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.

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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.

 

‘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.

 

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]

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]

If something sounds too good to be true, it probably is.

If you are in or near retirement, it is a safe bet that you would like more yield from your investments rather than less. That truth sometimes leads liars, scammers, and fraudsters to pitch any number of too-good-to-be-true “investment opportunities” to retirees. Given all that and the classic money scams perpetrated on elders, you have good reason to be financially skeptical as you get older.

Beware of unbelievable returns. Sometimes you hear radio commercials or see online ads that refer to “an investment” or “an investment opportunity” that is supposedly can’t miss. Its return beats the ones achieved by the best Wall Street money managers, only the richest Americans who know the “secrets” of wealth know about it, and so forth.

Claims like these are red flags, the stuff of late-night infomercials. Still, there are retirees who take the bait. Sometimes the return doesn’t match expectations (big surprise); sometimes their money vanishes in a Ponzi scheme or pyramid scheme of sorts. Any monthly or quarterly statements – if they are sent to the investor at all – should be taken with many grains of salt. If they seem to be manually prepared rather than sent from a custodian firm, that’s a hint of danger right there.

Beware of equity investments with “guaranteed” returns. On Wall Street, nothing is guaranteed.

Beware of unlicensed financial “professionals.” Yes, there are people operating as securities professionals and tax professionals without a valid license. If you or your friends or relatives have doubts about whether an individual is licensed or in good standing, you can go to finra.org, the website of the Financial Industry Regulatory Authority (formerly the National Association of Securities Dealers) and use their BrokerCheck feature.1

Beware of the “pump and dump.” This is the one where someone sends you an email – maybe it goes straight to your spam folder, maybe not – telling you about this hot new microcap company about to burst. The shares are a penny each right now, but they will be worth a thousand times more in the next 30 days. The offer may be entirely fraudulent; it may even promise a guaranteed return. Chances are, you will simply say goodbye to whatever money you “invest” if you pursue it. Brokers pushing these stocks may not even be licensed.2

Watch out for elder scams. In addition to phony financial services professionals and exaggerated investment opportunities, we have fraudsters specifically trying to trick septuagenarians, octogenarians, and even folks aged 90 and above. They succeed too often. To varying degrees, all these ploys aim to exploit declining faculties or dementia. That makes them even uglier.

You still see stories about elders succumbing to the “grandparent scam,” a modern-day riff on the old “Spanish prisoner” tale. Someone claiming to be a grandson or granddaughter calls and says that they are in desperate financial straits – stranded without a car or return ticket in some remote or hazardous location, in jail, in an emergency room without health insurance, could you wire or transfer me some money, etc.  A disguised voice and a touch of personal information gleaned from everyday Internet searches still make this one work.3

Would you believe some crooks prey on the grieving? Elders can be targeted by funeral scams, in which a criminal reads new obituaries, and then calls up widowers claiming that the deceased spouse or partner had an outstanding debt with them. Occasionally, the crook even attends the funeral and presents the bogus claim to the bereaved in person. Identity thieves may present themselves as official representatives of Medicare – they are calling from Washington D.C. or the local Medicare office, they have detected an error, and they need a senior’s personal information to make things right. In reality, they aim to do wrong.4

Everyone wants to look younger, and unsurprisingly, new scams have surfaced pitching bogus anti-aging products. One Arizona-based scam pushing fake Botox brought in $1.5 million in just over a year before its masterminds were arrested. Expect to see more of this, with the cosmetics or medicines offered either amounting to snake oil or resulting in physical harm.4

A little healthy skepticism can’t hurt. If you are recently retired or approaching retirement age, be aware of these scams and schemes – and inform your elderly parents about them, too.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. 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 – finra.org/investors/about-brokercheck [7/9/18]
2 – money.usnews.com/investing/stock-market-news/articles/2018-03-08/penny-stocks-5-ways-to-spot-a-pump-and-dump-scam [3/8/18]
3 – tickertape.tdameritrade.com/retirement/elderly-financial-scams-16236 [12/25/17]
4 – ncoa.org/economic-security/money-management/scams-security/top-10-scams-targeting-seniors/ [7/9/18]

Some good reasons to retain it.

Do you need a life insurance policy in retirement? One school of thought says no. The kids are grown, and the need to financially insulate the household against the loss of a breadwinner has passed.

If you are thinking about dropping your coverage for either or both of those reasons, you may also want to consider some reasons to retain, obtain, or convert a life insurance policy after you retire. It may be a prudent decision once you take these factors into account.

Could you make use of your policy’s cash value? If you have a whole life policy, you might want to utilize that cash in response to certain retirement needs. Long-term care, for example: you could explore converting the cash in your whole life policy into a new policy with a long-term care rider, which might even be doable without tax consequences. If you have income needs, many insurers will let you surrender a whole life policy you have held for some years and arrange an income contract with the cash value. You can pull out the cash, tax-free, as long as the amount withdrawn is less than the amount paid into the policy. Remember, though, that withdrawing (or taking a loan against) a policy’s cash value naturally reduces the policy’s death benefit.1

Do you receive a “single life” pension? Maybe a pension-like income comes your way each month or quarter, from a former employer or through a private income contract with an insurer. If you are married and there is no joint-and-survivor option on your pension, that income stream will dry up if you die before your spouse dies. If you pass away early in your retirement, this could present your spouse with a serious financial dilemma. If your spouse risks finding themselves in such a situation, think about trying to find a life insurance policy with a monthly premium equivalent to the difference in the amount of income your household would get from a joint-and-survivor pension as opposed to a single life pension.2

Will your estate be taxed? Should the value of your estate end up surpassing federal or state estate tax thresholds, then life insurance proceeds may help to pay the resulting taxes and help your heirs avoid liquidating some assets.

Are you carrying a mortgage? If you have refinanced your home or borrowed to buy a home, a life insurance payout could potentially relieve your heirs from shouldering some or all of that debt if you die with the mortgage still outstanding.2

Do you have burial insurance? The death benefit of your life insurance policy could partly or fully pay for the costs linked to your funeral or memorial service. In fact, some people buy small life insurance policies later in life in preparation for this need.2

Keeping your permanent life policy may allow you to address these issues. Alternately, you may seek to renew or upgrade your existing term coverage. Consult an insurance professional you know and trust for insight.

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 – forbes.com/sites/forbesfinancecouncil/2018/03/06/using-life-insurance-for-retirement-purposes/ [3/6/18]
2 – nasdaq.com/article/4-reasons-to-carry-life-insurance-in-retirement-cm946820 [4/12/18]

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Tax overhaul risks leaving pension recipients under withheld when it comes time to file for 2018

By Laura Saunders

June 22, 2018

Courtesy of the Wall Street Journal

Millions of Americans receiving pensions could be in for a bad tax surprise next year.

A little-noticed effect of last year’s tax overhaul is that many pension payments are now larger, reflecting the new lower tax rates in effect for 2018. But this bump-up increases the risk that recipients will be under withheld at tax time next year—and therefore owe a penalty. To avoid this, retirees should immediately check their withholding and adjust it if necessary.

One who will be checking is Ann Gardella, a retired music teacher now living in Southbury, Conn. She says most of her income is from her pension and the monthly payments rose earlier this year. Because she already has a tax balance due each April, she plans to review her withholding.

“I really don’t want to owe penalties next year,” says Ms. Gardella.

The situation with pensions is similar to what’s happening with paychecks, says Jonathan Zimmerman, a benefits attorney with Morgan, Lewis & Bockius. Earlier this year, Treasury officials adjusted withholding tables to reflect changes for 2018 made by last year’s tax overhaul, and these changes have been incorporated into many pension payments as well as employee paychecks.

But these adjustments didn’t take into account many of the overhaul’s changes. For example, the current withholding tables include tax-rate changes but not the effect of the new $10,000 cap on deductions for state and local taxes. The withholding tables have never included this information, according to an IRS spokesman.

The upshot is that some pension recipients could wind up under withheld in for 2018 because the automatic adjustments to their pension payments set them too high. In general, people must pay in at least 90% of the tax they’ll owe during the year, or by the following mid-January if they are paying quarterly estimated taxes, to avoid a penalty. The penalty is based on an annual interest rate that’s currently 5%.

Penalized

The growth in filers who owe penalties on quarterly tax payments has far outpaced the growth in individual returns in recent years.

Pension payments and filers’ circumstances vary widely, so it’s hard to predict who’s at risk here. Mr. Zimmerman says that for a typical married pension recipient with a $50,000 annual pension, the reduction in withholding comes to about $818 a year. That may not sound like a lot, but it cuts withholding by about 20%. A pension payer that follows the government’s tables isn’t responsible if the recipient is under withheld.

This new wrinkle in pension payments is yet another reason why retirees—especially those who recently retired or are working part time—should be alert for “tax shocks,” says Gil Charney, a director of H&R Block’s Tax Institute.

For many retirees, income doesn’t just drop, he explains. Often it becomes lumpy, especially if someone has part-time work, Social Security payments, or retirement-plan withdrawals. Medical expenses may become deductible for the first time, and additional “standard deductions” kick in at age 65.

Retirees must also decide what to withhold from Social Security payments and payouts from plans such as 401(k)s or individual retirement accounts at the same time that many are switching to quarterly estimated tax payments.

“The onus is on the taxpayer to make sure the withholding is correct,” says Mr. Charney, rather than on both the taxpayer and the employer.

There’s evidence of rising taxpayer problems in this area. Between 2010 and 2016, the number of filers penalized for underpaying estimated taxes rose 36%, from 7.2 million to 9.8 million.

To help with these issues, the IRS has posted a new withholding calculator. It can be used by most filers, including retirees with multiple sources of income, according to an IRS spokesman.

To use it, you’ll need a copy of last year’s tax return and estimates of this year’s sources of income and withholding so far. Based on the results, you may want to submit a revised Form W-4P, for pension and annuity withholding, to the payer.

Retired or Semi Graph

The form for Social Security withholding is W-4V. Filers can elect to withhold at one of four flat rates—7%, 10%, 12%, or 22%. To change the withholding on the payouts from a retirement plan such as an IRA or 401(k), check with your provider.

What if a filer underpays estimated taxes? The law offers two outs. There’s often no penalty if income is less than $150,000 and the filer has paid in an amount equal to 100% of his tax for the prior year. For those earning more than $150,000, the threshold rises to 110% of the prior year’s tax.

The other is that the IRS often waives estimated tax penalties incurred in the year someone retires or becomes disabled, or sometimes the year after that. To qualify, the taxpayer submits Form 2210 with proof and an explanation that the error wasn’t willful.

But this relief often comes after a scary letter from the IRS and filling out yet another form—so avoid it if you can.

There’s nothing like doing your homework and being selective.

When we buy a car or a house, consider a school for our children, or plan our next vacation, what kind of approach do we take? For one thing, we take our time. We shop around and consider our choices.

Yet when it comes to selecting a financial consultant, not everyone takes such care. Chuck Jaffe, for many years a MarketWatch columnist, often spoke to audiences on this topic, and when doing so, he liked to conduct an informal poll. He started by asking people to raise their hand if they had ever worked with a financial advisor. Typically, many hands went up. Next, he asked them to keep their hands in the air if they hired the first financial advisor they met with in their search. Seldom did a hand lower. Then he asked them to keep their hands up if they did a background check on that person before agreeing to work together. Jaffe noted that when that third question was asked, “[I] never had a single hand stay in the air.”1

Credibility and compatibility both matter. When it comes to the “alphabet soup” of financial industry designations, some of them carry more clout than others. Some of the most respected professional designations are Certified Financial Planner™ (CFP®), Chartered Financial Consultant® (ChFC), and Chartered Financial Analyst® (CFA). These designations are earned only after thorough examinations and a required curriculum of college-level studies in financial planning applications, retirement, insurance and estate planning fundamentals, and other topics. Real-world experience complements this course of study.2

Beyond a financial professional’s credentials and designations, you have the matter of compatibility. You don’t want to work with someone who insists that you fit into a preconceived box, for you are not simply Investor A, Investor B, or Investor C who deserves this or that generic strategy. Better financial professionals really get to know you – and they will not be offended if you make the effort to get to know them.

This is a relationship-based business, and when a financial consultant offers a thoughtfully considered, personalized strategy to a client resulting from one or more discovery meetings, they have taken a step to earn the respect and trust of that client. Finer financial professionals abide by a client’s preferences and risk tolerance and take the client’s values, needs, and priorities into account.

How do you “check out” a financial professional? You can visit www.finra.org (the Financial Industry Regulatory Authority) and use FINRA BrokerCheck to see if anything questionable has occurred in their career. If that financial professional is an investment advisor, you can go to the Securities and Exchange Commission website and look at that advisor’s Form ADV at advisorinfo.sec.gov. Part 1 will tell you about any issues with clients or regulatory agencies; Part 2 will tell you about the advisor’s services, fees, and investment strategies.3,4

In addition, AARP offers you a Financial Adviser Questionnaire, and websites like ussearch.com and paladinregistry.com can provide you with further information.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. 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 – marketwatch.com/story/7-mistakes-investors-make-in-hiring-advisers-2010-05-20 [5/20/10]
2 – csmonitor.com/Business/Saving-Money/2017/0205/A-simple-guide-to-the-many-financial-advisor-designations [2/5/18]
3 – brokercheck.finra.org/ [6/13/18]
4 – adviserinfo.sec.gov/ [6/13/18]

Some things to think about as you get started with your strategy.

First, look at your expenses and your debt. Review your core living expenses (such as a mortgage payment, car payment, etc.). Can any core expenses be reduced? Investing aside, you position yourself to gain ground financially when income rises, debt shrinks, and expenses decrease or stabilize.

Maybe you should pay your debt first, maybe not. Some debt is “good” debt. A debt might be “good” if it brings you income. Credit card debt is generally deemed “bad” debt.

If you’ll be carrying a debt for a while, put it to a test. Weigh the interest rate on that specific debt against your potential income growth rate and your potential investment returns over the term of the debt.

Of course, paying off debts, paying down balances, and restricting new debt all works toward improving your FICO score, another tool you can use in pursuit of financial freedom (we’re talking “good” debts).1

Implement or refine an investment strategy. You’re not going to retire solely on the elective deferrals from your paycheck; you’re to going retire (potentially) on the interest that those accumulated assets earn over time, assisted by the power of compounding.

Manage the money you make. If you simply accumulate unmanaged assets, you have money just sitting there that may be exposed to risk – inflation risk, market risk, even legal risks. Don’t forget taxes. The greater your wealth, the more long-range potential you have to accomplish some profound things – provided your wealth is directed.

If you want to build more wealth this year or in future years, don’t go without a risk management strategy that might be instrumental in helping you retain it. Your after-tax return matters. Risk management should be part of your overall financial picture.

Request professional guidance. A considerate financial professional should educate you about the principles of wealth building. You can draw on that professional knowledge and guidance this year – and for years to come.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. 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 – experian.com/blogs/ask-experian/credit-education/improving-credit/improve-credit-score/ [5/30/18]