All Things Financial Planning Blog


Not Your Father’s Retirement Plan

Personal-DebtA recent article in Time featured a study by the Deloitte Center for Financial Services suggesting many American pre-retirees are throwing in the towel when it comes to saving or planning for retirement. Insufficient savings combined with the market downturn five years ago, a housing bubble, extended low interest rate environment and a Federal government seemingly bent on making it difficult to plan for the long term has created a perfect storm for many. This will be a significant problem facing Boomers over the next few decades.

But, this blog is not meant for those near retirement. This is for the Millennials entering the workforce and the Gen Y folks already there. It’s a brief wakeup call about your future financial goals and retirement plans. The short version – you’re on your own. Your retirement plan is not and cannot be that of your parents.

For most, pensions are a thing of the past. 401(k)s and similar plans are great places to start saving, but have their limitations. Social security is likely headed for substantial reform that will leave future benefits unclear. Medicare will face significant changes over the long run. Many of the sources past generations have relied on to help care for them in their later years are more vulnerable than ever before.

Sound frightening? It is. But it’s no excuse to throw in the towel. Inaction is not an option. There are simple, but not always easy ways to put meaningful plans and processes in place to enjoy today while keeping a mindful eye on tomorrow. You just have to be willing to commit to a plan and stay true to your own values.

The bottom line? Knowledge is the key. Not about which stock to pick or what your magic number is for retirement. Instead, you need a firm grasp on what you really value in life, what you want to do for your children or others close to you, and a realistic view of what resources you have and how much you’re willing to balance those resources between goals for today and those for tomorrow. You need to revisit these questions on a regular basis to make sure you’re on track and be clear in how you communicate expectations to all those impacted by your financial decisions.

I’m no pessimist. Quite the opposite as I think the future ahead is very, very bright. I also believe that we can meet our goals, provided there’s a plan in place, we stay true to that plan, protect against the unexpected to a responsible degree and really have a grasp on what’s important to us as early as humanly possible.

The most dangerous things we put off are those that are important, but not urgent. The best time to start mapping out your plan for today, tomorrow and well down the road is now. It may not feel urgent, but it may be the most important thing you do any time soon. The you that is 20, 30 and 40 years down the road is counting on you.

Chip Workman, CFP®, MBA
Lead Advisor
The Asset Advisory Group
Cincinnati, OH


Emergency Cash Reserves – Unloved yet Necessary

My New Year’s Resolution for EveryoneI met with a couple recently to deliver their financial plan, and throughout the first half of the meeting we laughed repeatedly as they seemed to have guessed my recommendations and either did or planned on doing exactly what I had written down.

They’ve been contributing 15% of their wages to their long-term retirement plan, have no debt other than a mortgage that will be paid off well before retirement, are able to pay a college tuition bill within their cash flow, and up until recently have been making it a point to contribute to Roth IRAs.

Aside from the validation from a professional, what possibly could this couple have needed with a financial advisor?

Admittedly, not as much as many clients I see, but one of the major observations was the excessive amount of importance on trying to be as efficient as possible. They put every available dollar towards the long-term retirement plan or into paying down their long-term mortgage debt, and in doing so they blew past step one in creating a solid financial foundation – having an adequate amount on hand for short-term emergencies and cash needs.

Our sample couple here came to me wondering how in the world they will be able to pay for a second tuition bill, or purchase new cars. They recently stretched their budget even further by refinancing their 30 year mortgage to a 15 year, and increased their monthly minimum payment. I also pointed out that they had no options to cover any other short-term emergencies that life may send their way other than to go into debt, or raiding a retirement fund.

In preparing their recommendations, I gave them a financial scorecard they would receive the following grades:

Long-term savings – A+

Credit and consumer debt – A+

Living within their means – A+

Having adequate liquidity – D

Overall financial health – B-

What this couple was lacking is cash on hand. Unlike most of your other financial priorities, holding cash is never the most efficient thing to do and so its importance is often overlooked. Compared with paying down a mortgage at 4%, or earning 5-10% in a long-term investment, cash earning next to nothing just isn’t an attractive idea!

But, having an emergency cash reserve is a critical piece of a financial plan. It acts like a moat around your financial castle. It protects you from the need to sabotage your long-term investment plan, or take on high interest debt in order to cover cash needs.

Having a minimum of three months of your net income in an emergency cash account is a requirement of any complete financial plan (Note: three months is a minimum. If you are self-employed, have rental properties, or other concerns about income remaining stable you may need to be at six or more). Even at the expense of not fully funding a retirement account or not paying extra on that student loan for some time. Make having emergency cash in a savings account or money market a priority now, and when the time comes to need it you won’t have to worry.

robertSchmanskyRobert Schmansky, CFP®
Financial Advisor
Clear Financial Advisors, LLC
Royal Oak, MI


Year End Tax Planning – Part Two – Business

Year-end tax considerations for businesses are not quite as up in the air as is the individual tax situation so let’s take a look at a few of them.

Will the 3.8% Net Investment Income Tax Come Into Play?
With respect to that 3.8% net investment income tax coming in 2013, don’t worry, the tax doesn’t apply to income from trades or businesses conducted by a sole proprietor, partnership, or S corporation. But income, gain, or loss on working capital isn’t treated as derived from a trade or business and thus is subject to the tax.  Additionally, gain or loss from a disposition of an interest in a partnership or S corporation is taken into account by the partner or shareholder as net investment income and, therefore, could cause the 3.8% tax to apply.

Considering Buying Equipment?
Current law allows you to ‘write-off’ (expense), up to $139,000 of qualifying property placed in service in the tax year. If you have already placed in service $560,000 of qualifying property this strategy will not work because for every dollar of qualifying assets that you place in service above this level you lose a dollar of ‘expensing’ benefit. If you haven’t exceeded the maximum yet, and you need the machine but do not have the cash, put the purchase on your credit card that will qualify it as having been purchased this year. You can also get substantial write-offs in 2012 from a purchase of a more than 6,000 pound vehicle that may be used in a trade or business.

Do you need to ‘shelter’ income or want to save for the future?
Setting up a retirement plan is fairly easy. The costs of a plan can be very minimal or they can get very expensive if you want ‘tailored or targeted’ plan design or a, so-called defined benefit plan, which has annual actuarial costs and other expense factors. Without going into details regarding selection or design factors let’s look at some of the basic choices for retirement plans other than an individual retirement account …

Plan Type:   Simple
Establish Date:  October 1st  
Fund By Date:  Due date return + Extension
Max. if <50 yrs. old:  $11,500 + 3% or 2%

Plan Type: 401 (K)
Establish Date:  December 31st
Fund By Date:  Due date return + Extension
Max. if <50 yrs. old:  $16,500 + 25%*

Plan Type: Defined Benefit
Establish Date: December 31st
Fund By Date: Due date return + Extension
Max. if <50 yrs. old:  Actuarially Determined

Plan Type: SEP
Establish Date:  Due date of return + Extension
Fund By Date: Due date of return + Extension
Max. if <50 yrs. old: $49,000 (25%* of comp)

[*Note that 25% is actually 20% because it is 25% of income ‘in respect of’ (after) the deduction so $100,000 of income minus $20,000 =’s $80,000.   $20/$80 is 25%]

Need Employees?
If you are thinking of hiring, consider hiring a veteran before year-end to qualify for a work opportunity credit. The credit, a dollar for dollar reduction in tax liability, can range from $2,400 to $9,600 depending on a variety of factors.

Are you a Corporation?
If you are incorporated, you may want to consider a stock redemption (buy-back) which may, depending on a multitude of factors, create a long-term capital gain or a dividend which will receive the favorable 15% tax rate if done this year. Remember, unless Congress acts, capital gains rates will be going up and that 3.8% net investment income tax could apply if you make more than $250,000 married, $125,000 married filing separately and $200,000 individually.

Are you a Partnerships or a S-Corporation?
When our ‘amount at risk’ in an activity is not sufficient to allow us to, possibly, take a loss from an activity, our loss will be ‘suspended’ until such time as we have sufficient amounts ‘at-risk’. If you might not be able to utilize a loss currently because you didn’t have sufficient amounts ‘at-risk’, consider adding capital, or, alternatively, if possible, add debt that you are ‘personally responsible for’ to the activity which, by definition, will increase your at-risk. That will allow you, then, to take the loss currently. Remember, though, if this is a passive activity, there are other hurdles to overcome in order to take a ‘passive loss’ currently.

Closing Thoughts
These are but a few of the year end considerations. For 2013 ‘larger’ small businesses who offer health care to their employees, or even those that do not offer health care to employees currently, will need to review provisions of the Patient Protection and Affordable Care Act to determine the tax impact of the Act on their benefit plans and what course of action might be most prudent to pursue with respect to benefit plan(s) design for the business.

I hope that your 2012 tax year was a good one for you, your family and your employees, and I hope that 2013 is even better for ALL!

David Bergmann, CFP®, EA, CLU, ChFC
Managing Principal
The David Bergmann Group
Marina Del Ray, CA


5 Common Retirement Planning Mistakes (and How to Fix Them)

The timing could not have been worse. The largest generation of retirees in our nation’s history is entering their retirement years during the worst economic downturn since the Great Depression. Not only have baby boomers witnessed their retirement accounts shrink by as much as 50% during 2008, they also have to deal with anemic yields on bonds and CD’s, a decimated real estate market, and record high unemployment rate. Coupled with a significant increase in life expectancy thanks to modern medicine, retirees certainly have their work cut out for them.

Fortunately, it is never too late to start the retirement planning process. But retirees need to avoid many of the common mistakes because the acceptable margin of error is much smaller than ever. Here are 5 of the most common mistakes made by retirees, and how to fix them.

  1. Having a Plan with Outdated Assumptions. While most people who are near retirement age have a sense of how much assets they have accumulated, how much they will need to spend in retirement, and how long their money might last, most of people fail to have those numbers checked against different market conditions. As long as the world economy continues to struggle, one needs to challenge the conventional wisdom regarding expected annual rate of return, inflation rate, GDP growth, etc, because any one of these macroeconomic factors can easily derail a carefully crafted retirement plan. Therefore, potential retirees should consider updating their plans using a variety of market returns assumptions (both good and bad), rate of inflation (both benign and extreme), and other macro factors. If your numbers come up short, it’s time to consult a professional.
  2. Retiring Too Soon. Working even a few years beyond what you’ve planned can pay a surprisingly large bonus in retirement security. Social Security defines age 66 as the typical retirement age for most people, but about half of all Americans don’t wait that long. You can avoid the early-filing benefit reductions imposed by Social Security by working until your full retirement age (as defined by IRS). At the same time, you can keep contributing to your retirement-savings plan, building additional balances that can be put to work in the market. Every additional year of working income is a year in which you’re not supporting yourself by drawing down retirement balances. The upshot is that staying on the job a few additional years can boost your income in retirement by one-third or more.
  3. Underestimating Health Care Cost. Even for those on Medicare, health care costs can erode spending power and economic security for most retirees. Out-of-pocket expenses for people in retirement have jumped 50 percent since 2002–and that doesn’t include the possibility of needing long-term care insurance. Health care costs pose one of the most serious risks to retirement security, so it’s important to understand how to plan for this major expense, navigate the system and manage your spending. There are many public and private resources available to help you plan. Do not wait until retirement to seek advice.
  4. Not Diversifying Your Portfolio. It is not uncommon for a retiree who has worked at the same company for many years to accumulate a large amount of that company’s stock in his or her portfolio. Some retirees choose not to diversify because they feel that they “know their company the best”, and others simply neglect to do so. From a diversification and risk management perspective, a retiree’s investment portfolio should hold no more than 5% ~ 10% of any one particular stock, so that ones portfolio can be protected should an investment goes awry.
  5. Putting the Kids College Before Your Retirement. As I’ve told many of my clients, “there is always college aid for your kids. But there is no retirement aid for you other than yourself”. A retiree should never jeopardize his or her own retirement by either withdrawing, or borrowing from their retirement accounts to help fund their children’s college education (or home purchase, wedding, car, etc). Instead, they should focus on building and protecting their nest egg to last them through their golden years.

It is never too late to start planning for your retirement. If you find the task of mapping out your financial life for the next thirty years overwhelming, it might be time to lean on professionals to get a second opinion.

By Andrew Chou, CFP®
Special to FPA

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How Could Retirement Be Better Than This?

When you think about your retirement, what images come to mind? For many of us, including me, the picture of retirement is not very clear. We know how we spend our days now. For some of us, it is easier to picture what we will stop doing than it is to picture what we will do. That concerns me.

I have run into a few people whose only retirement plan is to leave their workplace. One friend was counting down the days until he could retire. The only trouble was that he had ten years of days to count down. Someone else accepted a job he hated because it paid more than other opportunities and would allow him to retire at the age of 55. Let’s see, does it make more sense to take $50,000 from a job I hate for 30 years so I can retire early or should I do work I love at $40,000 for 40 years? I wonder if their retirement planning moves beyond what they will not be doing long enough to plan what they will be doing.

An adviser friend talked with pride about his success with one client. The client had been planning to retire in only a few years when their job was eliminated. The adviser did a great job of evaluating the situation and finding the capacity for an early retirement. I complimented the adviser and asked how the client is spending their retirement. 

“Watching daytime TV,” was his sheepish response.

That is not how I want to spend my retirement. 

Frankly, there is little chance that I will spend my retirement that way. I am self employed and have no trouble whatsoever finding activities to keep me busy eight hours per day (or 12 hours per day for that matter). One of the reasons I do not have a clear vision of my retirement is that I love what I do and cannot imagine giving up my daily activities. How could retirement be better than this?

My initial thought was that with all the doing, all the activity, I may not be doing enough goal setting and focusing. It reminds me of the General Accounting Office report on duplication of government services. In the government, we have too many people looking for ways to take action and not enough people looking at the big picture to see which agency should handle which task and how we should balance, on the one hand, our need to invest in infrastructure and education with our need, on the other hand, for the private sector to produce goods and services. 

However, goal setting is a regular part of my work. I do spend time “working on my business” as well as “working in my business.” 

Maybe my plans for retirement would become clearer and my desire to start retirement would become more intense if I thought about those goals differently. Suppose my framework for those goals was creating a personal legacy rather than an ongoing company. More broadly, suppose my framework for those goals was to incorporate my wife’s goals as well…perhaps even giving some consideration for the goals of my two sons. How would my strategies and tactics change?

For instance, my wife wants to retire at a “normal” retirement age. So far my assumption has been that we could accommodate that by reducing my hours somewhat so we can travel and do a few more activities jointly. If she wants to continue to foster lifelong learning in retirement as she has in her career, we may find some ways to integrate that into my desire to enhance financial education. Talking about our retirement goals and how we can enhance our individual and joint goals might be a good starting place.

How about your goals for retirement? How would conversations with your loved ones about their goals help you to define your retirement? Let’s find a way to retire to our retirement goals and activities rather than retiring from our jobs.

John Comer, CFP®
Comer Consulting, LLC
Plymouth, MN

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It’s Time to Evaluate Workplace Benefits

Fall is typically the season when many have the opportunity to review their workplace benefits and make changes.

Here are four items to keep in mind as you review your benefit elections and options:

  1. Make sure you have taken major life changes into account. Have you recently married or had a child? You may need to increase your life insurance coverage. Also check that you are covered adequately for disability, especially if your family depends on your earnings. There are no magic rules of thumb to pick the needed amounts, so discuss your situation and needs with your financial advisor.
  2. Review your health plan choices. It can seem daunting to explore the choices in the marketplace, but it is well worth the time. If you and your family enjoy good health, you might benefit over your working life from true insurance in the form of a High-Deductible Health Plan (HDHP) combined with a Health Savings Account (HSA). HSAs are like IRA accounts for health benefits where contributions grow tax-free if used for healthcare costs and are tax-deferred if withdrawn for other purposes.
  3. Take advantage of the use-it-or-lose-it plans. Dependent care reimbursement accounts and Flexible Spending Accounts (FSAs) can provide a great tax benefit if you have eligible expenses, even though legislative changes will make them less attractive. Beginning January 1, 2011, purchases of over-the-counter medicines will require a doctor’s prescription to be eligible reimbursements from FSAs. Then in 2013 FSA plans will be capped at $2500 (and indexed for inflation starting in 2014).
  4. Check if you’re paying for insurance you don’t need. Accident insurance typically is not worth buying. Don’t confuse it as a replacement for life or disability standard life insurance. There is often no good reason from a financial or protection perspective to purchase these policies.

Although you are probably not restricted to the fall to make changes to your company’s retirement plan, it’s a good idea to do a full plan review as well.

Start out by making sure beneficiary designations are up to date. Ensure your investments are allocated appropriately and that company stock is not an overwhelming part of your total investment assets (try for no greater than 5-10%). Make sure to take full advantage of any matching plan your employer may offer. If it is an attractive plan or your best option for retirement savings, maximize your contributions beyond the match.

I also recommend making it a habit to increase your contributions by at least 1% annually, and at any point in the year you receive a pay raise. It may require some discipline to do, but the difference that 1% annually will bring over the years will make all of the difference financially when you come to need it.

robertSchmanskyRobert Schmansky, CFP®
Financial Advisor
Northern Financial Advisors, Inc
Franklin, MI