, , ,

Is the right time to Roth it?

For some, the recent tax reforms indicate, yes. For others, not so fast.

By Cornerstone Wealth Management

Can federal income tax rates get lower than they are today? Given the national debt and the outlook for Social Security and Medicare, it is hard to imagine that rates go much lower. In fact, it is more likely that federal income taxes get higher, as the tax cuts created by the 2017 reforms are scheduled to sunset when 2025 ends.

Additionally, the Feds are now using a different yardstick, the “chained Consumer Price Index,” to measure cost-of-living adjustments in the federal tax code. As a result, you could inadvertently find yourself in a higher marginal tax bracket over time, even if tax rates do not change. Due to this, it is possible that today’s tax breaks could eventually be worth less.1

As a result of tax reform, we are occasionally asked if this is a good time to convert a traditional IRA to a Roth. A conversion to a Roth IRA is a taxable event. If the account balance in your IRA is large, the taxable income linked to the conversion could be sizable, and you could end up in a higher tax bracket in the conversion year. For some, that literally may be a small price to pay.2

The jump in your taxable income for such a conversion may be a headache – but like many headaches, is likely to be short-lived. Consider the long term advantages that could come from converting a traditional IRA balance into a Roth IRA. A “big picture” comprehensive financial plan can help you estimate the short and long term merits of this transaction, even before you decide to pull the trigger.

Generally, you can take tax-free withdrawals from a Roth IRA once the Roth IRA has been in existence for five years and you are age 59½ or older. For those who retire well before age 65, tax-free and penalty-free Roth IRA income could be very nice.3

You can also contribute to a Roth IRA regardless of your age, provided you earn income and your income level is not so high as to bar these inflows. In contrast, a traditional IRA does not permit contributions after age 70½ and requires annual withdrawals once you reach that age.2

Lastly, a Roth IRA is can be a good estate planning strategy. If IRS rules are followed, Roth IRA beneficiaries may end up with a tax free inheritance.3

A Roth IRA conversion does not have to be “all or nothing.” Some traditional IRA account holders elect to convert just part of their traditional IRA to a Roth, while others choose to convert the entire balance over multiple years, the better to manage the taxable income stemming from the conversions.2

Important change: you can no longer undo a Roth conversion. The Tax Cuts & Jobs Act did away with Roth “recharacterizations” – that is, turning a Roth IRA back to a traditional one. This do-over is no longer allowed.2

Talk to a tax or financial professional as you explore your decision. While this may seem like a good time to consider a Roth conversion, we have seem working with our clients that this move is not suitable for everyone. Especially during years of high earned income. The resulting tax hit may seem to outweigh the potential long-run advantages.

If you or someone you know would like to get coaching on the most appropriate approach to reviewing Roth strategies, we welcome your call.

#IRA #RothIRA #Roth #RothConversion #FinancialPlanning #Investments #RetirementIncome #RetirementPlanning #Taxes #TaxStrategies #TaxSavings #Cornerstonewmi

This material was prepared by MarketingPro, Inc. and does not necessarily represent the views of the presenting party nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – money.cnn.com/2017/12/20/pf/taxes/tax-cuts-temporary/index.html [12/20/17]
2 – marketwatch.com/story/how-the-new-tax-law-creates-a-perfect-storm-for-roth-ira-conversions-2018-03-26 [8/17/18]
3 – fidelity.com/building-savings/learn-about-iras/convert-to-roth [8/27/18]

,

IRA vs. 401(k)

Comparing two popular retirement account types.

By Cornerstone Wealth Management

When you think about retirement accounts, it is likely that at least one of these two account types come to mind: the IRA and the 401(k). Each are common and relatively easy ways to save for retirement. Each have unique and common features and benefits. What follows is a summary of features, merits, and demerits of each account type.

What IRAs and 401(k)s have in common.

  • Taxes are deferred. One significant advantage is that funds held in these accounts have the potential to grow and compound year after year tax deferred.1 When money is eventually withdraw from either plan, it will be taxed as ordinary income.
  • IRAs and 401(k)s can reduce ordinary income taxes. It varies depending on whether the account is traditional or Roth in nature. Contributions to a traditional IRA may be tax deductible while contributions to a 401(k) lower your taxable income. When money is eventually withdraw from either plan, it will be taxed as ordinary income. When you have a Roth IRA or Roth 401(k), contributions are not tax deductible, but can potentially be withdrawn from the account without taxation.1
  • Generally, the I.R.S. penalizes withdrawals from these accounts before age 59½. Distributions from traditional IRAs and 401(k)s prior to age 59½ usually trigger a 10% federal tax penalty, on top of income tax on the withdrawn amount. Roth IRAs and Roth 401(k)s allow you to withdraw a sum equivalent to your account contributions at any time without taxes or penalties, but early distributions of the account earnings are taxable and may also be hit with the 10% early withdrawal penalty.1
  • You must make annual withdrawals from 401(k)s and traditional IRAs after age 70½. This is called a Required Minimum Distribution (RMD). And while withdrawals from a Roth IRA are not required during the owner’s lifetime, only after his or her death. Roth 401(k)s do require annual withdrawals after age 70½.2 At this point, you may be starting to get confused on the nuances. If you have questions, we welcome you call.

How IRAs and 401(k)s differ.

  • Annual contribution limits for IRAs and 401(k)s differ greatly. As an employee non-business owner, you may direct up to $18,500 into a 401(k) in 2018; $24,500, if you are 50 or older. In contrast, the maximum 2018 IRA contribution is $5,500; $6,500, if you are 50 or older.1 The additional $6,500 contribution is called a “catch-up.”
  • Your employer may match your 401(k) contributions. This is free money coming your way. If your employer offers matching, amount of match differs by employer, is usually partial, but certainly nothing to disregard – it might be a portion of the dollars you contribute up to 6% of your annual salary, for example. Do these employer contributions count toward your personal yearly 401(k) contribution limit? No, they do not. Retirement planning tip: Consider contributing at least enough to qualify for the full match if your company offers one.1
  • An IRA permits a wide variety of investments, in contrast to a 401(k). The typical 401(k) might offer only about 20 investment options, and you have no control over what investments funds are chosen. With an IRA, you can have access to hundreds of investment options.1,3
  • You can contribute to a 401(k) no matter how much you earn. Your income may limit your eligibility to contribute to a Roth IRA; at certain income levels, you may be prohibited from contributing the full amount, or any amount.1
  • If you leave your job, you cannot take your 401(k) with you. It stays in the hands of the retirement plan administrator that your employer has selected. The money remains invested, but you may have less control over it than you once did. You do have choices: you can withdraw the money from the old 401(k), which will likely result in a tax penalty; you can leave it where it is; you can possibly transfer it to a 401(k) at your new job; or, you can transfer it into an IRA.4,5
  • You cannot control 401(k) fees. Some 401(k)s have high annual account and administrative fees that effectively eat into their annual investment returns. How costa are established is beyond your control. The annual fees on your IRA may not be as expensive.1

All this said, contributing to an IRA or a 401(k) is a prudent idea. In fact, many pre-retirees contribute to both 401(k)s and IRAs in the same tax year. Today, investing in these account types appear to be essential in achieving retirement savings and retirement income goals.

If you or someone you know would like to get coaching on the most appropriate approach to saving money for retirement, or would like assistance with the jargon below, we welcome your call.

Note: Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax. The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.

#401k #IRA #traditionalIRA #RMD #RequiredMinimumDistribution #CatchUp #Investments #MarketOutlook #RetirementIncome  #RetirementPlanning #Taxes #TaxStrategies #TaxSavings #cornerstonewmi

This material was prepared by MarketingPro, Inc. and does not necessarily represent the views of the presenting party nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – nerdwallet.com/article/ira-vs-401k-retirement-accounts [4/30/18]
2 – irs.gov/retirement-plans/retirement-plans-faqs-regarding-required-minimum-distributions [5/30/18]
3 – tinyurl.com/y77cjtfz [10/31/17]
4 – finance.zacks.com/tax-penalty-moving-401k-ira-3585.html [9/6/18]
5 – cnbc.com/2018/04/26/what-to-do-with-your-401k-when-you-change-jobs.html [4/26/18]

, , , , ,

A Good Problem: How to Handle a Financial Windfall

What do you do with sudden money?

Provided by Cornerstone Wealth Management

Imagine getting rich, quick. Liberating? Yes of course. Frustrating and challenging? Most likely.

Sudden money can help you resolve retirement saving or college funding goals, and set the stage for your financial independence. On the downside, you’ll pay higher taxes, attract more attention, and maybe even deal with “wealth envy.” Sudden Money may also include grief or stress if associated to death, divorce, or a employer buy-out.

Sudden Money does not always lead to happy endings. Take the example of Alex and Rhoda Toth, a real-life Florida couple down to their last $25 who hit a lottery jackpot of roughly $13 million in 1990. Their story ended badly: by 2006, they were bankrupt and faced tax fraud charges. Or Illinois resident Janite Lee, who won $18 million in the state lottery. Eight short years later, Janite filed for bankruptcy; had $700 to her name and owed $2.5 million to creditors. Sudden Money doesn’t automatically breed “old money” behavior or success. Without long-range vision, one generation’s wealth may not transfer to the next. Wealth coaching firm The Williams Group spent years studying the estate transfers of more than 2,000 affluent households. It found that 70% of the time, the wealth built by one generation failed to successfully migrate to the next.1,2

What are some wise steps to take when you receive a windfall? What might you do to keep that money in your life and in your family for their future?

Keep quiet, if you can. If you aren’t in the spotlight, don’t step into it. Aside from you and your family, the only other parties that need to know about your financial windfall is the Internal Revenue Service, the financial professionals who you consult or hire, and your attorney. Beyond those people, there isn’t generally an upside to notify anyone else.

What if you can’t keep a low profile? Winning a lottery prize, selling your company, signing a multiyear deal – when your wealth is more in the public domain, expect friends and strangers and their “opportunities” to come knocking at your door. Time to put on your business face: Be fair, firm, and friendly – and avoid handling the requests directly. One well-intended generous handout on your part may risk opening the floodgates to others. Let your financial team review requests for loans, business proposals, and pipe dreams.

Yes, your team. If big money comes your way, you need skilled professionals in your corner – a tax professional, an attorney, and a wealth manager. Ideally, your tax professional is a Certified Public Accountant (CPA) and or Enrolled Agent (EA) and tax advisor, your lawyer is an estate planning attorney, and your wealth manager is “big picture” and pays attention to tax efficiency.

Think in increments. When sudden money enhances your financial standing, you need to think about the immediate future, the near future, and the decades ahead. Many people celebrate their good fortune when they receive sudden wealth and live in the moment, only to wonder years later where that moment went. Many times, it is better to identify what needs immediate attention, and delay anything else until life becomes more stable.

In the short term, an infusion of money may result in tax challenges; it may also require you to reconsider existing beneficiary designations on IRAs, retirement plans, and investment accounts and insurance policies. A will, a trust, an existing estate plan – they may need to be revisited. Resist the immediate temptation to try and grow the newly acquired wealth quickly by investing aggressively.

Looking down the road a few miles, think about what financial independence (or greater financial freedom) means to you. How do you want to spend your time? Do you want to continue working, or change your career? If you own a business, should you stick with it, or sell or transfer ownership? What kinds of near-term possibilities could this mean for you? What are the strategies that could help you defer or reduce taxes long term? How can you manage investment and other financial risks in your life?

Looking further ahead, tax efficiency can potentially make an enormous difference for that windfall. You may end up with considerably more money (or considerably less) decades from now due to asset location and other tax factors.

Important idea: Think about doing nothing for a while. Nothing financially momentous, that is. There’s nothing wrong with that. Sudden, impulsive moves with sudden wealth can backfire.

Welcome the positive financial changes, but don’t change yourself. Remaining true to your morals, ethics, and beliefs will help you stay grounded. Turning to professionals who know how to capably guide that wealth is just as vital.

If you or someone you know would like to get coaching on the most appropriate to sudden money, we welcome your call.

This material was prepared by MarketingPro, Inc. and does not necessarily represent the views of the presenting party nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – bankrate.com/finance/personal-finance/lottery-winners-who-went-broke-1.aspx#slide=1 [5/23/18]
2 – money.cnn.com/2018/09/10/investing/multi-generation-wealth/index.html [9/10/18]

This article was prepared by a third for information only. It is not intended to provide specific advice or recommendations for any individual.

, ,

Is Your Company’s 401(k) Plan as Good as It Could Be?

Two recent court rulings may make you want to double-check.

How often do retirement plan sponsors check up on 401(k)s? Not as often as they should, perhaps. Employers should be especially vigilant these days.

Every plan sponsor should know about two recent court rulings. One came from the Supreme Court in 2015; another, from the U.S. District Court for the Central District of California in 2017. Both concerned the same case: Tibble v. Edison International.

In Tibble v. Edison International, some beneficiaries of the Edison 401(k) Savings Plan took Edison International to court, seeking damages for losses and equitable relief. The plaintiffs contended that Edison International’s financial advisors and investment committee had breached their fiduciary duty to the plan participants. Twice, they argued, the plan sponsor had added higher-priced funds to the plan’s investment selection when near-identical, lower-priced equivalents were available.1

Siding with the plan participants, the SCOTUS ruled that under ERISA, a plaintiff may initiate a claim for violation of fiduciary duty by a plan sponsor within six years of the breach of an ongoing duty of prudence in investment selection.1

The unanimous SCOTUS decision on Tibble (expressed by Justice Stephen Breyer) stated that “cost-conscious management is fundamental to prudence in the investment function.” This degree of alertness should be applied “not only in making investments but in monitoring and reviewing investments. Implicit in a trustee’s [plan fiduciary’s] duties is a duty to be cost-conscious.”2,3

Two years later, the U.S. District Court ruled that Edison International had indeed committed a breach of fiduciary duty regarding the selection of all 17 mutual funds offered to participants in its retirement plan. It also stated that damages would be calculated “from 2011 to the present, based not on the statutory rate, but by the 401(k) plan’s overall returns” during those six years.3

The message from these rulings is clear: the investment committee created by a plan sponsor shoulders nearly as much responsibility for monitoring investments and fees as a third-party advisor. Most small businesses, however, are not prepared to benchmark processes and continuously look for and reject unacceptable investments.

Do you have high-quality investment choices in your plan? While larger plan sponsors may have more “pull” with plan providers, this does not relegate a small company sponsoring a 401(k) to a substandard investment selection. Sooner or later employees may begin to ask questions. “Why does this 401(k) have only one bond fund?” “Where are the target-date funds?” “I went to Morningstar, and some of these funds have so-so ratings.” Questions and comments like these may be reasonable and might surface when a plan’s roster of investments is too short.

Are your plan’s investment fees reasonable? Employees can deduce this without checking up on the Form 5500 you file – there are websites that offer some general information as to what is and what is not acceptable regarding the ideal administrative fees.

Are you using institutional share classes in your 401(k)? This was the key issue brought to light by the plan participants in Tibble v. Edison International. The U.S. District Court noted that while Edison International’s investment committee and third-party advisors placed 17 funds in its retirement plan, it “selected the retail shares instead of the institutional shares, or failed to switch to institutional share classes once one became available.”3

Institutional share classes commonly have lower fees than retail share classes. To some observers, the difference in fees may seem trivial – but the impact on retirement savings over time may be significant.3

When was the last time you reviewed your 401(k) fund selection & share class? Was it a few years ago? Has it been longer than that? Why not review this today? Call in a financial professional to help you review your plan’s investment offering and investment fees.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – faegrebd.com/en/insights/publications/2015/5/supreme-court-decides-tibble-v-edison-international [5/18/15]

2 – cpajournal.com/2017/09/13/erisas-reasonable-fee-requirement/ [9/13/17]

3 – tinyurl.com/yd8s2rq3 [8/17/17]

, , ,

Real Estate Investments Course Starts September 17, 2018 at UC Berkeley Extension, San Francisco Campus

The next Real Estate Investments for Financial Planners and Investors course starts Monday September 17th at the San Francisco UC Berkeley Extension campus. This class will serve as an important foundation for making buy, sell, and hold real estate investment decisions. The coursework includes

  • An introduction to real estate investment basics
  • The Real Estate Cash Flow model
  • Real estate ownership and finance
  • Case studies on real estate investment decisions, and how they have impacted personal financial goals

Click here to register. Or contact me if you have any questions, or if you would like a copy of the course outline.

Sincerely, Rich Arzaga, CFP®, CCIM, Instructor

, , , , ,

How Much Money Will You Really Spend in Retirement? Probably a Lot More Than You Think

When we retire, every day becomes just like the weekend. And on the weekend, we have all kinds of time and opportunities to spend money. Many of us vastly underestimate the percentage of income we’ll need. Here’s how to make sure you get that number right.

I was asked recently by a former student-CFP® candidate to recommend a software program for a friend who wanted to create a plan on her own. I get this question every-so-often. While there are a few pretty slick sites that produce easy to create financial profiles, my experience is that it is often user-error that causes them to create a plan that looks promising but falls apart on quick review. One of the biggest reasons in understatement of spending. The following article by Dan Ariely and Aline Holzwarth, begins to describe this gap. Other assumptions not covered in this article are also missed, like assumed performance, treatment of assets and taxes, and the introduction of risk during the plan. If you want a great plan, my recommendation is to choose a great planner who can integrate technology with planning experience. Ask for a sample of her/his work. Ask her/him to explain how the plan was assembled. Ask if she/he holds a CFP® designation. These few questions alone will help you learn which advisors view planning as a foundation for your financial life, and other advisors say they are planners but prefer to only manage your investments. I hope this article helps.

By Dan Ariely and Aline Holzwarth

It’s the question that plagues pretty much everybody as they look ahead: How much money will I need in retirement?

Most likely, a lot more than you think.

Let us explain. The typical approach most people take is to ask what percentage of their final salary they think they will need in retirement. If you have ever visited a financial adviser, you must have been asked this sort of question. You most likely dedicated a whole minute (at most) to formulating your answer.

And no one would blame you for it. Answering a question as complex as this requires knowledge far beyond most people’s grasp—and far beyond the grasp of even many professionals.

Just imagine for a second the sorts of inputs you might use to get to the right number, such as the cost of living where you want to retire, the cost of health care (and how much of it you will utilize), the state of Social Security, the rate of inflation, the risk level of your investment portfolio, and especially how you want to spend your time in retirement. Do you want to take walks in the park or join a gym? Drink water at dinner or expensive wine? Watch TV or attend the ballet weekly? Visit family once a year or twice a year or four times a year? Do you want to eat out once or twice or five times a week? And so on.

Try it yourself. Stop for a minute and think to yourself what your percentage might be. Clearly, it’s a daunting task to transform all these hard-to-predict inputs into a single percentage.

To understand better how people grapple with this question, we invited hundreds of people—of different age groups, income levels, and professions—to our research lab and asked them how much of their salary they thought they would need in retirement.

The answer most people gave was about 70%. Did you also choose a percentage around 70%-80%? You’re not alone. In fact, we, too, thought that 70% sounded reasonable. But reasonable isn’t the same as right. So we asked the research participants how they arrived at this number. And we discovered that it wasn’t because they had truly analyzed it. It was because they recalled hearing it at some point—and they simply regurgitated it on demand.

The 70%, in other words, is the conventional wisdom. And it’s wrong.

Sticker shock

To find out what people actually will need in retirement—as opposed to what they think they will need—we took another group of participants, and asked them specific questions about how they wanted to spend their time in retirement. And then, based on this information, we attached reasonable numbers to their preferences and computed what percentage of their salary they would actually need to support the kind of lifestyle they imagined.

The results were startling: The percentage we came up with was 130%—meaning they’d have to save nearly double the amount they originally thought.

How could this be? Just think about it. Working is actually a very cheap activity. When you’re working (never mind the fact that you are actually making money), you aren’t spending much. There’s no time to spend money at work. And when we do spend money, it is often paid for by our employers. At least some companies pay for our coffee, our travel, team-building activities, happy-hour drinks and so on. It is one of the cheapest ways to spend our time.

When we retire, it is as if someone took 10 waking hours of our workday and gave us free time to do as we please. Every day becomes just like the weekend. And on the weekend, we have all kinds of time and opportunities to spend money. We shop, travel, buy tickets for events and eat out.

Sure, we may have the time in retirement to do certain things ourselves that we would pay for while working (like mow the lawn, clean the house or make our own lunch). But for the most part, it is much easier to spend money when we’re not spending most of our waking hours at work.

Self-assessment

Now that we know how misguided the 70% figure is, here’s the hard question: How can each of us figure out more precisely the kind of life we’ll want—and what it will cost?

In a study conducted in collaboration with MoneyComb, a fintech company that participated in our Startup Lab academic incubator program at our Center for Advanced Hindsight at Duke University, we found out that a good way to think about spending in general is to think about the following seven spending categories: eating out, digital services, recharge, travel, entertainment and shopping, and basic needs.

To help you think about your time in retirement, imagine that every day was the weekend. How much would you like to spend in each of these categories? How often would you eat out? Which digital subscriptions would you want to have? How would you pamper yourself? How often, where and how luxuriously would you want to travel?

Clearly, those who prefer spending time at the beach and watching Netflix won’t spend nearly as much as those who prefer the opera and good wine three times a week. Those who want to spend vacations visiting family won’t spend nearly as much as those who want to take a few cruises a year. Believe it or not, what might seem like minor preferential differences like these can quickly add $20,000 a year to your spending requirements. This is precisely why it’s so important to factor in these preferences when determining how much you need for retirement.

Details, Details

Failing to account for all of your expected costs in retirement, no matter how small, can be costly. Here are some specifics—many of which people often forget—to factor in when making projections.

1 Water, gas, electricity, heating/cooling, garbage collection    2 Rent, mortgage, insurance, maintenance    3 Primary-care doctor, specialists, hospital bills, medications, insurance    4 News sources, Netflix, Hulu, etc.    5 Loan/lease, maintenance, insurance, gas, car wash, parking

Source: Dan Ariely and Aline Holzwarth

Try this exercise yourself: Close your eyes and picture a single representative year in retirement. Live it in the best way you can imagine. (And remember that “best” doesn’t necessarily mean “more expensive.”) The more expensive you imagine your future, the larger the sacrifice you will have to make today.

Now, answer each of the following questions from the list of categories.

We know that just thinking about retirement, not to mention doing the math, can be overwhelming. So pour yourself a glass of wine and make this a rewarding process for yourself. Just take note of how much you spent on the bottle for future reference.

  • Eating out and in:Do you like to cook, or do you prefer going out to eat? How often do you want to go out to dinner in retirement? How much do you spend on each meal, on average? How often do you see yourself splurging on dessert, or a fancy bottle of wine?
  • Digital services:What are the digital services you pay for now? Do you have a subscription to The Wall Street Journal? (You won’t want to give that up.) Do you have cable? How about videogames? Apps and software? Online courses? What are all the digital services you want to have in retirement, and how much do they cost? Would you like to spend more or less on digital services in retirement?
  • Recharge (recreational and personal services):Do you like to pamper yourself? What sort of pampering do you imagine in retirement: reading a book at the beach, treating yourself to the occasional $15 manicure, or going all in with luxurious spa treatments? How often do you want to get a massage? Are you a member of a country club, or would you like to be?
  • Travel:Do you like to travel? How often? How much do you spend on everyday transportation? What do you spend on flights in a year? Do you imagine traveling more or less in retirement than you do now? What sort of traveling suits you? Do you like to go on cruises? Are you the type to go on a cross-country road trip in your 60s, or would you prefer the comfort of first class on a plane? Or perhaps you want to have your own private jet that takes you to your own private island. (We can all dream.)
  • Entertainment:How will you spend your time in retirement? What sorts of events will you want to attend? How much do you want to spend on the opera, concerts, musicals, ballet, sports events, museums, classes and so on? Will you buy books or borrow them from the library?
  • Shopping:Are you a shopper? Do you like to give your friends and family gifts? What about donations to charity? How much shopping do you see yourself doing in retirement? How much do you imagine spending on clothing, electronics, home goods and other shopping?
  • Basic needs (utilities, housing, health care):Finally, we arrive at the least exciting but most necessary category—our essential spending. How much do you think you will spend on utilities, housing, health care and other basic needs? (This is of course a very complex number to estimate, and this is where getting input from professionals can be very useful.)

 

Doing the math

Now that you have a guide for determining roughly how much you’d like to spend in each category, you’re ready to add everything up. Here is an Excel spreadsheet that you can download and play with. It is prepopulated with example numbers, but you should change things around to fit your own personal preferences. To get your percentage, you’ll need to add your salary in the spreadsheet. (And if you’d like, go to our survey to let us know what percentage you got and share any feedback.)

If you want to take the next step in this process and translate your annual amount to the total amount you will need over the course of your full retirement (to know the total amount you need to accumulate from until then, for example), simply multiply the annual amount by the number of years you expect to be in retirement. For most of us, that should be about 20 years.

As we live longer, funding retirement is a moving target. And to have any hope of successfully securing our future lifestyles, we have to start early and we have to build a more detailed and accurate picture of the way we hope to live. We have to understand not just how much we will earn in our life and how far we are from retirement (in years and in dollars), but also how we want to spend our time both during our working years and after.

Once we have determined how much we truly need to save for retirement, we can then focus on how to get to this amount. We can adjust our current lifestyle accordingly, figuring out which trade-offs we are willing and unwilling to make. We should also work backward to determine how much risk we need to take in our investment portfolios in order to reach these goals. And finally, for most of us the retirement we desire may be out of reach, so we need to start being extra nice to our children.

Mr. Ariely is the James B. Duke Professor of Psychology and Behavioral Economics at Duke University. He is the founder of the Center for Advanced Hindsight. Mrs. Holzwarth is the head of behavioral science at Pattern Health, and principal of the Center for Advanced Hindsight at Duke University.

Appeared in the September 4, 2018, print edition as ‘How Much You’ll Really Spend in Retirement.’

This article was prepared by a third party for information purposes only. It is not intended to provide specific advice or recommendations for any individual. It contains references to individuals or entitles that are not affiliated with Cornerstone Wealth Management, Inc. or LPL Financial.

 

, ,

Financial Planning Optimism

It’s back to school for students all across the country, and whether it’s the first week in kindergarten, high school, or college, parents and students alike are excited yet probably nervous at the same time. What will the new school year bring—and can it live up to our hopeful expectations? This is likely how many investors may feel about the markets right now, with reasons for excitement and some causes for concern. Overall, when it comes to market fundamentals, the positives may outweigh the negatives—and hopefully the same will be the case for the 2018–19 school year.

Strength in several economic and market indicators is driving optimism among consumers and businesses. The Institute for Supply Management manufacturing index has soared to a 14-year high, while the job market also continues to show robust growth. As we await the figures for August, the economy has produced an average of 215,000 new jobs during the first seven months of the year. These positive economic indicators cement expectations of an additional interest rate increase at the Federal Reserve’s (Fed) September meeting; given the Fed’s gradual and transparent rate hike campaign, however, investors in U.S. markets have thus far taken these increases in stride.

Along with a steady economy, corporate America continues to deliver solid performances, as second quarter earnings season delivered very strong profit growth. Meanwhile, generally upbeat forward-looking guidance, along with high business and consumer confidence, helps support the outlook for earnings over the balance of the year and into 2019. With this backdrop, the now longest bull market in history may have further to go.

Although stocks have been performing well, there are some areas of concern. September is historically the weakest month of the year for stocks. There are also some trouble spots in emerging markets, including Turkey and Argentina, which have led to year-to-date losses in emerging market investment strategies. Policy risk remains in the background with the ongoing trade tensions and the upcoming midterm elections. These factors may lead to a pickup in near-term market volatility, but stocks still have the potential to push higher from current levels over the rest of the year.

The longest bull market, and one of the longest economic expansions, means investors may worry that the good times will soon come to an end. But it appears that both the bull market and expansion have room to run. The U.S. economy is enjoying solid momentum, bolstered by the new tax law; business spending is picking up; the manufacturing sector is healthy; and the latest earnings season was one of the strongest on record. So although there are areas to keep a close eye on, and the potential for some ups and downs in the market, we can retain a positive outlook for the final months of 2018. Let’s hope that students, teachers, and parents can also put their worries aside and enjoy their return to another school year.

As always, if you have any questions, I encourage you to contact me.

Sincerely,

Important Information

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.

All performance referenced is historical and is no guarantee of future results. Indexes are unmanaged and cannot be invested into directly. Economic forecasts set forth may not develop as predicted.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

This research material has been prepared by LPL Financial LLC. Tracking #1-768037

, , , ,

When to Ignore the Crowd and Shun a Roth IRA

‘Stealth’ taxes and financial aid implications are among the factors savers should consider when switching accounts

The following article is Courtesy of Laura Saunders and The Wall Street Journal, and makes some very good points on why funding a Roth Conversion could have a negative impact to an overall financial plan. For many of our clients who are high income earners, the worse possible time for a Roth Conversion may be when they are in their peak earning years – the same period of time most people think about this for the first time.

To determine if a Roth IRA is the right strategy for you and your family, or perhaps to learn when might be the right time to explore this strategy, feel free to reach out to Cornerstone.

Switching your traditional individual retirement account to a Roth IRA is often a terrific tax strategy—except when it’s a terrible one.

Congress first allowed all owners of traditional IRAs to make full or partial conversions to Roth IRAs in 2010. Since then, savers have done more than one million conversions and switched more than $75 billion from traditional IRAs to Roth accounts. (Source: The Wall Street Journal September 2018)

The benefits of a Roth conversion are manifold. A conversion gets retirement funds into an account that offers both tax-free growth and tax-free withdrawals. In addition, the account owner doesn’t have to take payouts at a certain age.

While traditional IRAs can also grow tax-free, withdrawals are typically taxed at ordinary income rates. Account owners 70½ and older also must take payouts that deplete the account over time.

IRA specialist Ed Slott and Natalie Choate, an attorney in Boston, say that Roth IRAs also yield income that is “invisible” to the federal tax system. So Roth payouts don’t raise reported income in a way that reduces other tax breaks, raises Medicare premiums, or increases the 3.8% levy on net investment income.

Yet both Ms. Choate and Mr. Slott agree that despite their many benefits, Roth conversions aren’t always a good idea. IRA owners who convert must pay tax on the transfer, and the danger is that savers will give up valuable tax deferral without reaping even more valuable tax-free benefits. For tax year 2018 and beyond, the law no longer allows IRA owners to undo Roth conversions.

Savers often flinch at writing checks for Roth conversions, and sometimes there are good reasons not to put pen to paper. Here are some of them.

  • Your tax rate is going down. In general, it doesn’t make sense to do full or partial Roth conversions if your tax rate will be lower when you make withdrawals. This means it’s often best to convert in low-tax-rate years when income dips. For example, a Roth conversion could work well for a young saver who has an IRA or 401(k) and then returns to school, or a worker who has retired but hasn’t started to take IRA payouts that will raise income later.
  • Those who will soon move to a state with lower income taxes should also consider waiting.
  • You can’t pay the taxes from “outside.”  Slott advises IRA owners to forgo a Roth conversion if they don’t have funds outside the account to pay the tax bill. Paying the tax with account assets shrinks the amount that can grow tax-free.
  • You’re worried about losses. If assets lose value after a Roth conversion, the account owner will have paid higher taxes than necessary. Ms. Choate notes that losses in a traditional IRA are shared with Uncle Sam.
  • A conversion will raise “stealth” taxes. Converting to a Roth IRA raises income for that year. So, benefits that exist at lower income levels might lose value as your income increases. Examples include tax breaks for college or the 20% deduction for a pass-through business. Higher income in the year of a conversion could also help trigger the 3.8% tax on net investment income, although the conversion amount isn’t subject to this tax. The threshold for this levy is $200,000 for singles and $250,000 for married couples, filing jointly.
  • You’ll need the IRA assets sooner, not later. Roth conversions often provide their largest benefits when the account can grow untouched for years. If payouts will be taken soon, there’s less reason to convert.
  • You make IRA donations to charity. Owners of traditional IRAs who are 70½ and older can donate up to $100,000 of assets per year from their IRA to one or more charities and have the donations count toward their required payouts. This is often a highly tax-efficient move. But Roth IRA owners don’t benefit from it, so that could be a reason to do a partial rather than full conversion.
  • Financial aid will be affected. Retirement accounts are often excluded from financial-aid calculations, but income isn’t. If the income spike from a Roth conversion would lower a financial-aid award, consider putting it on hold.
  • You’ll have high medical expenses. Under current law, unreimbursed medical expenses are tax deductible above a threshold. For someone who is in a nursing home or has other large medical costs, this write-off can reduce or even wipe out taxable income. If all funds are in a Roth IRA, the deduction is lost.
  • You think Congress will tax Roth IRAs.Many people worry about this, although specialists don’t tend to. They argue that Congress likes the up-front revenue that Roth IRAs and Roth conversions provide and is more likely to restrict the current deduction for traditional IRAs and 401(k)s—as was considered last year.

Other proposals to limit the size of IRAs and 401(k)s to about $3.4 million, to make non-spouse heirs of traditional IRAs withdraw the funds within five years, and to require payouts from Roth IRAs at age 70½ also haven’t gotten traction so far.

Withdrawals from a Roth IRA may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

 

, ,

Are Changes Ahead for Retirement Accounts

A bill now in Congress proposes to alter some longstanding rules.

Most Americans are not saving enough for retirement, despite ongoing encouragement to do so (and recurring warnings about what may happen if they do not). This year, lawmakers are also addressing this problem, with a bill proposing big changes to IRAs and workplace retirement plans.

The Retirement Enhancement and Savings Act (RESA), introduced by Senator Orrin Hatch, would amend the Internal Revenue Code and the Employee Retirement Income Security Act (ERISA) in some significant ways.1

Contributions to traditional IRA accounts would be allowed after age 70½. Today, only Roth IRAs permit inflows after the owner reaches this age.2

An expanded tax break could lead to more multiple-employer retirement plans. If small employers partner with similar companies or organizations to offer a joint retirement savings program, the RESA would boost the tax credit available to them to offset the cost of starting up a plan. The per-employer tax break would rise from $500 to $5,000. A multiple-employer plan could be attractive to small companies, for it might mean lower plan costs and administrative fees.2

Portions of federal tax refunds could even be directed into workplace plans. The RESA would allow employees to preemptively assign some of their refund for this purpose.2

Retirement income projections could become a requirement for plans. Not all monthly and quarterly statements for retirement accounts contain them; the RESA would make them mandatory. It would oblige financial firms providing investments to employer-sponsored plans to detail the amount of cash that the current account balance would generate per month in retirement, as if it were fixed pension income. Plans might also be permitted to offer insurance products to retirement savers.2,3

A new type of workplace retirement account could emerge if the RESA passes. So far, this account has been described vaguely; the phrase “open-ended” has been used. The key feature? Employees could take loans from it without penalty.2,3

Whether the RESA becomes law or not, the good news is that more of us are saving. In the 2016 GoBankingRates Retirement Survey, 33.0% of respondents said that they had saved nothing for retirement; in this year’s edition of the survey, that dropped to 13.7%, possibly reflecting the influence of auto-enrollment programs for workplace plans, the emergence of the (now absent) myRA, and improved economic ability to build a retirement fund. (In the 2018 edition of the survey, the top reason people were refraining from saving for retirement was “I don’t make enough money.”)4

Could the RESA pass before Congress takes its summer recess? Good question. Senate and House lawmakers have many other bills to consider and a short window of time to try and further them along. The bill’s proposals may evolve in the coming weeks.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – congress.gov/bill/115th-congress/senate-bill/2526 [7/3/18]
2 – fool.com/retirement/2018/07/22/heres-what-the-proposed-retirement-savings-changes.aspx [7/22/18]
3 – marketwatch.com/story/proposed-changes-to-your-401k-retirement-plan-could-be-promising-or-not-2018-07-18 [7/18/18]
4 – gobankingrates.com/retirement/planning/why-americans-will-retire-broke/ [3/6/18]

, , ,

The Sequence of Returns

A look at how variable rates of return do (and do not) impact investors over time. 

What exactly is the “sequence of returns”? The phrase simply describes the yearly variation in an investment portfolio’s rate of return. Across 20 or 30 years of saving and investing for the future, what kind of impact do these deviations from the average return have on a portfolio’s final value?

The answer: no impact at all.

Once an investor retires, however, these ups and downs can have a major effect on portfolio value – and retirement income.

During the accumulation phase, the sequence of returns is ultimately inconsequential. Yearly returns may vary greatly or minimally; in the end, the variance from the mean hardly matters. (Think of “the end” as the moment the investor retires: the time when the emphasis on accumulating assets gives way to the need to withdraw assets.)

An analysis from BlackRock bears this out. The asset manager compares three model investing scenarios: three investors start portfolios with lump sums of $1 million, and each of the three portfolios averages a 7% annual return across 25 years. In two of these scenarios, annual returns vary from -7% to +22%. In the third scenario, the return is simply 7% every year. In all three scenarios, each investor accumulates $5,434,372 after 25 years – because the average annual return is 7% in each case.1

Here is another way to look at it. The average annual return of your portfolio is dynamic; it changes, year-to-year. You have no idea what the average annual return of your portfolio will be when “it is all said and done,” just like a baseball player has no idea what his lifetime batting average will be four seasons into a 13-year playing career. As you save and invest, the sequence of annual portfolio returns influences your average yearly return, but the deviations from the mean will not impact the portfolio’s final value. It will be what it will be.1

When you shift from asset accumulation to asset distribution, the story changes. You must try to protect your invested assets against sequence of returns risk.

This is the risk of your retirement coinciding with a bear market (or something close). Even if your portfolio performs well across the duration of your retirement, a bad year or two at the beginning could heighten concerns about outliving your money.

For a classic illustration of the damage done by sequence of returns risk, consider the awful 2007-2009 bear market. Picture a couple at the start of 2008 with a $1 million portfolio, held 60% in equities and 40% in fixed-income investments. They arrange to retire at the end of the year. This will prove a costly decision.

The bond market (in shorthand, the S&P U.S. Aggregate Bond Index) gains 5.7% in 2008, but the stock market (in shorthand, the S&P 500) dives 37.0%. As a result, their $1 million portfolio declines to $800,800 in just one year. Its composition also changes: by December 31, 2008, it is 53% fixed income, 47% equities.2

Now comes the real pinch. The couple wants to go by the “4% rule” (that is, the old maxim of withdrawing 4% of portfolio assets during the first year of retirement). Abiding by that rule, they can only withdraw $32,032 for 2009, as compared to the $40,000 they might have withdrawn a year earlier. This is 20% less income than they expected – a serious blow.2

Two other BlackRock model scenarios shed further light on sequence of returns risk, involving two hypothetical investors. Each investor retires with $1 million in portfolio assets at age 65, each makes annual withdrawals of $60,000, and each portfolio averages a 7% annual return over the next 25 years. In the first scenario, the annual portfolio returns for the first eight years of retirement are +22%, +15%, +12%, -4%, -7%, +22%, +15%, +12%. In the second, the returns from year 66-73 are -7%, -4%, +12%, +15%, +22%, -7%, -4%, +12%. (For simplicity’s sake, both investors see this 5-year cycle repeat through age 90: three big advances of either +12%, +15%, or +22%, then two yearly losses of either -4% or -7%.)1

At the end of 25 years, the investor in the first scenario – the one characterized by big gains out of the gate – has $1,099,831 at age 90, even with yearly $60,000 drawdowns gradually adjusted 3% for inflation. In that scenario, the portfolio losses are fortunately postponed – they come three years into retirement, and six of the first eight years of retirement see solid gains. In the second scenario, the investor sees four bad years out of eight from age 66-73 and starts out with single-digit portfolio losses at age 66 and 67. After 25 years, this investor has … nothing. At age 88, he or she runs out of money – or at least all the assets in this portfolio. That early poor performance appears to take a significant toll.1

Can you strategize to try and avoid the fate of the second investor? If you sense a market downturn coming on the eve of your retirement, you might be wise to shift portfolio assets away from equities and into income-generating investments with little or no correlation to the weather on Wall Street. If executed well, such a shift might even provide you with greater retirement income than you anticipate.2

If you are about to retire, do not dismiss this risk. If you are far from retirement, keep saving and investing knowing that the sequence of returns will have its greatest implications as you make your retirement transition.

Examples are hypothetical and are not representative of any specific situations. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – blackrock.com/pt/literature/investor-education/sequence-of-returns-one-pager-va-us.pdf [6/18]
2 – kiplinger.com/article/retirement/T047-C032-S014-is-your-retirement-income-in-peril-of-this-risk.html [7/3/18]