The end of the year is quickly approaching and it goes without saying that most of us are starved for time. December may be a hectic month, but it is also a great time to get your financial house in order before the New Year. Here are some quick and easy year-end financial fixes that will help you start 2017 off right.
Congratulations to the class of 2016, your hard work and perseverance has paid off. You are newly minted graduates and may be facing a variety of decisions surrounding your life and career that you feel totally unprepared to make. Should I take that crazy job teaching English in Tibet, or the stuffy office gig with a 401 (k)? Mom and dad said I could move back home, but living with my friends in a sixth-floor walk- up apartment just seems like more fun. Do I need to start saving for retirement already, oh, and what about my student loans? Continue reading
Let’s face it, the financial services industry loves analytics. We produce mountains of data and delight in presenting it to clients in new and creative ways. Finance is, after all, a highly analytic field, so it is hardly surprising that we focus our time and energy on numbers. This is the paradigm that is often used to develop and deliver financial advice, but a growing body of evidence suggests that the financial decisions made by most individuals may have less to do with analytics and more to do with behavior and emotions. How do we as advisors strike the appropriate balance between analytics and emotions, and what can the field of behavioral finance teach us that may help our clients to make better financial decisions?
Back when your parents or grandparents were daydreaming about retirement, $1 million seemed like a magic number. That was then. Today, $1 million won’t get you very far during retirement.
One million dollars is no longer the magic number for retirees because it’s not the same value that it used to be. Since 1975, inflation as measured by the Consumer Price Index, has risen an average of more than 4 percent a year. One million today has the same buying power as $227,683.43 did 39 years ago, explains Michael Farr, president and CEO of wealth management firm Farr, Miller & Washington and author of A Million is Not Enough: How to Retire with the Money You’ll Need.
It’s more realistic to say that you should save around 10-12 times your current salary. If you make at least $100,000 that will give you between $1-$1.2 million and will allow you to have around $50,000 a year for 20-25 years when adjusted for inflation, says Farr.
If you’re still a skeptic and think $1 million is good enough, plenty of experts disagree.
The silent killer
Inflation erodes wealth. “When we need to crystallize the theory of inflation with clients, the examples of the cost of milk, postage or even a new car today versus when they started working usually results in an understanding that the value of $1 slowly erodes over time,” says Bradley Bofford, managing partner, Financial Principles.
In the current environment, Treasuries, CDs and savings account yields are at historic lows. If a conservative retiree hoped to live off of the interest from these vehicles, their income has steadily decreased over the last five years. In many cases, the retiree taps principal, resulting in a snowball effect of depleting assets.
Over the next 10 years, a 60% equity, 40% fixed income portfolio is projected to return 3.25%, says Nick Ventura, president of Ventura Wealth Management. On a $1 million portfolio, this hardly provides enough for the average family to live comfortably during retirement. For the average family, to generate a median retirement income of approximately $85,000, the nest egg should approach $2 million, says Ventura.
Depending on where the assets are invested, taxes can be another factor that will lower the net income from retirement assets. Additionally, says Bofford, there is a general consensus that tax rates will continue to increase, resulting in further erosion of wealth.
Forces beyond your control
Life is full of surprises. Many times, those equate to more money coming out of your pockets, points out Kevan Melchiorre, a private wealth advisor with Busey Wealth Management. Take for example a double whammy like market volatility and an illness that requires long term care. Suppose there was a bad year in the market, let’s say like 2008, when the market dropped 34%. That means if you began with $1 million and assumed you were going to take out 5% per year ($50,000), you could end up with only $693,000 to live off of, says Jonathan Gassman, of The Gassman Financial Group. Depending on the frequency of events (market returns) you could run out of money. “Compound that with a long term care event, which on Long Island can cost $150,000 a year – three years in, you are eating and living off Alpo.”
Know too that dependable income sources are a dying breed. Historically, Americans could rely on some type of pension or other defined benefit plan, along with Social Security to fund their retirement living expenses. This made it easier to maintain savings and not need those buckets for income, says Melchiorre. Consequently, you need more savings than ever to sustain your lifestyle.
“The good news is we are living longer. For some, the bad news is, we are living longer. If there isn’t enough accumulated retirement assets available because someone lived much longer than expected, then it can force the person to depend on someone to help with their income needs, as well as health care costs,” says Bofford. This scenario ends up affecting not only the person who poorly planned, but the person they now rely on. The reality is that while $1 million may be enough to retire, the question is, “how long will you be able to stay retired?” asks Andrew Carrillo, managing principal, Barnett Capital Advisors.
Realize math is fuzzy
Truth is, “There is no real number. Each person has their own NUMBER and it depends on their spending and their lifestyle,” says Gassman. The question is, “Do you know yours?”
Make a plan
The most important part of retirement planning is to have a plan. This includes taking a look at your current and expected sources of income and expenses to determine what your cash flow will look like during retirement and throughout your life expectancy, says Anthony Criscuolo, a certified financial planner with Palisades Hudson Financial Group.
As part of this process, establish your financial/retirement goals to determine how big a nest egg you need. “Knowing ‘your number’ is one of the most important aspects of your retirement plan, but before you can determine what your number is, you have to make a plan and establish your goals,” says Criscuolo.
If you want to get to whatever is your number, you’ll need strategy and discipline. “Don’t put your kids’ education expenses before your retirement needs. Many parents sacrifice earlier retirement or a comfortable retirement to foot the bill for their child’s college expenses or children of the ‘boomerang’ generation living at home well into their late 20s,” says Ventura.
Consider using a heavier equity balance in your retirement portfolio. “Having exposure to growth vehicles during retirement may add volatility, but it may also allow for a higher rate of return. This may permit higher income off of a lower starting investment base,” says Ventura.
Save more. “Trim $300-$500 a month in expenses that can be put away for later use, rather than on luxury items now,” says Farr. Contribute to retirement accounts as early as possible and in a tax efficient way, says David Richmond, president of Richmond Brothers.
Purchase long term care insurance. Says Ventura, “The biggest hazard to retirement success is maintaining two households at the same time. This happens when both spouses are alive, but one must go into an assisted living facility. Having insurance to help mitigate these costs can help both spouses be more comfortable in a trying time.”
With tax season ending and the start of summer, it’s easy to forget about your finances. However, this midpoint in the year, as things begin to slow down, is one of the best times to evaluate where you stand, to become aware of issues before it is too late, and to make any necessary course corrections.
We recommend evaluating your:
Now is a great time to fine-tune your budget or spending plan based on any changes (raises, bonuses, additional debt).
Make sure that your emergency savings fund is on track. While some suggest setting aside 3 months worth of household income, we suggest 6-9 months of cash readily accessible, particularly as the timeframe to fine employment increases.
Check in on your other savings goals such as: your children’s educational planning, retirement savings, family vacation, or home improvements.
Retirement: make sure you are maximizing your annual contributions to your 401k, traditional or Roth IRA, or any other sort of savings you’re looking towards. For more information check out our retirement posts. If you see you’re falling short, you may want to consider increasing your contributions. Take the time to evaluate your company match to maximize your full match potential
Guard against identity theft. Request your free credit report from the 3 credit reporting agencies online, for free at http://www.freecreditreport.com. Make sure your credit report is updated and accurate – check for any problems or unusual activity. Close down credit cards that are no longer in use. Make sure the debt that you’ve taken out is in your name.
The midyear checkup is a good opportunity to review your tax withholdings and make any estimated tax payments. Contact your CPA or check the IRS withholding calculator.
Take a look at your current insurance plans: life, health, disability, long-term care, auto, homeowner’s policy. Do you have the right type of insurance and coverage? Make any policy changes or modifications based on changes in the first part of the year.
Now is a good time to review and adjust your asset allocation or your goals, particularly if you want to take on more risk or your retirement time horizon has changed.
With Tax Day in 2 weeks, you might be wondering whether there are any last minute things you can do to save on taxes from last year’s income. Good news: if you’re an entrepreneur, there is!
Did you know that if you’re self-employed or a small business owner there is a special type of pension plan available for you (and your employees)? Available for businesses of any size, a simplified employee pension plan (SEP-IRA)is a written arrangement that allows a self-employed individual or a business owner to contribute to a pension plan with significantly higher limits than a traditional IRA.
A self-employed individual can contribute (pre-tax!) between 0-25% of their compensation (maximum contributions up to $51,000 for 2013, $52,000 for 2014); here’s the small catch: each eligible employee has to get the same percentage.
There are distinct advantages to setting up a plan like this:
- You can contribute more (up to $51,000) to a plan like this than the traditional IRA maximum annual contribution of $5,500
- The contribution is tax deductible
- The account grows tax deferred until you withdraw the money
- There are no annual reporting requirements for SEPs as long as each participant or individual who is in the plan receives a copy of the plan agreement and disclosure form (this is unlike a traditional 401K, defined contribution plan, or defined benefit plan, which have an annual 5500 form filing requirement)
In order to deduct the contribution, you must establish the plan by April 15th and contribute to the plan by April 15th (or the due date of your return including extensions – check with your accountant).
There are very few drawbacks to setting one of these plans up.
How to set up a SEP-IRA:
SEP-IRAss can be set up through a financial advisor, through a brokerage house, or through a bank.
Participants are eligible to sign up for a wide variety of investment opportunities including mutual funds, stocks, bonds, ETFs, and many more.
There should be no establishment fees to launch the plan and annual fees are minimal.
If you had a machine in your basement that printed out $20 bills whenever you wanted, would you buy a warranty for the machine?
We recently had a meeting with a client that we’ve known for a long time. Despite an annual income of $500K+, we were concerned; his financial plan had a few major shortfalls, which put his family – his wife and two daughters – at risk.
Of note, his financial plan:
- Did not have enough liquidity
- Had no emergency account
- Did not have enough savings for retirement
- Had no personal disability insurance
The first few issues are ones we often encounter with new clients. These typical financial traps can be safely avoided with a good financial plan that re-allocates income and creates liquidity in savings.
The most worrisome part of this client’s financial plan is that he didn’t have personal long-term disability insurance.
Fifteen years ago, this client had bought life insurance, but declined purchasing long-term disability insurance. Why? His excuses are ones we hear far too often:
- “My company offers disability insurance” (only for as long as you’re working there)
- “It can’t happen to me” (unfortunately, it can’t until it does)
- “I don’t want to pay for it” (if you need to use it, the investment in the premium will pay off very quickly)
Fast-forward fifteen years to our meeting last week. This client, like many people we know, has been diagnosed with a degenerative disease (something similar to multiple sclerosis, or muscular dystrophy, Lou Gehrig’s disease, etc.). Like many of those diseases, there’s no known cure. Moreover, the disease will get progressively worse over time. If/when he becomes disabled, the insurance that he bought through work will not cover him long-term. If he was to lose his job, not only is he completely vulnerable, but so is his family – there is no coverage in place.
Think back on the money-printing machine we asked about at the top of the page. Would you insure it? Most people answer yes that they would get a warranty for the money-printer; however, most people don’t take the same warranty out on their ability to work, which is their greatest asset and source of future money.
5 Key Things for Financial Stability
Happy New Year! New Year = New Resolutions = New Opportunities. So let’s kickoff the new year on the right foot and focus on getting our financial lives in order.
Here are 5 key things to put your financial house in order: Continue reading