Tax Traps to Avoid in Retirement

Since we celebrated our nation’s birthday earlier this month, it’s only fitting to quote one of our founders:

“Our new Constitution is now established, and has an appearance that promises permanency; but in this world, nothing can be said to be certain, except death and taxes.”

It’s a quote that comes down to us from Benjamin Franklin, who uttered the phrase in 1789.

Taxes–federal, state, local, sales tax, property tax, gasoline tax, payroll tax, tolls, fees, taxes on capital gains, dividends and interest, gift tax, inheritance tax, and cigarettes and alcohol. There has even been a rising chorus that is calling for a special tax on junk food. Yikes!

Yes, Ben Franklin nailed it. We can’t escape taxes.

If you have already retired, you are aware that taxes don’t end when retirement begins. For those who are nearing retirement, it is important to recognize, plan for, and minimize the tax bite that awaits.

Before we jump in, let me say that this is a high-level summary. It’s designed to educate and avert surprises. Planning for tax outlays doesn’t reduce the discomfort that goes with paying Uncle Sam. But preparation can reduce the tax bite and eliminate unexpected surprises.

As I always emphasize, feel free to reach out to me with specific questions, or consult with your tax advisor.

That said, let’s get started.

1. Estimated quarterly tax payments may be required

If you have never been self-employed, you are accustomed to having federal, state (if your state has an income tax), and payroll taxes withheld from each paycheck.When you stop working, there are no more W-4s to complete and no one is withholding taxes for you. But that doesn’t absolve you of your year-end tax liability.You can make estimated payments each quarter. You can also have taxes withheld from your pension, social security, or IRA distribution.

If you have yet to file for social security, you may choose to have Social Security withhold 7%, 10%, 12% or 22% of your monthly benefit for taxes. Or you may decide not to have anything withheld.

But make sure enough is withheld or your estimated quarterly payments are sufficient. Otherwise, you may face a penalty.

Does it sound complicated? You don’t have to go it alone. Tax planning is a part of retirement income planning. If you have any concerns or questions, please reach out to me.

2. Social security may be taxed 

If you file as an individual and your combined income (adjusted gross income + nontaxable interest + half of your Social Security benefits) is between $25,000 and $34,000, you may have to pay income tax on up to 50% of your benefits.If the total is more than $34,000, up to 85% of your benefits may be taxable.

If you file a joint return and you and your spouse have a combined income that is
between $32,000 and $44,000, you may have to pay income tax on up to 50% of your benefits. If combined income is more than $44,000, up to 85% of your benefits may be taxable. (SSA.gov Benefits Planner: Income Taxes and Your Social Security Benefits).

Additionally, 13 states–Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia–tax Social Security. Fortunately for most of our clients that live in Virginia, Virginia does not tax Social Security.

3. Beware of the required IRA minimum distribution

Let me put this right up front: failure to take the required distribution could subject you to a steep penalty.

Required minimum distributions (RMDs) are minimum amounts that retirement plan account owners must withdraw annually starting with the year they reach 70½ years of age or, if later, the year in which they retire.

However, if the retirement plan account is an IRA or the account owner is a 5% owner of the business sponsoring the retirement plan, RMDs must begin once the account holder is 70½, regardless of whether he or she is retired (IRS: Retirement Plan and IRA Required Minimum Distributions FAQs).

Distributions are not required from a Roth IRA.

The first payment can be delayed until April 1 of the year following the year in which you turn 70½. For all subsequent years, including the year in which you were paid the first RMD by April 1, you must take the RMD by December 31 of the year.

The RMD rules also apply to SEP IRAs and Simple IRAs, 401(k), profit-sharing, 403(b), 457(b), profit sharing plans, and other defined contribution plans.

If you expect to have large RMDs that could push you into a higher tax bracket, it may be beneficial to begin taking distributions prior to 70½. Or, you could convert some of your IRA into a Roth, which will help shelter gains and future distributions from taxes. You pay a tax upfront, but it’s one strategy that can help minimize taxes long-term.

4. The hidden cost of selling your primary residence 

Downsizing can generate cash and reduce your daily expenses. But beware that it may also trigger a tax liability.

If you’ve lived in your primary residence for at least two of the last five years prior to selling, you can exempt up to $250,000 of the profit from taxes if you are single and up to $500,000 if you are married. If you are widowed, you may still qualify for the $500,000 exemption (IRS: Publication 523 (2017), Selling Your Home).

The sale may also trigger the 3.8% tax on investment income. It’s a complex calculation that can ensnare single filers who have net investment income and modified adjusted gross income above $200,000 and $250,000 for married filers. (IRS: Questions and Answers on the Net Investment Income Tax).

The decision to sell shouldn’t be strictly governed by the tax code. However, it’s important to understand the tax ramifications. Timing income streams might be beneficial if a sale will trigger a taxable event.

There are other methods to lower your taxes, including charitable donations. How we structure retirement income, your investments, and distributions from retirement accounts can help to reduce the tax burden. If you need assistance on any of the points I’ve shared, we are happy to assist.

Please email me at croberts@financialfreedomplanners.com or call me at (804) 277-9734 and we can talk.

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Kiplinger’s Personal Finance: Finding conflict-free financial advice

Take a look at a recent article in the Richmond Times Dispatch discussing how to find conflict-free financial advice. Call us at Financial Freedom Planners and see how our approach as a CFP®, we offer objective, affordable fee-only (hourly & project-based) financial planning and investment advice. We are proud members of the Garrett Planning Network.

Kiplinger’s Personal Finance: Finding conflict-free financial advice

financial planner with young couple
Young couple with financial planner

If you’re looking for a financial professional to give you conflict-free advice, consider a certified financial planner.

 

CFPs must put your interests first. They may charge by the hour or base fees on a percentage of your assets.

 

In the past, these planners were often unaffordable for people who didn’t have a lot of money to invest, but that’s changing.

 

 For example, advisers with the Garrett Planning Network (www.garrettplanningnetwork.com) typically charge $180 to $300 an hour. Some regions of the country have no Garrett planners, but interest among advisers is growing.

 

“We’re seeing a huge escalation in new members this year,” said Sheryl Garrett, founder of the network. “The public is pushing the industry in the right way.”

 

Similarly, XY Planning Network (www.xyplanningnetwork.com), founded by fellow CFPs Michael Kitces and Alan Moore, focuses on providing fee-only advice to Generation X and Y clients. There are no minimums; clients have the option of paying a monthly fee, ranging from about $75 to $200.

 

Other planners are looking for new ways to structure their fees.

 

Jonathan McQuade, a fee-only CFP in Austin, Texas, charges separately for financial planning and investment management. For planning, he charges a fixed monthly fee that ranges from $150 to $500. For investment management, he charges 0.75 percent of assets. McQuade says his system emphasizes the value of overall financial planning, which he says is often treated as an afterthought to portfolio management.

 

Some fee-only advisers base their fees on clients’ net worth rather than the amount of money they have invested.

 

Justin Harvey, a CFP and president of Quantifi Planning in Philadelphia, charges an annual fee of 1 percent of his clients’ income and 0.5 percent of their net worth, which covers both investment management and financial planning.

 

He says the model allows him to work with clients — many of whom are physicians — who have high earnings but not a lot of savings. “I can get fairly compensated, and they can get the nuanced, detail-oriented planning help that they need,” he said. Look for a fee-only planner at the website of the National Association of Personal Financial Advisors, www.napfa.org.

Send questions to moneypower@kiplinger.com. Visit Kiplinger.com for more on this and similar money topics.

Financial Freedom Planners

(804) 277-9734

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Is Market Volatility the New Normal?

Last year, stocks marched higher with only minor pullbacks. When the year ended, the largest peak to trough decline for the S&P 500 Index was just under 3% (St. Louis Federal Reserve data on the S&P 500). It was a year that lacked turbulence and one that rewarded diversified investors.

Since the beginning of February, volatility has returned. It’s a reminder that periods of relative tranquility don’t last forever.

In my opinion, it’s something that the long-term investor should look past, though I recognize it can create uneasiness among some investors.

If we were facing serious economic problems, something that might be signaling a recession, it would be a cause for concern. Right now, I don’t believe we are.

The Case for Stocks

Let’s review two underlying supports for the equity markets.

Thanks in part to the tax cut, corporate profits are forecast to rise nearly 20% this year (Thomson Reuters).

Weekly first-time claims for unemployment insurance recently touched a level not seen since the late 1960s (St. Louis Federal Reserve). It’s a concrete sign that companies don’t want to lose employees. If business conditions were deteriorating, the opposite would be true.

The Conference Board’s Leading Economic Index (designed to detect emerging trends in the economy), just hit a new high. I know we are facing some challenges (we always will), but the economic fundamentals are solid right now.

Coupled with interest rates that remain at historically low levels, the fundamentals have cushioned the downside, in my view, and remain supportive of stocks.

Shorter term, however, headline risk continues to whipsaw sentiment.

Causes of Volatility in Stocks

Two issues have surfaced that have stirred up volatility, in my view.

  1. Last month President Trump announced he will impose steep tariffs on steel and aluminum imports, fueling concerns over protectionism and the potential impact on the economy. His apparent goal: Pry open foreign markets to U.S. exports.Before I go on, let me say that it is not my role as your financial advisor to offer up opinions on political issues. However, it is incumbent upon me to analyze and share my thoughts on headlines that are influencing shares. It’s not a political statement. It is a commentary on events viewed through the narrow prism of the market.

    Investors viewed the corporate tax cut and the paring back of regulations favorably. Trade tensions, however, have created uncertainty.

    Most economists support free trade. It’s a net benefit to the U.S. and global economy. But “net benefit” means there are both winners and losers.

    Losers–those whose jobs disappear amid a flood of cheaper imports. Winners–consumers who pay less for various goods, and those who work in export-oriented industries. In 2017, U.S. exports totaled $2.3 trillion (U.S. Bureau of Economic Analysis). Yes, that’s trillion with a “T.”

    Free trade versus fair trade–it’s a highly debated topic.

    U.S. manufacturers are consumers of steel and aluminum, including farm and construction equipment, aerospace, and pipelines and drilling equipment in the energy industry.

     

    At the margin, it may modestly boost inflation and could force some U.S. manufacturers to put projects back on the shelf or move production offshore.

     

    Additionally, U.S. tariffs may invite retaliation, pressuring exporters, jobs and profits in globally competitive sectors. It could also spark a tit-for-tat trade war that hurts everyone.

     

    As the month came to a close, Trump announced he is set to raise tariffs on Chinese imports. In return, China announced new barriers to some U.S. goods, though the response was measured.

     

    While the odds of a major trade war remain low, all this has injected uncertainty into market sentiment.

     

  2. Troubles popping up in the tech sector have added to volatility. For example, Facebook is embroiled in a controversy over privacy and data sharing. More recently, Trump has set his sights on Amazon, expressing his displeasure in several tweets.Yes, they are only two stocks, but both have performed admirably, leading the tech sector higher. And, they have a combined market capitalization of $1.1 trillion (WSJ as/of 4.3.18).

Perspective

 

I provided an explanation for the recent volatility because I believe one is in order, but let me caution you not to get lost in the weeds. Day traders care about minute-by-minute swings in stocks prices. Long-term investors sidestep such concerns.

So, let’s step back and gather some perspective by reviewing the data.

According to LPL Research—

  • The average intra-year pullback (peak to trough) for the S&P 500 Index since 1980 has been 13.7%.
  • Half of all years had a correction of at least 10%.
  • Thirteen of the 19 years that experienced an official correction (10% or more) finished higher on the year.
  • The average total return for the S&P 500 during a year with a correction was 7.2%.

These bullet points are an evidenced-based way of saying turbulence surfaces from time to time. Patient investors who don’t react emotionally have historically been rewarded.

I understand that some degree of risk is inevitable. But our recommendations are designed to minimize risk, and they are designed with your long-term goals in mind.

If you have any questions or concerns, let’s talk. I’m simply an email (croberts@financialfreedomplanners.com) or phone call (804-277-9734) away.

 

Table 1: Key Index Returns

MTD % YTD % 3-year* %
Dow Jones Industrial Average -3.7 -2.5 10.8
NASDAQ Composite -2.9 2.3 13.0
S&P 500 Index -2.7 -1.2 8.6
Russell 2000 Index 1.1 -0.4 7.2
MSCI World ex-USA** -2.2 -2.7 2.5
MSCI Emerging Markets** -2.0 1.1 6.3
Bloomberg Barclays US Aggregate Bond TR 0.6 -1.5 1.2
Source: Wall Street Journal, MSCI.com, MarketWatch, Morningstar
MTD returns: Feb. 28, 2018-Mar. 29, 2018
YTD returns: Dec. 29, 2017-Mar. 29, 2018
MSCI returns run through Mar. 30, 2018
*Annualized
**in US dollars

 

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Busting 5 Big Retirement Myths

Urban legends, urban myths, and the latest that’s on everyone’s lips–fake news. Whatever you call it, in our age of information, claims of spurious repute can go viral in minutes. Anyone with a PC can start a blog and offer up opinions on just about any subject, whether he or she is an authority or not. Sources? Who needs sources?

OK, there’s a bit of sarcasm in that last comment, but I think you know where I’m going.

When it comes to retirement, there are plenty of misleading thoughts, opinions and fake news floating around out there. This month, I’d like to clear up some misconceptions that surround the retirement years. With that in mind, let’s jump in.

  1. I’ll never see a penny of the money I put into Social Security. If I had a nickel every time I heard someone utter that phrase. Sadly, if a 40-something says he is confident he will receive monthly checks, he sets himself up for ridicule among his contemporaries.

    I wouldn’t disagree with the hypothesis that young people getting started in the workforce will receive a low return on contributions into Social Security, but that’s a completely different argument.

    Back to the matter at hand, Social Security is not on the verge of bankruptcy, and I fully believe even those who are many years from retirement will be collecting monthly benefits when it’s their turn. Let me explain.

    According to the 2017 annual report from the Social Security and Medicare Board of Trustees, Social Security “has collected roughly $19.9 trillion and paid out $17.1 trillion,” in its storied 82-year history, “leaving asset reserves of more than $2.8 trillion at the end of 2016 in its two trust funds.”

    As an ever-larger number of baby boomers continue to retire and collect benefits, the trustees expect the trust funds to be depleted by 2034.

    Thereafter, expected-tax-income receipts are projected to be sufficient to pay about three-quarters of scheduled benefits. Put another way, recipients of Social Security would receive about a 25% cut in benefits, if no changes are made to the current structure.

    Of course, these are simply projections and much will depend on economic growth, job creation, and wages. Yet, it’s a far cry from, “I won’t see a penny of Social Security.”

    I suspect that politicians will eventually settle on some type of compromise that will extend the life of the current system.

    That said, I recognize that timing and strategies that can be implemented for Social Security may be complex. If you have questions, please give me a call or shoot me an email. I would be happy to discuss your options with you.

  2. The stock market is too risky. There’s no question about it, the bear markets that followed the dot.com bubble and the 2008 financial crisis were unprecedented, in that we saw two steep declines in less than 10 years.

    Made fearful by what they see as too much risk, millennials have shied away from stocks, according to a Bankrate survey. What seems like a complete disconnect: Millennials seem to be far more interested in Bitcoin! The word speculative doesn’t even begin to describe Bitcoin. But let me get back on topic.

    There has always been a degree of risk in stocks, even with a fully diversified portfolio. Yet, a well-diversified portfolio is akin to a stake in the U.S. and global economy. Moreover, the U.S. and global economy has been expanding for many decades. It may not be larger next year, but history tells us it will be bigger in 10 or 20 years.

    When it comes to investing in stocks, I typically experience some resistance from folks who haven’t seriously entertained the idea before. I listen to their concerns, and answer with an array of factual data that’s not designed to win an argument, but simply to educate. When you have all the facts, then you can make an educated decision about what’s best for you.

  3. Medicare will handle all my health care needs in retirement. If only Medicare did cover everything. But then, the cost to finance it would be much higher.

    Medicare doesn’t cover the full cost of skilled nursing or rehabilitative care, according to AARP. Yes, the first 20 days of a stay in a nursing home is covered, but you’ll pay over $160 per day for days 21 through 100. And Medicare doesn’t cover stays past 100 days.

    You may be paying out of pocket for personal care assistance, too. The same holds true for miscellaneous hospital costs, routine eye exams, hearing, foot and dental care.

  4. Why save today when you can start tomorrow—there’s plenty of time. This section is designed for millennials and those who are just beginning their journey in the workforce. There’s no better day to begin saving than today! I can’t stress this enough.

    Let me give you a simple but telling example.

    Susan invests $5,000 annually between the age of 25 and 35 and earns 7% annually. She puts away a total of $50,000.

    Bill invests $5,000 annually between the age of 35 and 65 and earns 7% annually. He saves a total of $150,000.

    When Susan reaches 65, she will have amassed $602,070, while Bill will have $540,741.

    Source: JP Morgan Asset Management

    Lesson learned–the sooner you begin, the better off you will be as you approach retirement.

    Take full advantage of your company’s retirement program. If your company doesn’t have a savings plan, there are many simple ways that you can get started. Feel free to reach out to me and I can assist you.

  5. Retirement is easy. Many look forward to the day when they will no longer prepare for Monday mornings at the office. For those who face the work challenges that crop up daily, retirement may seem like a welcome oasis in the distance.

    But that oasis sometimes turns out to be a mirage. Often, the transition from decades of working to retirement isn’t so simple.

    For a better retirement, set goals, and not simply financial ones. Can you transition to part-time in your job? Consider part-time employment or consulting. It will ease the transition, keep you busy, and extend your savings.

    Volunteer with your local church or local community organizations. Are you familiar with Meetup.com? Look for groups with similar interests. You’ll not only derive an enormous amount of satisfaction from helping others, but you’ll meet like-minded folks and make new friends.

    Try something new. Take up piano or another musical instrument. You may enjoy it and be good at it. A friend of mine took up poetry to keep his mind sharp.

    Please, keep up any exercise routines—and it’s never too late to start a new one. Check with your doctor, who will be happy to prescribe a fitness plan that’s suited to you.

    Have you ever considered taking a class? How about writing a book? Expanding your knowledge or sharing your ideas can be quite fulfilling. Though well into his 70s and still happily working, one individual I know is writing a book to his kids. Now there’s a legacy!

    The most important thing you can do to make retirement enjoyable is to stay active and keep your mind and body sharp.

Concerned about retirement readiness, when to take Social Security, pension questions? Give us a call at (804) 277-9734 or email us at croberts@financialfreedomplanners.com; we can help!

www.financialfreedomplanners.com

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TAX SIMPLIFICATION – DON’T BET ON IT!

“Don’t tax you, don’t tax me, tax that fellow behind the tree,” quipped Senator Russell Long, who chaired the powerful Senate Finance Committee from 1966 to 1981.

This past year, Halloween was barely over when House Republicans introduced their version of tax reform. Few observers thought such a massive undertaking could be signed into law within seven short weeks.

But that is exactly what happened. In the hectic days that preceded Christmas, the president signed into law the most sweeping change in the tax code since 1986.

“The legislation will result in substantive tax reform for corporations, with the elimination of the corporate alternative minimum tax (AMT) and consolidation down to a single 21% tax rate (from 35%), all of which are permanent,” Michael Kitces, a respected authority on tax issues, wrote on Kitces.com.

“However,” he added, “When it comes to individuals, the new legislation is more of a series of cuts and tweaks, which arguably introduce more tax planning complexity for many, and will be subject to another infamous sunset provision after the year 2025.”

Tax Simplification – Not So Much

I know the often-stated goal of tax reform was simplification. But simplification means that much lower tax brackets can only be achieved if cherished deductions and credits are done away with.

It’s easier said than done.

Sure, simplification is a lofty ideal, but, “Don’t take my deductions or credits from me,” has always been the taxpayers’ battle cry. And yes, Congress heard and listened to several of those pleas.

While some deductions will disappear, others remain or have been reduced. Senator Long probably would have sported a grin when President Trump signed the massive bill.

Sharpen your pencils – the new tax code and tax planning

Over 80% of Americans will get a tax cut next year, while just 5% of taxpayers are expected to pay more (Tax Policy Center, Washington Post). In most cases, cuts are expected to be modest; however, much will depend on individual circumstances.

Due to the complexities of the new law, I am always happy to talk with you, but I also encourage you to check with your tax advisor. Many experts are struggling with the details of the bill, and that’s to be expected this early in the game.

What I would like to do is touch on the high points. It’s not all-inclusive and not a deep dive, but given many of your questions lately, I believe an overview is in order.

So, let’s get started. (Sources for this review include Kitces.com and the Tax Policy Center). This applies to tax year 2018.

  1. The 10% bracket remains unchanged, while the 15% bracket declines to 12%, the 25% to 22%, the 28% to 24%, the 33% to 32%, the 35% holds steady, and the 39.6% slips to 37%. The thresholds are modestly adjusted above the new 22% bracket.
  2. The standard deduction nearly doubles to $12,000 for single filers and $24,000 for married filers, reducing the incentive to itemize and simplifying for some taxpayers.
  3. The $4,150 personal exemption is eliminated, and the $1,000 child tax credit doubles to $2,000. In general, rules for charitable contributions remain unchanged. By itself, the combination of points one, two, and three will provide modest tax relief for most families. But I must caution, it depends on your individual circumstances.
  4. Those in high-tax states could see the biggest hit, as there will be a $10,000 cap on state, local and property tax deductions.
  5. For investors, the preferential treatment for long-term capital gains and dividends remains intact, as is generally the case for retirement accounts. One important change – the new law repeals rules that allow for recharacterization of Roth conversions back into traditional IRAs. Once you convert into a Roth, there’s no going back.
  6. The 3.8% Medicare surtax on investment income for high-income taxpayers was retained. Since the levy entered the tax code, we have crafted strategies that reduce its bite; however, the tax survived tax reform and is likely to remain a permanent feature of the tax code going forward.
  7. The AMT for individuals was not repealed, but exemptions have been widened.

    According to the Tax Foundation, Congress passed the AMT in 1969 after the Secretary of the Treasury said 155 people with adjusted gross income above $200,000 had paid no federal income tax on their 1967 tax returns.

    The AMT was never adjusted for inflation and grew into an onerous feature for many Americans. In inflation-adjusted terms, those 1967 incomes would be roughly $1.2 million in today’s dollars. Ideally, it would have been eliminated from the tax code. But Kitces points out, “While the AMT commonly impacted those around $150,000 to $600,000 of income, in the future, AMT exposure will be much smaller, and it will be extremely difficult to be impacted at all, especially given more limited deductions.”

  8. The estate tax survived, but the exemption will double from $5.6 million to $11.2 million, and $11.2 million to $22.4 million for couples.
  9. The new tax bill also repeals the Obamacare mandate that requires all individuals to obtain health insurance. It becomes effective 2019.

    Finally, it’s important to point out that many of the more popular changes in the tax code for individuals will sunset in 2025. While many may eventually be made permanent, as we saw with the Bush tax cuts of 2001 and 2003, there’s no guarantee this will happen again.

  10. And for businesses: Given that the 21% corporate tax rate applies only to C-corps, there will be a 20% deduction for pass-through entities, such as S-corps, partnerships, and LLCs. I believe this will be a welcome benefit for many business owners, but complex rules may limit the pass-through for some entities.

Final Thoughts

I fully expect that the rewrite of the tax code will produce unintended benefits and unexpected consequences.

From an economic standpoint, Congress and the president hope to unleash the “animal spirits” that have been lethargic for much of the economic expansion. They hope that changes, especially as they relate to business, will encourage firms to open new plants, expand in the U.S., and level the playing field with the global community.

Prior to reform, the U.S. corporate rate was the third highest among 188 nations (Tax Foundation).

The $64 million-dollar question – will it work? About 90% of economists surveyed by the Wall Street Journal expect a modest boost to growth in 2018 and 2019, but after that, opinions diverge.

If tax incentives boost productivity, it could lift long-run GDP potential, which would yield a significant benefit. If the economic benefits end after a two-year sugar high, it will likely be deemed a failure.

Early anecdotal data offer some encouragement, as several large firms announced year-end bonuses or wage hikes tied to the lower corporate tax rate.

At a minimum, the lower tax rate increases longer-run after-tax earnings, which played a big role in the late-year stock market rally. It could also boost corporate stock buybacks and dividends going forward, which would create an added tailwind for stocks.

That said, I’m cautiously optimistic it will encourage entrepreneurship and economic growth, which would benefit hard-working Americans.

Again, I understand that uncertainty breeds questions and concerns. If you would like to talk, I’m simply a phone call or an email away. I’d be happy to talk with you and answer any questions you may have.

Hourly & Project-Based Personal Financial Planning

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Avoiding 8 Big Mistakes in Retirement

Tens of millions of Americans are looking forward to the day they retire. Others enjoy their profession and can’t imagine a life without work. Yet, even those folks recognize that one day they won’t wake up on a Monday and head into the office.

In either case, they share a common goal—a comfortable retirement that doesn’t force them into a drastic lifestyle change. And while I admit it’s a well-worn cliché, a failure to plan is another way of saying that you are really planning to fail.

As I’ve done in many of my monthly newsletters, I want to take a step back and talk about the basics or the fundamentals, and review important mistakes that retirees sometimes make.

Experience isn’t always the best teacher. Many times, someone else’s experience is. If we can avoid common pitfalls, we can sidestep costly mistakes and reduce the stress that can sometimes accompany retirement.

8 Retirement mistakes to avoid:

1. Falling prey to scams. Sadly, scams are proliferating in today’s tech-driven world. They are just a mouse-click away. One must always be on guard. That is why I am leading off with a warning about fraud.

I recently came across an article that illustrated how home buyers were being scammed out of their down payment. Long story short, a buyer unsuspectingly receives and acts on fraudulent wire instructions from hackers who have hacked into the computer of their real estate agent. The hackers are posing as their agent.

Unfortunately, the seller rarely has any recourse, losing both home and cash.

I provide this illustration because the criminal mind is only limited by creativity. Scams, including investment scams, come in multiple forms.

I don’t want you to be taken by con artists. I don’t want you to go through the pain of being victimized. I’ve seen it before and it breaks my heart.

2. Be careful not to drain your savings too quickly. Once you retire, there may be the temptation to shift spending toward new hobbies or travel. Unless you have substantial reserves set aside, spending too much too soon could create unwanted stress and exacerbate worries that you might outlive your retirement.

Set up a budget and look for ways to trim expenses without a significant change in lifestyle. I know a retiree who financially is in great shape. For much of her life, she’s shopped at Goodwill for her clothes and still enjoys “finding deals,” as she puts it.

Simple changes can sometimes yield substantial savings.

3. House rich and cash poor. If you own your home, might it be time to downsize? You can lower your utilities, maintenance, property taxes, insurance, and more by moving into a smaller home that doesn’t appreciably impact your lifestyle.

Equity that remains can supplement savings.

4. Failing to take health care into account. Medicare doesn’t cover everything, and long-term care expenses may eventually crop up. With some appropriate adjustments, we can make sure you are aware of your options and plan accordingly.

5. An investment mix that is too aggressive or too conservative can come back to haunt you.

As you near or enter retirement, the more aggressive posture that served you well may no longer be appropriate. It goes without saying there may not be the time to make up unanticipated market losses, especially if you are forced to liquidate to cover normal or unexpected expenses.

Conversely, getting too conservative in retirement can put unwanted constraints on your portfolio. The danger—your investments lack a component geared toward appreciation, creating the risk you may outlive your money.

While time-tested principles can guide us, each situation is unique and we can assist you in finding the right balance.

6. Claiming Social Security too soon could be an expensive proposition. It may be tempting to file for Social Security when you reach 62. But, did you know that you will reduce your monthly benefit by 25% by not waiting until full retirement—now 66 years of age.

Every year you delay past full retirement age increases your monthly check by 8%, until you reach 70, where you’d receive another 32%. Plus, annual cost of living adjustments are based on your current benefits. So, if you delay, you will not only receive a larger monthly check, but the annual cost of living increases will be based on the larger base amount.

Of course, many factors determine when it’s best to claim your benefits, including life expectancy.

Married couples have several options that are not available to those who are single. And let’s not overlook spousal benefits, which may be eligible for those who are divorced.

Social Security offers many options and strategies. If you are so inclined, let’s talk and see what may work best for you.

7. You can’t ignore taxes. Most of you will see your marginal tax bracket drop in retirement. But some seniors may be in for a rude awakening when they file.

Many are aware that IRA or 401k distributions are taxable, but sometimes fail to adequately prepare when they take distributions.

The same holds true for interest, dividends, and capital gain distributions from mutual funds. In addition, some folks are surprised to find that Social Security may be subject to taxes.

If you file as an individual and your combined income (adjusted gross income + nontaxable interest + ½ of your Social Security benefits) is between $25,000 and $34,000, you may have to pay income tax on up to 50% of your benefits. If the total is more than $34,000, up to 85% of your benefits may be taxable. For married couples, raise the numbers to $32,000-$44,000 and $44,000, respectively (SSA.gov Benefits Planner: Income Taxes and Your Social Security Benefits).

Planning for tax outlays doesn’t reduce the discomfort that goes with paying Uncle Sam, but preparation can reduce the tax bite. And proper planning can eliminate surprises at tax time.

As always, I’m happy to assist but feel free to consult your tax advisor.

8. Leading a sedentary lifestyle. For some individuals, working and socializing go hand in hand. When they retire, they inadvertently disconnect from the world. Don’t let this happen to you!

Stay active and exercise as you are able. Have you considered a senior aerobics class or other low impact exercises? Talk to your doctor. He or she will be thrilled to recommend a plan.

Stimulate your mind. Some like to read, others enjoy puzzles or brain teasers. Or you might consider an online class. I know of one retiree in her late 70s who is now taking piano lessons.

What is your passion? Now is the time to volunteer. Local organizations or your church can point you in the right direction. As a bonus, it will open up avenues for new friendships.

This isn’t an all-inclusive list. It’s not meant to be, but avoiding common mistakes will reduce your stress and help you get the most out of your retirement.

Changing gears—upward march in stocks

No question about it—for those who have invested in a well-diversified equity portfolio this year, you have been handsomely rewarded.

Of course, I rarely recommend diving into a portfolio that’s 100% invested in stocks, unless you are young and your tolerance for risk is high.

When markets get volatile, those who are 100% invested will see the biggest declines. Simply put, other asset classes help reduce volatility and put you on a straighter path toward your goals.

The tailwinds that have driven stocks over the last year, and for that matter, over recent years, remain in place.

Economic growth in the U.S. has been quite resilient, even in the face of devastating hurricanes.

The U.S. Bureau of Economic Analysis reported at the end of October that Gross Domestic Product (GDP) expanded at an annual pace of 3% in Q3. It’s the second-consecutive quarter of GDP growth that has met or exceeded 3%. The economy hasn’t experienced that since 2014.

But it’s not simply just what’s happening at home; we’re witnessing an acceleration in economic activity around the world.

One byproduct for investors—solid corporate profit growth. It’s a key factor in the stock market equation.

Throw low inflation and low interest rates into the mix and the S&P 500 Index set 11 new all-time closing highs in the month of October (St. Louis Federal Reserve data).

Table 1: Key Index Returns

MTD % YTD % 3-year* %
Dow Jones Industrial Average +4.3 +18.3 +10.4
NASDAQ Composite +3.6 +25.0 +13.3
S&P 500 Index +2.2 +15.0 +8.5
Russell 2000 Index +0.8 +10.7 +8.6
MSCI World ex-USA** +1.3 +18.0 +2.9
MSCI Emerging Markets** +3.5 +29.8 +3.3
Bloomberg Barclays US Aggregate Bond TR +0.1 +3.2 +2.4
Source: Wall Street Journal, MSCI.com, MarketWatch, Morningstar
MTD returns: September 29, 2017-October 31, 2017
YTD returns: December 30, 2016-October 31, 2017
*Annualized
**in US dollars

 I have never favored market timing as a strategy. You know, hoping to sidestep the inevitable declines and get back into stocks prior to the inevitable upswing. It’s simply not possible to accurately and consistently predict the future. I know that seems obvious, but it must be said.

My approach has always been a time-tested strategy that is based on the historical data that takes the bumps in the road into account.

I won’t venture a guess as to how markets may perform next year or through the remainder of the decade, but we’ll participate in the upside and use various evidenced-based strategies that will mitigate, though not eliminate, the downside.

History tells us this has been the best path to wealth accumulation and obtaining your goals.

As always, I’m honored and humbled to have the opportunity to serve as a financial confidant, planner and advisor.

We’re simply an email or phone call away, and can be reached at:

croberts@financialfreedomplanners.com or (804) 277-9734.

Schedule a free 15 minute phone consultation or 45 minute “Getting to Know You” meeting today.

Hourly & Project-Based Personal Financial Planning

Financial Freedom Planners with tagline

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5 STEPS TO ACCUMULATING WEALTH

There are many reasons to engage the services of a financial advisor.

Some investors don’t understand the complexities and the array of choices, and they would prefer to have an expert deal with it for them. That’s understandable.

Others enjoy the DIY approach. They love to explore the various strategies of money management. Grasping and understanding new ideas and concepts creates that “Aha!” moment. But time has become a major impediment.

We have many clients who came to us working hard, making good incomes with little to show for it (their words, not mine). Busy schedules place demands on our time and energy, and it’s easy to lose focus, and many times control over our financial lives.

Then there are those who were comfortable managing their own finances, and, having amassed a fair degree of wealth, can claim success. But climbing to new financial heights can sometimes create a fear of heights. At this juncture in their life, they are more comfortable having a financial professional keeping an eye on their choices.

Retaining an advisor is akin to having a personal trainer coaching you as you go through your daily exercise regimen. The trainer keeps you on track, encourages you, and can suggest beneficial adjustments.

If you find yourself in one of these categories, you now know that you aren’t alone.

Once again, though, let me emphasize that each individual situation is unique, each client is unique, and we adapt our advice so that it matches your circumstances and financial goals. And we are always here to answer your questions or address any concerns.

But, while each person’s plan has its unique qualities, there are fundamental principles that must be woven into every financial blueprint. These fundamentals are the building blocks for wealth accumulation over the long-term, and it’s important to keep them in mind, always.

Let’s take a look at the fundamentals:

5 steps to accumulating wealth

1. Pay yourself first.

You no doubt have heard this before. Put yourself first in line and think about the following questions: Do you have a budget? If you don’t have a budget, why? Why are you saving? What motivates you to contribute to your savings on a consistent basis?

Many people find a negative association with the word budget. We prefer to borrow a line from Dave Ramsey: Having a budget actually gives you permission to spend. You won’t be depriving yourself—you’ll be telling yourself it’s okay to spend the money (that is, as long as it’s in the budget for the month).

Have a goal. Dream big and keep the goal in front of you!

2. Avoid get-rich-quick schemes. 

I’ve been around the block many times. If it seems too good to be true, it probably is. After reading that common sense advice, many of you are probably thinking, “I know that. Why did you lead off with something this simple?” Well, I’ve seen too many smart folks fall for get-rich-quick schemes that leave them poorer. Sometimes much poorer. And it’s heartbreaking to hear the tales.

Maybe it’s simply greediness we’re afraid of losing out on perceived riches. Maybe it’s fear—fear we’ll miss out on a once-in-a-lifetime opportunity. Maybe we’re too trusting. The best con-artist’s pitch is steeped in sincerity. Maybe our judgment gets clouded, as we’re dazzled by the flashing presentation or personal flattery.

If you ever come across something you believe might lead to quick riches, please let me review it with you. I promise I will provide you with an objective viewpoint.

3. Avoid trying to time the market. 

It sounds so simple. Buy low, sell high.

Or, here’s another take: “Buy when there’s blood in the streets.” It’s still bounced around in financial circles.  Forbes credited the saying to Baron Rothschild, an 18th Century British nobleman and member of the Rothschild banking family. Coincidently, or not, Forbes published the article two weeks prior to the market bottoming in 2009.

However, in both cases, these are platitudes that are best ignored, in my view. You see, we’re not wired to dive off a cliff and buy when everyone is selling. Instead, the temptation is to circle the wagons and play defense.

In reality, it’s much easier to buy when markets are heading higher. Euphoria can breed euphoria, which leads to a feeling of invincibility. It’s the “follow the crowd” mentality.

We eschew trying to pick a few winners, avoid trying to predict the future, (i.e., market timing) and preach diversification and a disciplined approach that strips the emotional component from the investment plan.

Longer term, stocks have historically been an excellent vehicle to accumulate wealth. Let me explain.

Crestmont Research produces a chart each year that reviews the annual 10-year total returns for the S&P 500 Index going back to 1909. These are rolling, 10-year periods; i.e., we are reviewing over one hundred 10-year periods.

Since 1909, there have been only four 10-year timeframes that have generated negative returns. Want to hazard a guess as to when they may have occurred?

That’s right–the late 1930s and the end of the last decade. That shouldn’t come as too much of a surprise given extreme valuations that occurred in the late 1920s and late 1990s and early 2000s.

Oh, and the average annual return? It can vary by a considerable amount, but it averages 10%.

4. You must start somewhere, but start.

Let me share my story. Years ago, I began working for a company that offered a 401k plan with a generous match. In my mind, a 401k was a euphemism for, “I get nothing today so I’ll have something tomorrow.” It epitomizes the concept of delayed gratification.

Don’t try to climb Mt. Everest overnight. I started withholding 2% of my paycheck, and increased it quarterly to 4%, then 7%, and finally 10%. As I bumped it up in small increments, I found I really didn’t miss the extra withholding.

Guess what? I enjoyed watching my small nest egg begin to grow! One more thing, you can’t start too young. Compounding and time is your friend.

I’m thrilled when I have the opportunity to work with people in their 20s and 30s who are embarking on their careers. They truly have a once-in-a-lifetime chance to get a head start on wealth accumulation.

When’s the best time to start? How about NOW?

5. Diversify.

Both Mark Twain and Andrew Carnegie allegedly said, “Put all your eggs in one basket, and watch that basket closely.” Twain and Carnegie didn’t live in an age where the dissemination of information is almost instantaneous. Bad news comes in like a WWE smack down on a stock. It’s the defensive end leveling the quarterback, and it can happen in seconds.

Our team carefully screens investments in mutual funds and exchange-traded funds. We also pay close attention to the underlying cost of those investments. You’d be amazed on how much difference the cost can make over time. Our goal is to select the right balance that leaves you exposed to the longer-term appreciation potential in all major sectors of the economy. You can read more about that in “Balanced Investing Is Part of a Balanced Life.”

And we don’t stop at the U.S. border, as we recognized the potential the global economy offers.

A fixed income component is critical for most folks. Being 100% diversified in a portfolio of stocks can leave you exposed to a market decline. It’s for someone with a very long-term time horizon. If you are nearing retirement, you may not have the time to recover in the event of a steep market decline.

Bonds, cash, and fixed income securities are not earning spectacular returns right now. However, they help anchor the portfolio. As the percentage of stocks decline in relation to cash/fixed income, the portfolio is likely to experience less volatility. You won’t see the peaks in a roaring bull market, but you’ll sleep better at night knowing that a sudden dip in the market is far less likely to take a big bite out of your investments.

Switching gears: New highs and the fundamentals

The S&P 500 Index finished the quarter at a record high. Notably, the closely followed gauge of 500 large U.S. stocks ran up its quarterly winning streak to eight consecutive quarters (WSJ, MarketWatch data).

It’s done so in the face of three devastating hurricanes—Harvey, Irma and Maria, dysfunction in Washington, unsettling news from North Korea, and gridlock in Washington.

But in many respects, it shouldn’t be all that surprising.

As I’ve wandered through the literary tulips with you, one common theme is a focus on the economic fundamentals.

Stocks take their longer-term marching orders from corporate profit growth. And profits are driven primarily by economic growth at home and abroad.

Currently, we’re in the midst of a synchronized global expansion, which has created a strong tailwind for earnings.

Moreover, interest rates remain near historic lows, and the Federal Reserve hasn’t been shy about signaling that any rate hikes are expected to come at a gradual pace.

If I had to concoct a recipe for bull market, I’d go heavy on profits, economic growth, and low interest rates—Oh, wait a minute—that’s today’s environment!

Now, I understand the hurricanes have changed lives and wrecked property in Texas, Florida, and Puerto Rico. If you are so inclined, please consider donating to relief efforts. Short term, the economic data is taking a hit from the storms. Longer term, it’s unlikely to have much impact on the economic trajectory.

While North Korea’s quest for an ICBM that can strike the U.S. is very unsettling, short-term investors seem to be pricing in the unpredictability of the rogue regime. More importantly—speaking strictly from an investment perspective—investors aren’t anticipating a disruption in the economic cycle.

So, while you should be prepared for more troubling news, it simply isn’t affecting U.S. economic activity.

Table 1: Key Index Returns

MTD % YTD % 3-year* %
Dow Jones Industrial Average +2.1 +13.4 +9.5
NASDAQ Composite +1.1 +20.7 +13.0
S&P 500 Index +1.9 +12.5 +8.4
Russell 2000 Index +7.4 +9.9 +10.1
MSCI World ex-USA** +2.3 +16.5 +1.8
MSCI Emerging Markets** -0.6 +25.5 +2.5
Bloomberg Barclays US Aggregate Bond TR -0.5 +3.1 +2.7
Source: Wall Street Journal, MSCI.com, MarketWatch, Morningstar
MTD returns: August, 2017-September 29, 2017
YTD returns: December 30, 2016-September 29, 2017
*Annualized
**In U.S. dollars

Tax reform

“Don’t tax you, don’t tax me, tax that man behind the tree,” was attributed to the late Louisiana Senator Russell Long, who chaired the powerful Senate Finance Committee from 1966 to 1981 (NYT).

He assisted with tax reform in 1986, and Congress is now considering the first major rewrite of the tax code since then.

The initiative that’s been proposed by the President and the Congressional Republican leadership is simply a blueprint. It must clear a number of hurdles before becoming law.

The framework is silent on how dividends and capital gains will be treated, and no mention has been made of the 3.8% surtax on investment income for high-income Americans.

The outline calls for special treatment for retirement accounts, but no other details were provided.

Therefore, anticipating and positioning for changes becomes very difficult given the uncertainty surrounding the bill.

Meanwhile, a 20% top corporate rate has been proposed, down from 35%. It’s roughly in-line with most developed nations, and is expected to be supportive of stocks.

But it’s early in the game and any discussion of the final points is purely speculative.

Nonetheless, please reach out to me if you have any questions about tax reform or tax planning. Or, if you would like to discuss any other matters, I’d be happy to talk with you.

We’re simply an email or phone call away, and can be reached at croberts@financialfreedomplanners.com or (804) 277-9734. Schedule a free 15 minute phone consultation or 45 minute “Getting to Know You” meeting today.

Hourly & Project-Based Personal Financial Planning

Financial Freedom Planners with tagline

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