is moving ahead with implementation, potentially regardless of possible regulatory about faces. Hence the future of the rule is unclear at this time.
you always have the option to roll over to an IRA that you can manage
Of course, whether or not this regulation takes effect in 2017, you can still benefit from working with a fiduciary advisor. If the advisor you are working with is not working to a fiduciary standard – i.e., with your best interests in mind, seek out someone who is. It’s important: after all you are dealing with your money and your future standard of living in retirement.
In the current regulatory environment, fee-only Financial Planners at Registered Investment Advisor firms usually serve as fiduciaries, and are required to always act in your best interests – they must avoid conflicts of interest, and cannot steer plans and IRA owners to investments based on their own, rather than their clients’ financial interests. In contrast, brokers, insurance agents and certain other investment professionals only have a responsibility to recommend securities that are “suitable.”
Making sure that the investment professional you are working with is acting in your best interest may help you invest your retirement funds more appropriately. Note that the Securities and Exchange Commission (SEC) has not promulgated similar regulations for non-retirement investment accounts so if you are not dealing with a fiduciary advisor, you run the same risk of potentially higher costs or merely suitable investments. In fact if you have an IRA and a brokerage account with your financial advisor, he or she may end up being a fiduciary on one account and not a fiduciary on the other account. How is that for confusing?
We started the year in the middle of a correction, as the S&P500 lost 13.3% between November 4, 2015 and February 11, 2016.
However, supported by a slow but continuing economic recovery, rising corporate profits and low interest rates, 2016 ended up being a pretty good year for the financial markets with the S&P500 rising 11.96%.
Concerns over China, falling oil prices, surging junk bond yields, recession fears, the rising dollar, Brexit, a four-quarter profit recession, a contentious U.S. election, weakness in U.S. manufacturing, and eurozone banking worries all conspired against bullish sentiment during various times of the year.
While the pundits credited a solid market prior to the election to the expectation that Clinton would win, we were surprised by the reaction to Trump’s win and the consequent exuberant market rally. Most of the year’s gains happened in the fourth quarter after the election.
So what about 2017?
Trump and the Republican Congress have made many promises, some of which appear to help sustain the financial markets. In particular the move to tax reform and limit regulations will probably be implemented and is viewed very positively by the business community.
Some proposals such as rebuilding infrastructure have the Congress and Trump at odds. Historically, infrastructure has not been a strong Republican concern. It remains to be seen whether a significant bill can pass Congress.
Some other initiatives are more problematic and could have consequences that have not yet been factored in the financial markets. The move to limit legal immigration and the intent to expel millions of undocumented immigrants could have a ripple effect throughout the economy, including Silicon Valley and the agriculture industry.
Talking about altering trade patterns, starting with the elimination of the TPP and various noises about import tariffs goes counter to decades of bipartisan free trade efforts. It is not clear what the net impact of these policies, which have not yet been fully defined, will have on the economy. However, restricting free trade is not a positive.
Last but not least, Republicans have a political imperative to deal with health care. Will they show the intestinal fortitude to go through with a full repeal of Obamacare, as has been talked about? A full “repeal now and replace later” could create chaos for States, employers, insurance companies, the healthcare industry, and the public. We’ll have to wait and see to evaluate the net effect.
The financial markets are demonstrating optimism in the midst of all this political turmoil, although we don’t know if the clouds on the horizon carry rain or not. Regardless the US economy is strong and resilient; it will survive our dysfunctional politics.
This post is extracted from our January 2017 newsletter. Please write to let us know that you would like a copy
People will often feel very proprietary about their retirement accounts. They will reason that because the account is in their name only, as opposed to the house which is usually in both their names, they should be able to keep those accounts. Most of the time, this is flawed reasoning. The general rule is that assets that are accumulated during marriage are considered marital assets regardless of the titling.
However, there are cases when part of a retirement plan can be considered separate. This often depends on state law, so it is best to check with a specialist before getting your hopes up.
2. Can I Divide a Retirement Account Without Triggering Taxes?
Since there are so many different retirement accounts, the rules to divide them vary widely. Plan administrators will often recommend their own “model” QDRO. It usually makes sense to have a QDRO specialist verify that the document conforms to your interests.
In addition, that money that was set aside for retirement will no longer be there for that purpose. Although you might tell yourself that you will replace that money when you can, that rarely ever happens.
However, if you have no other choice, it so happens that divorce is one of the few exceptions to the penalty rule. A beneficiary of a QDRO (but not the original owner) can, pursuant to a divorce, take money out of a 401(k) without having to pay penalties. However, you will still have to pay income tax on your withdrawal. Note that this only applies to 401(k)s. It does not apply to IRAs.
4. How Do I Compare Retirement Accounts with Non-Retirement Accounts?
Most retirement accounts contain tax-deferred money. This means that when you get a distribution, it will be taxable as ordinary income. At the other end of the spectrum, if you have a cash account, it is usually all after-tax money. In between you may have annuity accounts where the gains are taxed as income, and the basis is not taxed; you may have a brokerage account where your gains may be taxed at long-term capital gains rate; or you may have employee Restricted Stock which is taxed as ordinary income. All of these accounts can be confusing.
In order to get an accurate comparable value of your various assets, you will want to adjust their value to make sure that it takes the built-in tax liability into account. Many divorce lawyers will use rules of thumb to equalize pre-tax and after-tax accounts. Rules of thumbs can be useful for back-of-the-envelopes calculations , but should not be used for divorce settlement calculations, as they are rarely correct.
Because these calculations are not usually within a lawyer’s skill set, many lawyers and clients will use the services of a Divorce Financial Planner to get accurate calculations that can form a solid basis for negotiation and decision making. It is usually better to know than to guess .
5. Should I Request a QDRO of My Spouse’s Defined Benefit Pension?
Another key consideration is that defined benefit plans are complex. Although they have common features, they are each different from one another, and each come with specific rules. You will be well advised to read the “plan document” or have a Divorce Financial Planner read it and let you know the key provisions.
A common provision is that the benefit for the alternate payee can only start when the plan participant starts receiving benefits and must stop when the plan participant passes away. It is all good for the plan participant. But what if as a result of that, the alternate payee ends up losing his or her pension benefits too early?
Hence a key issue of valuing defined benefit plans is that a true valuation is more than just numbers. It also involves a qualitative discussion of the value of the plan, especially for the alternate payee. Some Divorce Financial Planners can handle the valuation of interests in a defined benefit plan easily and the discussion of the plan. Others will refer you to a specialist.
If instead in the same period you had been invested 50% in the S&P 500 and 50% in the Barclays US Aggregate Bond Index, you would have lost approximately 23.84%. You would have then needed a return of only 31.35% for your investment to return to its pre-recession level.
Obviously, this example is hypothetical. There are many other factors that weigh into portfolio design. Although real life portfolios will often contain many more components, this simple example illustrates the benefits of diversification, and the importance of managing risk in a portfolio.
It is up to you and your financial planner to judge the risk that you can afford, and up to your financial planner to help you implement a portfolio that reflects that risk.
Percentage Gains Needed to Offset Losses
The bar chart to the left will allow you to estimate the amount of gain required to offset any loss that you might have experienced.
What to do? After a financial planner has assessed your risk capacity, he/she will be able to recommend a fully diversified portfolio that includes all relevant asset classes to match your financial objectives.
Note: The above hypothetical example is based on historical performance of the S&P 500 and Barclays US Aggregate Bond Index using Morningstar data. You cannot invest in indices. Trading and management fees are not computed in the example. This is not investment advice, which can only be given individually based on your risk tolerance and circumstances.
Here are four key areas to focus on that will help you make the best of the rest of your year end financial planning.
you should never forget to ask why you bought that security in the first place
1) Realize your Tax Losses
At the time of this writing the Dow Jones is down 0.16% for the yearand the S&P500 hasbeen up just 1.35% for the year.There are a number of stocks and mutual funds that are down this year, some substantially, and could provide tax losses. Now may be a good time to plan tax loss harvesting. The IRS limits individual deductions due to tax losses to $3,000 . However, realized losses (i.e., stock that you sell at a loss) can be offset against realized gains (i.e. stocks that you sell at a profit), thus providing you with a great tool to rebalance your portfolio with minimal tax impact.
The contribution limits are the same if you happen to contribute to a Roth 401(k) instead. While your contributions to the Roth 401(k) are made with after-tax income, distributions in retirement are tax-free. Consult with your Certified Financial Planner professional to determine whether a Roth plan or a traditional would work best for you.
4) Plan your charitable donations
Charitable donations can also help reduce your taxable income, as well as provide other financial planning benefits. If you have been giving cash, consider instead giving appreciated securities. You can deduct the market value of the securities at the time of donation from your current income, and legally avoid the capital gains tax that would be due if you sold the stocks and realized a gain instead. Now, who would not want an opportunity to save on taxes?
If you are retired and need to balance income with your philanthropic impulses, consider giving with a Charitable Remainder Annuity: you may be able to reduce your taxable income, secure a stream of income for the rest of your life, and do good. Check in with your Certified Financial Planner professional about opportunities that may fit your needs.
Jenni (specifics details have been changed) came to our office for post-divorce financial planning. Jenni is 60, a former stay-at-home Mom and current yoga instructor with two grown children. She never had a professional career and spent much of her adult life with a series of low-paying part-time jobs. She is thinking about retiring now and wanted to know whether she would be able to make it through retirement without running out of assets.
That sounds reasonable on the surface. But as a professional financial planner, I believe that it was a mistake for Jenni to agree to a 25% discount adjustment to the 401(k). After analyzing her finances, it became clear that Jenni would likely always be in a lower-than-25% federal tax bracket after retirement. Had she met a Divorce Financial Planner sooner, he or she would have likely advised against agreeing to a 25% discount to the value of the 401(k).
Jenni and Ron, her ex-husband, also agreed that she would get half of her marital interest in a defined-benefit pension from his job as a pediatrician with a large hospital. At the time that pension division was agreed to, Ron thought that there was no value to the pension, and it was probably “not worth much anyway.” Neither lawyer disagreed.
[A Pension does] not come with a dollar balance on a statement
After a little research I found that Jenni would end up receiving a little over $37,000 a year from the pension division at Ron’s retirement, assuming he is still alive then. This is far from an insignificant sum for a retiree with a projected lifestyle requirement of less than $5,000 a month!
Long Term Care is not something that we rush to buy. Before you delay it too long, you may want to consider how the denial rate goes up with age. If you wait too long you may not be able to get it. Review the information at both the LongTermCare.gov and the AALTCI web site for a broader understanding of these topics.
Spend out of your own funds. You need to make sure that there will be enough. Consult a financial planner to make sure that this is the case
Medicaid planning. With this method you would be putting your asset in a trust that would shelter them from the government. Medicaid would end up paying for long term are. This is a complicated procedure that requires careful financial and legal planning.
Long Term Care insurance. With this method, a senior can shift the responsibility for long term care expenses to a third party.
A combination of the above. For instance many people end up using a combination of spending their own funds and long term care insurance.
Most Long Term Care Insurance Policies buy you a “Pool of Money” that can be used for home care, assisted living, nursing home and adult day care. Importantly, most seniors prefer to stay home as long as possible. Most long term care policies will pay for home care. For example, 40% of people buying a Long Term Care Policy bought a policy with 3-year of benefits (with an inflation rider) valued at $165,000. Costs and policy benefits vary greatly from company to company and policy to policy so close attention to detail is required as is a financial soundness assessment of the insurance company under consideration.
Wealth Management often ties in different disciplines. Planning for long term care needs to ensure that all the other parts of the retirement puzzle (investments, cash flow planning, other insurance, tax planning) are tied together.
As a Financial Planner, I often get asked if people should save money in a Traditional IRA or a Roth IRA. In a Traditional IRA, we contribute money on a pre-tax basis (i.e. we do not pay taxes on our IRA contributions), we let it grow tax-deferred, and we pay taxes when we withdraw the money in retirement. In a Roth IRA, we contribute after-tax money, we let it grow tax-free and we pay no taxes when we withdraw the money in retirement.
That last point (“we pay no taxes when we withdraw the money in retirement”) is, of course, the one that gets our attention. We don’t like paying taxes, and the thought that we could have tax-free income in retirement is really motivating, so much so, that, sometimes, it can be the only thing we focus on.
However, the Traditional IRA vs Roth IRA story is not quite that straightforward.
The reality is that we WILL pay taxes whether it is for a Roth IRA or a Traditional IRA. With the Traditional IRA tax deduction, we reduce taxes at contribution, and we pay taxes when we withdraw the money. With a Roth IRA, we pay taxes before we contribute the money. At the risk of disappointing many readers, allow me to repeat: the Roth IRA is NOT tax-free, it is taxed differently.
When you do the math you will find that if you 1) invest in the same way in a Roth IRA vs IRA, and 2) are taxed at the same rate on your Roth IRA contribution today, as on your Traditional IRA withdrawals at retirement, you will end up with the exact same amount of money to spend in retirement. Call us: we will show you the math.
So which one is best? The answer is that it depends.
In general, it makes sense to invest through a Roth IRA when we think that our tax rate in retirement will be equal to or higher than our current tax rate. If we think that our tax rate in retirement will be equal or lower than our current tax rate it makes better sense to invest through a Regular IRA.
How then should you decide?
It depends on your situation.
For instance, if you are at the peak of your earnings, and you can calculate that your income in retirement will be significantly less than it is today, a Traditional IRA calculator will tell you that you will save tax money immediately. Since you expect to be in a lower tax bracket at retirement, you will end up paying less taxes.
If you are currently a low earner, and expect to have higher income in retirement than you have now, a Roth IRA calculator will thell you that your cost in taxes will be relatively low, and you will not pay any more when you retire.
Because there are many phases in our working life, there are times when it makes better sense to invest through a Roth IRA or Roth 401(k), and other times when it makes better sense to invest through a Traditional IRA or a Traditional 401(k). Conversely, there will be times in our retired life when it will make better sense to withdraw from a Roth IRA, and others when it will make better sense to withdraw from a Traditional IRA.
There are some other constraints. For instance, the traditional IRA max contribution is significantly lower than the 401(k). In addition, if your income is above the Traditional IRA income limits or the Roth IRA limit you may not be able to contribute.
It is about balance and careful financial planning. In the right circumstances, the proper balance between Roth and Traditional IRAs could save you a significant tax bill. In my opinion, it justifies a consultation with a professional financial planner.
According to the Federal Government, Long Term Care is the range of services and
support you will need to meet health and personal care needs over a long period of time. LTC is not medical care , but rather assistance with the basic personal tasks of everyday life.
According to Genworth, a prominent provider of Long Term Care Insurance, the median annual cost in 2013 for a semi-private room in a nursing home is $75,405 per year. Based on my experience LTC costs in Massachusetts are much higher than that.
Who Pays for Long Term Care?
People often assume that Medicare or Medigap (the supplemental coverage for Medicare), or even regular health insurance will absorb the cost of their Long Term Care expense. Unfortunately, that is not the case.
In general, most people who need Long Term Care pay for it out of their own assets. Once there is no money left, Medicaid will usually take over. Take note that Medicaid is a government welfare program . This approach works best for people who have enough assets to cover any foreseeable circumstance, or people who just don’t have enough assets worth protecting.
First, it is expensive. Although, we might point out that the cost of insurance is normally much less than the cost of Long Term Care itself.
Second, the possibility that the insurance policy may not be used, for instance if death happens suddenly, is enough to stop many people from acquiring Long Term Care insurance. The thought of paying premiums for years, and not collecting a benefit would make the insurance a waste. For people who feel like that, there are alternatives.
Although, the details of these products is beyond the scope of this post, suffice it to say, that these alternatives can provide a lot of flexibility in a financial plan.
These three approaches (pay out of assets, traditional long term care insurance, and “not waste the premium” alternatives) all offer different benefits and should be matched to the correct circumstance and individual preference. If you need to figure out which option works best for you, get help from your financial planner.