Goldstone Financial Group's Blog
In this ongoing series, Goldstone Financial Group principals Michael and Anthony Pellegrino answer personal finance questions from the residents of Chicago. This episode centers on employer-sponsored retirement accounts — and, more specifically, the strategies a retiree can use to grow the money they save further.
How limited am I to my company’s 401K options?
MICHAEL PELLEGRINO: Unfortunately, you probably are relatively limited. Most people only have a few options available when they sign on to a company 401(k) plan. If you do enroll, it’s crucial that you contribute — and if your employer offers a match, take them up on it! That’s free money in your account. Aside from that, I’d suggest working with an advisor to see if you’re eligible to make an IRA or Roth contribution.
ANTHONY PELLEGRINO: Another factor to consider is age. Most people assume that they can’t touch their 401(k) while they’re working, but you have more options once you reach 59.5 years of age. If you’re still working and contributing at that point, a fiduciary could help you put together an in-service rollover. You can go in and access some part or all of your 401(k) and then roll over those funds to an IRA. At that point, you have more options for your investment — and you don’t have to stop contributing to your 401(k), either! You’ll have two buckets to grow your investment, instead of one.
Should I leave my old 401k with my past employer?
MICHAEL PELLEGRINO: That’s one option, but you may have others. It’s important to look at the specifics of your 401(k) before you make any decisions. Again, though, an employer-sponsored plan is going to limit your options. It might be worth looking into rolling the money over into other investment vehicles — an IRA account, for example.
Should I take out money from my pension fund from a previous employer, or should I leave it there to grow over time?
ANTHONY PELLEGRINO: Those of us at Goldstone Financial Group specialize in these “lump-sum pension option rollovers.” People come to us all the time to ask about lump-sum buyouts, wondering whether they should take their pension money out all at once or access it in installments as “income” in retirement. In our view, a pension is just a large annuity. Once you start drawing income, you give up all access to its liquidity. You’re locked into that model, and you have no way to move the money you’ve saved into other investment vehicles. Worse, a pension does not come with death benefits — if a retiree were to pass on after spending decades with a company, their family would get nothing.
MICHAEL PELLEGRINO: As fiduciaries, we can create a comparison of your options and help you determine whether you should keep your 401(k) as is or roll those funds over into another investment vehicle.
Anthony Pellegrino, Goldstone Financial Group founder and firm principal, has dedicated his practice not only to helping individuals plan for their financial future but also remaining by their side as a partner in achieving their desired results. When Goldstone Financial Group helps a client prepare for retirement, they aren’t afraid to talk about the worst-case scenarios.
“Everyone likes to hope for the best – heck, we like to hope for the best,” Anthony Pellegrino says, “But we have to think about the practical issues, too. The last outcome we want is for a client to put away money every day for two, even three decades and then find themselves struggling to pay their bills after an unexpected and financially catastrophic life event.”
Read the full article here!
When it comes to money, most people prefer a predictable approach; they feel secure with the regular schedule of a paycheck or the guarantee of a reliable income. There are some who may find a thrill in the possibility of a riskier and potentially more profitable investment, but their worry exceeds their optimism. Understanding the actual level of risk can make a huge difference.
The calculated risks investments demand isn’t for everyone. However, for Goldstone Financial Group founder and principal Anthony Pellegrino, assessing risk is a way of life. Anthony Pellegrino has built his career on determining good investments from bad investments while guiding his clients towards a secure financial future. Assessing and determining the level of risk in investments, he explains is one of the most important aspects of his job – mainly because many of the people he connects with do not realize how risky their portfolio really is.
Read the full article on Patch!
When most people save for retirement, they do so with the expectation that after they cash their last paycheck, they will have enough money in savings and investment assets to carry them through the entirety of their lives. They feel secure in knowing that they have money tucked away, so they rarely consider the worst-case scenarios.
What if they face a massive investment loss shortly before or after their retirement? What do they do if they spend most of their savings in the first decade of retirement, only to live another ten years?
Without a steady paycheck, retirees don’t have a fixed source of monthly income or a way to guarantee that they will be able to pay their bills during their sunset years. They need a plan – and Goldstone Financial Group is prepared to offer a few suggestions.
In this episode, firm principal Anthony Pellegrino provides a few insights into how those planning for retirement can establish a predictable income stream before they lose the security of their monthly paycheck.
According to Pellegrino, one of the best options available to retirees today are annuities. These investment vehicles come in all varieties, each with their pros and cons. An annuity that works for one person may be financially damaging for another – and as such, it is essential to consult a certified fiduciary before signing up for one. In this video, however, Anthony Pellegrino provides two examples of annuities that may be helpful for some retirees.
At age 60, you place $250,000 in an annuity account. This account will give you a bonus of six, seven, or even eight percent for signing up if you agree to a ten-year term. Throughout the decade, that percentage bonus will generate an additional $28,000 for your retirement fund.
Some annuity packages also come with a Home Healthcare Doubler, which would effectively double your income during the years that you might need assistance with two or more of the six active daily living (ADL) needs such as bathing, eating, or walking. It is worth noting that the doubler benefits only apply up until a set age ceiling; after that, the income provided would revert to the original amount.
Let’s assume that you place that same $250,000 in a different variety of account. In this scenario, you have the security of a floor beneath your initial contribution. Even better, the annuity is designed with a built-in inflationary hedge. Every time the market trends upward, you will see your annual income increase by the same percentage – and when the market trends downward, your income remains fixed at its previous yearly amount. As a bonus, these accounts can also be structured to include a clause for spousal continuation, which would allow the account holder’s spouse to take ownership of the annuity if they pass away.
Most retirees hope to build and build – but they don’t have a plan in place for establishing a stable income stream. Goldstone Financial Group can help! Reach out today to consult with a certified fiduciary.
Many investment professionals, including Warren Buffett, advise investors to buy and hold a diversified portfolio of stocks … and hold and hold. But with today’s record-long bull market, maybe it’s time to try tactical asset management instead.
When is the last time you took a look at how your investment portfolio is performing — and then did something about it?
If your answer is “Hmmm … not lately,” you’re not alone.
Too many people still have the old-school mentality that if they buy a diverse bunch of mutual funds and stocks — spreading out their money into several different buckets — they’ve done what they can to protect themselves against a big drop in the market. They buy and hope — and hope and hope — that by the time they retire, there will be more money in those buckets than when they started.
The Old Buy and Hold Approach Strategy
Who can blame them, when that’s been the prevailing investment theory for more than 60 years? Whenever the market starts to wobble, they’re told: “Don’t worry about it; stick with it. You’re in for the long haul.” Even billionaire Warren Buffett, the “Oracle of Omaha,” tells nervous investors not to watch the market too closely and says that buy-and-hold is still the best strategy.
It may not be. It may be an antiquated approach.
The markets have changed; we’re in a global economy. When something happens overseas — Brexit, for example, or debt or stock shifts in Greece or China — we feel it here. It may not make sense to buy and hold certain investments long term, possibly riding them as they go down. If you have stocks that appear to have run their course, why not take some of the chips off the table and pull some of the profits while you can? Sure, there are exceptions, but sometimes if you hold onto a winner too long, it can become a loser.
Many investors learned this lesson the hard way in 2008 and 2009.
People have come to our firm who used the buy-and-hold strategy then and thought they were safe. They experienced 30%, 40%, or even 50% losses during those years.
A Different Way of Approaching Investing
We talk to them about potentially taking a more active approach with tactical asset management.
Tactical asset management strategy is 100% math-based. It uses short-term and long-term averages to monitor the market, and when the two averages cross over, it’s a signal to become either defensive or bullish. Money managers use technical analysis to move to the sidelines into cash when the market statistical indicators look bleak and to buy back in when their market indicators improve.
Timing the market is never a sure thing, and investors who try to do it blindly can get burned if they let their emotions rule their decisions. However tactical asset management takes the emotional side out the market and focuses on the technical and fundamental aspects instead. That analytical approach can potentially eliminate riding a bull market too long.
Get the Help You Need to Actively Monitor Your Portfolio
So many people get caught up in life and forget about their investment accounts. The years fly by, and they remain passive about their investments until retirement closes in. (Although many don’t lessen the risk even then – you see Baby Boomers who still have almost everything in a bunch of stocks and mutual funds that carry risk.)
Find someone who will help watch your money with you. Look for a financial adviser who is held to a fiduciary standard, who is legally and ethically bound to put your interests first.
Don’t put it off any longer. This bull market may be running on wobbly legs, and hope isn’t going to prop it up.
With current advances in medical technology, Americans today are living longer than ever before. A retiree now has more time than they ever have expected to enjoy their post-career life — and more concerns that the nest egg they saved to fund it won’t last. In this episode, Goldstone Financial Group’s principal advisors, Anthony and Michael Pellegrino, sit down to discuss these fears and offer a few insights into how savvy professionals can leverage their assets to prepare for retirement.
The Pellegrinos begin the segment by outlining a few realities of personal finance today. Pensions, Anthony notes, have more or less fallen by the wayside. As employers step back, individuals need to take over the responsibility of ensuring that they have a steady income for the next twenty, thirty, or even forty years of their lives. Their spending, too, needs to be carefully considered — if retirees blow through too much of their savings too soon, they risk running out of the funds they need to pay their bills. If they spend too little, on the other hand, they may deprive themselves of a lifestyle they could have afforded.
As the pair explains, each individual has a different set of financial circumstances and goals. Some might be more risk-tolerant; others might be more risk-averse — and these preferences will play into the tailored financial plans that wealth managers create for their clients. However, Anthony Pellegrino stresses that regardless of a person’s financial nuances, every portfolio must be diversified beyond the typical set of stocks, bonds, and mutual funds. The careful diversification, he explains, will help mitigate some of the investment risks that some clients might otherwise face.
When the conversation turns to risk minimization, Michael Pellegrino takes the time to explain Goldstone Financial Group’s approach to what the principals refer to as Tactical Asset Management. Most people, Michael explains, are familiar with the “buy and hold” approach — that is, buying assets to hold through good and bad times alike. A TAM strategy is somewhat different: trained money managers use algorithms and their own experience to assess downturn risks, then adjust their investment strategy accordingly. If the risk is high, they can shift into a more defensive position – or change a client’s assets into cash to protect against severe fluctuations in the market.
Tactical asset management, Michael stresses, is not something that clients should attempt on their own. The best course of action would be to enlist the aid of high-level institutional money managers like the one Goldstone Financial Group employs to care for client accounts. These trained professionals work behind the scenes to track market movements and implement carefully-considered investment strategies on a client’s behalf.
Your retirement savings will fund your retirement, so don’t shortchange yourself. Consult a financial professional today to learn what you could be doing to achieve your long-term financial goals!
When it comes to retirement planning, the 401(k) is near-universal. The vast majority of company-employed workers funnel a small portion of their paycheck directly into their tax-deferred 401(k) each pay period. As Anthony and Michael Pellegrino explain in this installment, having this type of investment vehicle is a crucial part of an effective retirement savings strategy. The pair suggests that employees should take full advantage of their accounts by contributing as much as they can, as early as they can; after all, Michael points out, employees essentially accumulate free money if their work-sponsored plan includes an employer contribution.
What most people don’t have, however, is a strategy to handle their old 401(k) accounts. In his experience, Anthony Pellegrino says, late-career employees will often two, three, or even four old retirement accounts scattered across past employers. Most people tend to have an unfortunate “buy-and-hold” mentality when it comes to old 401(k)s and only notice them when the market dives. To make matters worse, the funds in these accounts are often subject to lots of internal fees, poor expense ratios, and sub-account fees. The better savings solution, Anthony explains, would be to roll the funds from those languishing 401(k)s into a single, more strategically-considered account.
Employees nearing retirement have even more options, Anthony points out. If a person is fifty-nine and a half or older, they have the opportunity to apply an in-service rollover or in-service distribution to old 401(k) accounts. While many people believe that they can’t access their current 401(k) during their employment term, those over the age mentioned above can roll the savings from that account into other investment vehicles and think beyond the limits of their company plan. No taxable event takes place when funds shift from a 401(k) into an IRA – so savers should take advantage!
That said, Michael Pellegrino interjects, people who haven’t reached the fifty-nine-year mark have their own set of imperatives. They need to start planning for retirement early on, contribute as much as they can, and ensure that their investment portfolio is diversified in a way that suits who they are.
To summarize: don’t neglect your old 401(k) plans, start contributing early, take advantage of employer contributions, and implement an in-service rollover when you can! If you need further advice and direction, advisors at Goldstone Financial Group can help you tailor these strategies to suit your unique needs.
In this episode, Goldstone Financial Group representatives took to Chicago’s streets to ask residents about their most pressing financial questions.
Anthony and Michael Pellegrino provide answers.
Are mutual funds the best place to invest my money?
Mutual funds can be a great vehicle for investment, but they certainly aren’t the only one available. Every person’s financial needs, situation, and goals are different; one person might be better suited by investing in bonds or stocks – or maybe mutual funds are preferable. Muddling through the possibilities can be difficult for anyone who hasn’t worked in the financial sector for years, so I would highly recommend making an appointment with an experienced financial advisor to understand your options.
My husband’s retiring, how will an annuity help us?
First things first – there is no single annuity. They come in a variety; fixed annuities are high-interest and tax-deferred, while variable annuities have high fees and fixed hybrids limit downside risks. Another option might be an immediate annuity, which would offer money right away, but prevent investors from having cash access. Like any other investment, its suitability varies depending on the financial needs and situations of the investor.
That said, annuities tend to get a bad rap. Michael and I generally tend not to like them, but there are a few great options out there. You need to enlist an advisor to help you make the best choice for your particular set of circumstances.
Am I better investing in ETFs?
Exchange Traded Funds (ETFs) do offer another option for investors. They came onto the investment scene in the last few years as an alternative to mutual funds. Like the latter investment type, ETFs allow investors to maintain multiple ownerships within one vehicle and thereby diversify their portfolio. ETFs also tend to have lower internal costs than mutual funds – but again, it’s best to consult a financial advisor before you settle on an investment plan.
When most people begin to plan for retirement, their goals are usually simple. They want to put aside enough money to live the lifestyle they want and have a little left to pass onto their beneficiaries. They imagine that by saving and investing, they are already well on the path to a successful retirement – but in some cases, covering the basics won’t be enough to secure financial stability later in life.
Too often, people overlook small but crucial details. They might have a substantial savings account and a few investments, but they haven’t realized just how much of their retirement fund they lose to fees each year.
As Anthony and Michael Pellegrino point out in this episode, seemingly small costs can add up quickly. Mutual funds, for example, are positively riddled with small financial demands that run the gamut form 12B-1 costs to sub-account fees and trading expenses. All told, these administrative expenses can claim two percent or more of a person’s investment earnings for the year. To make matters worse, these costs are applied internally, so the client might never realize how much those fees carve out of their profits!
As an institutional fiduciary, Goldstone Financial Group can lessen the impact of administrative costs by bundling them into a single wrap cost – a fee which takes care of advisory costs, covers third-party money manager expenses, and allows for unlimited trading. By packing the fees into one institutionally-managed bundle, Michael explains, Goldstone advisors can lower administrative costs overall by shifting clients out of retail investment and into a more cost-effective institutional setting.
However, avoiding hidden fees is only half of the battle when it comes to savvy investment. Knowing who is managing your money and what their qualifications are, Anthony stresses, is just as crucial to your financial health. While the vast majority of client-facing financial professionals call themselves “advisors,” only registered fiduciaries are legally obligated to put their client’s best investment interests above their own.
Brokers, Anthony goes on to explain, are trying to sell a product. When they convince their clients to invest, they earn a commission. The nature of their occupation incentivizes them to sell more, even when the investment might not be in the client’s best interests.
All of Goldstone’s advisors are registered fiduciaries; as such, they have a legal and moral responsibility to put their clients’ financial interests above their own. Regardless of whether clients choose to sign on with Goldstone or another investment firm, however, Anthony and Michael believe it to be critical that they sift through hidden fees early and find a registered fiduciary to help them plan for retirement. Otherwise, clients run the risk of losing significant portions of their retirement savings to unnecessarily high fees and unscrupulous “advisors.”
The American Society of Civil Engineers has given the U.S. an overall infrastructure grade of D+. Throughout the next decade, it will take more than $4.5 trillion to fix our aging infrastructure — including upgrades to roads, mass transit, wastewater treatment plants and the electrical grid.1
We’ve reached the mission-critical stage. One industry analyst observed, “We’re at the point where our infrastructure is becoming an impediment to productivity and long-term economic growth.”2
The idea of national infrastructure may remind us of personal retirement preparation. If you are still working and thinking about retirement options, consider your own “infrastructure” situation. First, are you considering relocating or downsizing, or are you committed to aging in your own home? If you prefer the latter, it’s a good idea to check out your home from top to bottom to see whether you need any major repairs or maintenance while you’re still earning a paycheck.
This inspection should include considering a new roof, checking for mold buildup in your crawl space and researching new windows or other energy-efficient features that can help lower your utility bills. Even replacing older appliances could impact your household budget once you’re living on a fixed income.
Given our dramatic weather pattern swings, we should also prepare for the possibility of a natural disaster that could affect our daily living. Consider how you might plan for a long-term disruption in power or clean water supplies, such as installing a generator, solar panels, tiles and/or a battery pack. While it may seem farfetched, remember that the citizens of Puerto Rico probably never thought they would have to adapt for long-term power outages, as seen after Hurricane Maria.3
One way the U.S. is trying to address some of these issues is by incorporating green stormwater infrastructure (GSI) in sewer overflow control and integrated wet-weather plans. The idea is to evaluate the performance of GSI systems for future development.4
With all the discussion about funding at the federal level, one little-known fact is how much infrastructure is controlled at the local level. In fact, 40 percent of the nation’s bridges and 46 percent of all public roads are owned and maintained by counties. Furthermore, counties help fund one-third of the nation’s airports and 78 percent of public transportation programs.5
The news isn’t all bad. According to the World Economic Forum, the U.S. international ranking for overall infrastructure quality improved from 25th to 12th place last year out of 138 countries. However, when it comes to specific categories, we show mixed results — the U.S. ranks second in road infrastructure spending but ranks 60th for road safety. The U.S. also lags behind other developed countries when it comes to infrastructure resilience and future sustainability.6
Content prepared by Kara Stefan Communications.
1 Merrill Lynch. 2018. “Getting a Bigger Bang for the Infrastructure Buck.” https://www.ml.com/articles/getting-a-bigger-bang-from-the-infrastructure-buck.html#financial-research-and-insights. Accessed April 20, 2018.
3 Camilla Domonoske. NPR. April 18, 2018. “Puerto Rico Loses Power — Again.” https://www.npr.org/sections/thetwo-way/2018/04/18/603569966/puerto-rico-loses-power-again. Accessed April 20, 2018.
4 Water Environment Federation. April 4, 2018. “Data analyses confirm GSI value in overflow control.” http://stormwater.wef.org/2018/04/data-analyses-confirm-gsi-value-overflow-control/. Accessed April 20, 2018.
5 Mary Scott Nabers. Infrastructure USA. April 9, 2018. “County government — a critical component of America’s greatness.” https://www.infrastructureusa.org/county-government-a-critical-component-of-americas-greatness/. Accessed April 20, 2018.
6 Hiba Baroud. PBS News Hour. Feb. 18, 2018. “Measuring up U.S. infrastructure against other countries.” https://www.pbs.org/newshour/nation/measuring-up-u-s-infrastructure-against-other-countries. Accessed April 20, 2018.
We are an independent firm helping individuals create retirement strategies using a variety of insurance products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic retirement income strategies and should not be construed as financial advice.
The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.
Choosing a retirement plan can be one of the most important decisions you make as you map out your financial future. Especially now, when Social Security again appears to be in jeopardy while defined benefit plans are already on their way out, a need for reliable options for working people is pertinent as ever. Unfortunately, too many employees put off thoughts of retirement as unfeasible or premature. Lack of planning often leads to hasty decision-making when the time comes to make vital choices about life after work.
That’s why default options are extremely useful for employers to introduce. Simply put, their implementation demonstrates a commitment to the well-being of the workforce that can pay off greatly in the long run. Lifetime Income Default Options offer their recipients a fixed rate of income during the years after retirement, with the option to opt out of the program rather than the need to opt in. Since many people underestimate how long they will live after they retire (and therefore don’t plan on having as much money), this option, helps provide a long-term safety net.
The major dilemma of retirement planning, income level vs. liquidity, is a choice not to be taken lightly. Some people may not be aware of it, but these lifetime income options offer a sort of compromise. To begin, their money is placed into a diversified fund that readjusts along with the market, so income level stays steady while their savings are accrued, then at a preset time (usually at age 48) allocations to a deferred annuity begin, with full conversion achieved about a decade later. This gradual approach helps to neutralize changes coming from interest rate adjustments, typically a driving force in annuity price changes.
The strategy assures employees that they will receive a baseline amount of income in retirement. If they choose, they can adjust their level of savings as they see fit. This saves them from getting locked into a strict amount and gives them the flexibility to spend the amount of money they feel most comfortable with.
These plans have already generated a great deal of interest that only looks to gain more momentum as the word spreads. It’s important not to let stagnation or complacency with existing, less than adequate plans get in the way of your employees’ needs. These plans offer a reliable way for your employees to retire with greater financial stability, and can encourage greater savings pre-retirement. In the end, what’s important is that people are able to use the tools at their disposal for a comfortable and prosperous retirement. A plan that offers employees flexibility while helping to provide for long-term financial safety is a win for them, and a win for you as a leader.
For many, having $1 million saved for retirement sounds like plenty, but when you break down the numbers, what once seemed like a fortune might seem like just passable or maybe even too little to maintain the lifestyle you have or fund the one you want.
Obviously, there’s no single answer for whether $1 million is enough to keep someone afloat during retirement—ostensibly, a frequent first-class jetsetter is going to need much more than that while someone opting for only simple pleasures may be satisfied with less.
If you’re a baby boomer and come out shy of the million dollar mark, know that you’re very much not alone. According to a survey from GoBankingRates, only 22% of individuals ages 55-64 and older have $300,000 or more set aside for the future and about 29% of those over 65 have nothing saved at all.
In fact, most Americans (81%) don’t actually know how much they’ll need to retire. But thanks to some general guidelines and user-friendly retirement calculators, it’s easy enough to estimate your target savings and see whether $1 million will allow you to afford the post-work life of your dreams. But how?
One rule of thumb is to plan on replacing 70-90% of your current income with savings and social security once you leave the workforce. That means if you make the American median annual household income of $55,775, then you should anticipate needing $39,042.50-$50,197.50 per year during retirement. However in an article for AARP, Dan Yu of EisnerAmper Wealth Advisors said that for the first 10 years of retirement, you are more likely to be spending 100% of your current income.
Another way of looking at it is by first calculating the bare minimum of how much you’ll need per year and then working backwards to see how much you need to save. Investopedia recommends using the 4% sustainable withdrawal rate, what they describe as “the amount you can withdraw through thick and thin and still expect your portfolio to last at least 30 years,” as a means of calculation. That means if you have $1 million saved, then your yearly budget will be around $40,000. If your retirement aspirations lean more towards golf resorts than improving your home garden, even with the additional $16,000 or so per year that you’ll receive through social security, $1 million will clearly not sustain you for long.
There’s also the added variable of your expected lifespan. While it may seem bleak to confront your own mortality, you need to calculate your yearly saving and spending with a time frame in mind. According to the CDC, the average life expectancy in the United States back in 2014 was 78.8 years old. But given that more Americans are living past 90, and a 65 year old upper middle class couple has a 43% chance that one or both partners will live a full 30 years more, you may end up stretching your savings for longer than you could have ever imagined.
Where you plan on living also has a massive impact on how far $1 million will get you. While a retiree in Sherman, Texas could lead a nice cushy life for 30 work-free years with a retirement account of just $408,116, a retiree in New York City would need more than 5 times that. SmartAsset calculated that the average retiree in NYC needs $2,250,845 in savings, allocating $47,000 per year for housing alone. Even a nest egg in Brooklyn isn’t much better—that too requires more than $1 million. Perhaps for that reason, New York City isn’t on Forbes list of best places to retire in 2017.
Even with the most careful planning, there are always going to be a few financial surprises along the way that may set you back more than a few pennies worth. Whether they’re negative like medical emergencies and subsequent health expenses or positive, like travel fare to a destination wedding, they’re still taking a bite out of your bank account that may not have been in your original budget. For this reason, it’s important to use the above guidelines and calculation tools as a rough estimate, and be on the safe side by saving more than you think you’ll need.
As the adage goes, “a life without regrets is a life not lived,” but it is also “better to regret what you have done than what you haven’t.” The three biggest regrets of retired baby boomers center on the things they have not done and teach the next generation to make more informed choices.
- Not Saving for Retirement Earlier
A rare absolute rule of finance is that people should start saving for retirement as early as possible, with the best time to start being in one’s twenties. Life expectancies are growing and show no signs of slowing down, so more money is needed to be stretched out for a longer period of time. Starting to save and invest as soon as one enters the full-time workforce can make a dramatic difference in the amount of money that accumulates by the time a person is ready to retire.
Many baby boomers failed to start saving on time and properly because they did not understand just how much money would be needed for their retirement. Some also did not know that receiving social security benefits or taking money out of retirement accounts before it is needed can have tax consequences that can substantially lower savings. Finally, many people tend to forget to adjust for inflation when considering whether they are satisfied with the rate of return on their investments.
- Not Working Less and Traveling More
A study of 2,000 baby boomers commissioned by British Airways revealed that one out of five boomers regrets not doing more traveling around the world. The survey data also indicate that only 9% of American workers get more than nine vacations days per year and that only 37% of Americans took all of their vacation days in 2015, suggesting that working too much may be an issue whose scope extends far beyond just the baby boomer generation.
A 10-year research project conducted by Karl Pillemer, Professor of Human Development at Cornell University, into the lives of 1,200 people aged 65 and older also revealed that lack of travel during one’s youth is a common regret. He writes, “To sum up what I learned in a sentence: When your traveling days are over, you will wish you had taken one more trip.”
- Not Working More
It might sound surprising given the decades of work they’ve done, but more than two-thirds of middle-income baby boomer retirees wish they had worked longer, and not for expected reasons. One might assume that people would want to continue working to keep earning their salaries, but for many baby boomers, wanting to keep working is about the work. People who are passionate about their careers and enjoy their work want to keep doing it. For this reason, many baby boomers return to the workforce on a part-time basis or as consultants. A number of baby boomers also enjoy working during their later years because they find that it keeps them mentally sharp, physically fit, and gives them a sense of purpose.
According to the Investment Company Institute, 401K plan assets reached $4.8 trillion dollars at the end of the first quarter in 2016. That’s nearly 20% of total retirement assets in America (which was at $24.1 trillion).
For 401K plan holders heading into retirement, changing jobs, or leaving a company, a big question looms: what should be done with this type of retirement savings account? Essentially, investors have to choose whether or not to roll the money over into a new account.
Options for rolling the 401K over include putting the cash into a self-directed IRA or transferring it to a new employer’s 401K plan. If workers decide against a rollover, the other options are to leave the account alone or cash out. Before making a decision, investors should look at the pros and cons and choose based on their unique situation.
Rollover Options and Advantages
There are significant advantages to rolling the 401K over to a new employer’s plan or IRA. Most investment professionals advise choosing an IRA, but it’s important for workers to also examine the quality of the new company’s 401K plan (if going to another job).
Pros of the Rollover into a Traditional IRA
Dr. Don Taylor, a retirement advisor and contributor at Bankrate, says that the rollover to a traditional individual retirement account from a former company’s 401K plan can provide “wider investment choices and potentially reduced annual fees and other expenses.” This flexibility makes the IRA an attractive selection, as investors can choose among mutual funds, stocks, bonds, and exchange-traded funds.
Like with a traditional 401K employer plan, money can continue to grow tax-deferred in a traditional IRA. That way, investors won’t have to worry about capital gains and dividend taxes each year.
This also allows workers to shop for plans with lower fees, and, if desired, select an IRA with more access to investing tools and management guidance. The IRA can also be withdrawn without penalty for specific purposes, like college tuition or a first-time home purchase (up to $10,000).
Pros of the Rollover into a Roth IRA
Unlike traditional IRAs, Roth IRA contributions are made after income is taxed—with the benefit that earnings are not taxed when withdrawn later. Because contributions are made after income taxation, investors have the ability to withdraw those contributions (not earnings) from the account without fees.
The Roth IRA does not have minimum required distributions after reaching age 70½, unlike 401Ks and Traditional IRAs. This makes it a potentially lucrative investment vehicle into old age and a good option for those looking to set up future generations.
Since the Roth IRA rollover requires a tax payment before transfer, Dr. Don Taylor attests that a Roth IRA rollover makes sense only if investors can come up with the tax fees from a source other than the 401K funds and “expect to be in a lower tax bracket now than when (they) start tapping retirement funds.” This makes paying the taxes now financially beneficial in the long run.
Pros of the Rollover into the New Employer’s 401K Plan
Most employers offer new employees the chance to roll over their old company’s plan. Getting all retirement plans into one place can make saving much more convenient and cheaper.
Investors should compare fees between the two company’s plans, and only roll over their old 401K’s cash if the new employer’s plan has lower fees and/or better investment options. The new company’s plan may even have lower fees than IRA accounts do.
For those that do choose to transfer to the new company’s fund, understand those earnings will continue to grow tax-deferred, and while those funds can be withdrawn after 59½ years old without penalty, workers may have the option to delay required minimum distributions (RMDs) beyond 70½ years old (if still employed at that company).
Traditional benefits of the old 401K still apply at the new company too. Investors are given more protection under federal law, as 401K assets are better protected from claims from creditors than IRA assets are. Many 401K plans provide investors the benefit of being able to borrow against the plan as well.
Options for Those Choosing Against the Rollover
While rolling the account over is traditionally the best choice, everyone’s personal situation is different. In some circumstances, one of the following two options may be the most ideal—or necessary—choice.
Leave the 401K Alone
The first and most common choice is simply to leave the 401K account with the old employer and let earnings continue to rise tax-free. For investors that like their current plan, aren’t paying a lot in fees, and are happy with its performance, this may be the best—and easiest—choice. Prior to doing this, do compare fee charges with other fund options, like the new business’ 401K plan and traditional and Roth IRAs.
In addition to having the benefits mentioned above for 401K plans, there is also a specific benefit for not touching the 401K. For those that leave their employer between the ages of 55 and 59½, they can enjoy penalty-free withdrawals before reaching 59½ (the typical starting withdrawal age).
Before doing this, ex-employees should check to see if their employers allow the money to stay in their old account. Most companies require at least a balance of $5,000
A final choice is the cashout. Most investors don’t suggest this route, as paying taxes on the withdrawal alone could easily cut into 35% of the total amount (depending on the tax bracket). A withdrawal penalty of 10% would also be assessed if younger than 59½.
Additionally, savings would no longer grow tax-deferred, which means investors robbing their future selves. For example, take the case of a worker making $75,000 per year who has a traditional 401K with $50,000 in assets. This worker decides to withdraw it all after quitting the company. In this case, 25% of that amount would be taxed and a 10% penalty would be implemented, leaving the worker with 35% less, or just $32,500. If this money was simply just left in the 401K and continued to grow at a decent rate for one or two decades, this easily turns into a six-figure mistake.
The cash-out option is mostly seen as a last resort for those experiencing a legit financial emergency and can’t access cash from other sources, such as lenders, savings accounts, and family. Only do it if absolutely necessary. Nearly every time, borrowing from other sources makes more financial sense than cashing out retirement savings.
Making the Best Decision with the 401K
While the traditional IRA is commonly seen as the best rollover option for 401K plans with an old employer, everyone’s personal situation is different. Ideally, workers should always research and choose retirement savings plans with low fees and high returns. They should make choices that set them up for long-term financial success.
Thus, it’s advised to also analyze the financial advantages and disadvantages of rolling over to the Roth IRA, transferring to another company’s 401K plan, and leaving the money with the old 401K. Once workers have a clear picture of what makes the most financial sense, they can go through with the decision—and watch their nest egg grow to its highest potential.
A majority of America’s small business owners are not saving for retirement. Many know they should, but feel that saving will hurt their business. According to David Deeds, Schulze Professor of Entrepreneurship at the University of St. Thomas in Minneapolis, small business owners do not save because they consider the business their retirement plan. “The plan is that when they retire, they are either going to transfer the business to a family member in exchange for a share of future wealth or a buyout or they are going to sell it off and turn that into cash.”
However, many circumstances may prevent the sale of a small business. Even if the business can be sold, the sale may not provide enough income to cover one’s entire retirement. Entrepreneurs may also have to retire earlier than they expected due to health problems or other unforeseen events.
Having a well-rounded retirement plan can help protect entrepreneurs against these and other risks. Here are five things small business owners need to know to plan their retirement effectively.
First, know the numbers. Small business owners should calculate how much money they will need to live on in retirement. Factors such as where they want to live (a pricier home or a modest apartment), how they want to spend their time (traveling or working part-time), and healthcare costs play an important role in this assessment.
Once they have an idea of how much they will need, entrepreneurs should get a valuation of their business to see if its sale or transfer is a viable retirement option. As part of their valuation, small business owners should consider whether the business can operate without their involvement. If it cannot, it may be difficult to sell or generate income from it once the business owner retires.
Next, determine a goal. This might seem elementary, but the power of having a firm vision for the future of a small business and retirement cannot be overstated. Entrepreneurs who set firm goals take steps to make sure their goals are met. This helps them find the best tools to save and also prepares them to wind down the business when it is actually time to retire.
Know the best tools. Business owners do not need to move significant amounts of money from their business in order to start saving for retirement. Investing just a little bit can help entrepreneurs save on their present-day taxes until they make withdrawals in retirement. There are four main instruments to choose from.
SEP-IRA: Like a traditional IRA, this retirement plan is tax-deductible. For returns filed this year, small business owners can contribute up to 25% of their income or $54,000. A SEP-IRA is a great retirement plan for sole proprietors because it is self-directed, but the 401(k) described below offers similar benefits but may be more cost effective due to lower administration fees.
Simple IRA: This plan is designed for entrepreneurs who employ 100 or fewer employees. Like for a 401(k), contributions are taken directly from employee paychecks and are pre-tax. Contributions cannot exceed $12,500 in 2017, but employees who are 50 or older may contribute up to $15,500.
Solo 401(k): This plan is for sole proprietors but may include the proprietor’s spouse. Proprietors may contribute up to 25% of their salary plus up to $18,000 ($24,000 for people aged 50 or older), but the total contribution may not exceed $54,000. A spouse who works in the business may also contribute the same amounts.
Simple 401(k): Small businesses with 100 or fewer employees may utilize this plan. Owners and employees have the option to contribute up to $12,500 this year, or $15,500 for people aged 50 and older. This plan also allows for borrowing against it and making penalty-free withdrawals to cover financial hardship.
A sole proprietorship, a partnership, limited liability company, or corporate can qualify for every plan except the SEP-IRA.
Keep investments simple. Most small business owners should probably invest in a globally diverse collection of low-cost index funds. An index fund invests broadly across entire markets like the U.S. stock market, U.S. bond market, and developed foreign stock markets.
Another option for simple investment is a target-date fund, which automatically adjusts the balance of fixed-income investments based on age and the selected date.
Diversify all investments. Diversification does not apply only to the retirement plans described above but to any asset a small business owner may choose to invest in. Getting all of one’s savings or investments caught in one basket can be risky.
This is especially true of home ownership. The real estate market is cyclical, so it can yield high returns or unexpectedly big losses. Small business owners who place most of their net worth in their home are cautioned to spread their wealth around.
Put it all together. With their numbers as their foundation and their goals in mind, small business owners have terrific opportunities to save for retirement. By utilizing the tools we describe to invest in a diverse portfolio, more small business owners can effectively build their wealth without hurting their present-day business growth.
The holidays are a time for festivity and joy. Families who gather want to catch up and spend quality time together, talking about work, kids, favorite TV shows, and so on.
It might sound surprising then, but the holidays are also a great time to have some important financial conversations with your family members, especially if you live far away from one another and are spread out during the year. While the topic of whether you’re planning to see this season’s latest Star Wars movie might be more appealing in the short run, taking time to map out your family’s financial future will help you better enjoy many more holidays to come.
Here are six topics to discuss that can leave everyone in your family feeling better prepared for the future.
- Where do you keep important documents?
This is a straightforward topic from which the rest of your conversations can spring. Knowing where important documents are kept can help keep you organized and on-task in the event of a future emergency.
Important documents can include wills, documents estate plans such as trusts, life insurance policies, living wills, power-of-attorney, and so on.
Also, consider discussing computer passwords if they will be required to access some of this necessary information.
- Do you have a properly executed will?
A properly executed will means that it was written when the testator (the person making the will) had the proper mental capacity and that he or she signed it in the presence of two witnesses who also signed it. A will allows a testator to direct how his or her assets will be divided after death. Alternatively, if someone dies without leaving a properly executed will (intestate), that person’s assets will be divided according to the laws of the state in which the person lived, which may significantly differ from the decedent’s intentions.
- Is your life insurance up-to-date?
Life insurance can help families cover out-of-pocket costs for end-of-life care and funeral expenses. But life insurance policies differ from one another. A key consideration is whether your family member has a term or whole life policy. Just like it sounds, a whole life policy lasts for the entire life of the insured, whereas a term policy lasts for only the limited duration of time specified in the policy. Make sure that a term policy is still in effect.
Additionally, regardless of which policy your family member may have, consider whether the beneficiary is up-to-date. Perhaps your family member initially named another relative as a beneficiary who is no longer alive, or with whom the relationship has changed.
- What would you want done if you suffered a medical emergency?
This may be the most difficult topic for people to address, so sensitivity is important when discussing medical emergencies or end-of-life questions. To help frame the conversation, make it a discussion about the oldest generation’s wishes for the future instead of a morbid dialogue about the end of life.
Consider working with older family members to establish advance directives so that hospitals and doctors will be cognizant of their wishes. These include a living will, designation of a proxy with durable power-of-attorney, or a medical directive arrived at with a physician. Issues to consider when making these decisions include the choice between prolonging life or improving the quality of life over a shorter time span, providing care or withdrawing it, activating life support or not, and so on.
However, these discussions may not always be appropriate. According to April Masini, an etiquette and relationship expert, it is sometimes best to steer clear of these conversations altogether. She says that, “If someone in the family has a terminal illness or is the partner of someone with a terminal illness, it’s inappropriate to discuss wills, estate plans and anything that has to do with death and money. The topic is too raw and should be conducted very privately and with specific sensitivity.”
- What are your funeral wishes?
Knowing your family members’ funeral wishes can help you create a financial plan to cover the expenses, as funerals are pricey. Knowing them in advance can also help you shop around ahead of time, instead of being forced to pay more when you’re grieving and time is of the essence once a family member has passed. Of course, even more importantly, discussing funeral wishes in advance will help you say goodbye to your family member with respect and dignity while honoring his or her wishes.
Reports claim that 10,000 Baby Boomers are retiring every day. But many of them are retiring into a standard of life that is significantly less ideal than they imagined. You don’t want that for you.
Don’t worry. If you’re smart, retirement will be a breeze. It just boils down to asking the right questions.
Those questions are:
- Can you afford it?
- Where should you retire?
- How do you maximize social security benefits?
One of the biggest fears people have about retirement is that they’ll retire broke. The problem with this way of thinking is that retirement isn’t an event. Rather, it’s a process that starts even before you reach your prime working years.
Unfortunately, more than half of Americans go into retirement broke, with nothing to show for the 35+ years they’ve been working. According to a GoBankingRates research, there is a significant chunk of the population that has less than $10,000 saved for retirement. Worse, many don’t have any savings at all.
A survey by Bank of America Merrill Lynch revealed that about 81% of Americans don’t even know how much they need to save for retirement.
Below are 3 questions to help you be more proactive in how you handle the retirement process.
1. “Can you afford it?”
The current economic environment has led to a rise in the number of people who are ready to retire but can’t. The common phenomenon is a hybrid; people are in retirement but they’re still working.
So, how much money do you need to avoid this situation?
To be able to answer that question, it boils down to one simple idea: your expenses need to be less than your income. There’s more to it, but that’s the basis.
Being retired means living on a fixed income without a possibility of salary increment. Also, your expenses won’t always be fixed: healthcare goes up, taxes fluctuate, and things cost more in general over time. There are assumptions you’ll need to make when saving up.
As a guideline, many financial planners advise you to start saving up to 15% of your income while you’re still in your 20s. If you want to know the exact amount, professionals estimate that you should have at least 10 times your last full-year income by retirement. Thus, if you make $100,000 in your last year of work, you’ll need at least $1,000,000. Use this online calculator to estimate how much you need.
2. “Where should you retire?”
Another thing most people overlook is the impact where they live has on their income. For instance, did you know that 13 states tax Social Security benefits while 37 don’t? Of the 13, 9 exempt tax up to a certain limit. The remaining 4 (Minnesota, Vermont, North Dakota and West Virginia) tax your benefits, no exemption.
Also, different states have different laws regarding estate and inheritance taxes. Some states have estate tax while others have inheritance tax. Yet, New Jersey and Maryland have both taxes.
You may also want to understand the different property tax rates across states. This will be crucial in helping you understand how you spend your money once you retire.
Bottom line: Understand the tax implications of your retirement state or city to save yourself from unnecessary surprises.
3. “Do you know how to maximize your Social Security benefits?”
A MassMutual quiz aimed at testing how much Americans know about the Social Security retirement benefits asked over 1,500 adults 10 basic Social Security questions and only one answered all correctly. Only 28% got seven or more questions right––this was the passing grade.
Will you be part of the many that retire without understanding how they can maximize their Social Security Benefits?
Although Social Security is designed to cover the disabled and survivors of deceased workers, is primary purpose is to assist retired workers with their monthly expenses and without it, most retirees would probably be in big trouble. According to a Gallup report, more than half of the retirees says Social Security is a major source of income.
While the Social Security benefits at Full Retirement Age (FRA) are capped at $2,687 a month in 2017, there are a number of ways that a retiree could use Social Security to boost benefits.
For instance, there’s a “Social Security secret” you can use to get an additional $15,978 each year. Retirees can influence the amount they are paid in Social Security by choosing when (what age) to claim their benefits. At FRA, a retiree is entitled to 100% of their benefits. Retiring before reaching the FRA reduces the monthly benefit. However, holding off filing for the benefits by a year increases your benefit by about 8%. This method works so well that 23% of retirees regret not waiting longer before filing.
Depending on how “lavish” you plan your retirement being, you might need a little more or less money. When in doubt, always opt for the higher amount. You never want to be surprised by post-retirement costs, and you always want to be ready.
If you’re worried about money for retirement, you’re not alone. 64% of Americans say they are moderately or very worried about having enough money in retirement. In fact, they’re more worried about retirement than yearly medical bills.
What’s the best way to prepare for retirement? Spending more time thinking about your portfolio. After all, you want to get the most out of your retirement investments.
Two products you may decide between are fixed annuities and bonds. Let’s take a look at which is better.
What are fixed annuities and bonds?
Usually purchased from life insurance companies, fixed annuities are insurance products that provide owners with lifetime income. Life insurance companies provide a fixed interest rate in exchange for a lump sum of capital.
Bonds, which are purchased from municipalities, governments, or corporations, are debt securities in which a fixed rate of interest is paid to the lender throughout the life of the loan. You are paid the principal back when the loan matures, or is due.
While fixed annuities and bonds have their similarities, they are some key differences when it comes to taxes, fees, risk, and liquidity. Let’s dig deeper.
With fixed annuities, not only is there no annual contribution limit (like with IRAs), you also can defer taxes. This makes them very useful to someone approaching retirement or with a large chunk of cash. When you begin to withdraw the money throughout retirement, you only pay taxes on earnings.
With bonds, you can actually make tax-free income. Certain types of municipal bonds are tax-exempt, meaning you don’t have to pay federal taxes on interest income you make. This makes bonds highly attractive to certain investors, especially those with high incomes and/or savings, provided the interest income is actually competitive (often, bond interest is very low).
From a tax standpoint, bonds sometimes offer you the chance to make more tax-free income, but overall earnings aren’t necessarily higher. That’s why it’s important to look at the rates being offered before making the investment. Make proper calculations and get the help of a certified financial advisor to choose the plan that can deliver you the best overall growth.
Though fixed annuities typically come with lower fees (less than 1%) than variable annuities, fees for annuities are still high. Sometimes insurance brokers aren’t entirely transparent about exactly how much you’re paying in fees, either.
There has been progress made to reduce fees, but the cost of owning an annuity is precisely the reason why it’s not as popular as before. It’s worth mentioning that the earnings annuities bring investors, especially in a high-interest rate environment, are more than enough to offset the fees. In some cases, they can be a much better investment vehicles than bonds.
Bonds, which are still praised for their higher yields, are also popular for their lower fees and commissions. This may seem like bonds are a no-brainer, but keep in mind your situation, as lifetime income does offer tremendous peace of mind. Also, think about risk.
Risk and Security
Fixed annuities can be set up for payouts over a lifetime, while bonds are paid in full at maturity. Considering that Americans are now living longer thanks to medical advancements and healthier habits, this makes annuities attractive, as many want the security of knowing their accounts are generating income regardless of how long they live. After all, 43% of Americans fear outliving their investments; fixed annuities are a viable solution.
Another positive development in the annuity world is the income rider. Lifetime annuity income riders provide investors with a guaranteed income account rate, typically around a minimum of 6–7% and sometimes higher. This can potentially allow your annual income to increase, as previous annuities only offered a “flat payout” and may not have actually kept up with inflation.
A fixed annuity does appear to remove market risk from your investment, but remember that payouts can be much lower than bonds, especially for products that have high fees and no inflation protection. In some annuities, If you die early you don’t get the full value of the annuity, and your surviving spouse or children might not be entitled to anything (unless you get a joint life annuity). Private annuity contracts also aren’t guaranteed by a federal agency, so there is a company failure risk as well.
When it comes to risk and security, bonds are seen as a way to preserve capital and earn a predictable rate of return. During any financial crisis, investors from all over the world buy U.S. Treasury Bonds, which are seen as a safe haven during tough times.
In this sense, there doesn’t appear to be much risk, but keep in mind the following:
- Bonds have maturity dates, and you’re at the mercy of whatever rates the “new bonds” are offering when the loan matures. These rates could be negative.
- Bond yields can vary tremendously if you don’t choose governments and corporations with high credit ratings. Always look at credit ratings.
- Municipal bonds do come with a default risk. For example, debt levels in Illinois should make bond investors cautious as to whether the state can fulfill its obligation.
To manage such risk, retirees can invest in short-term bonds for a much more predictable stream of income. Another good idea to avoid risk is to steer clear of bond funds, which can expose you to some bad investments.
Target date funds may also deliver low or negative growth if you’re nearing retirement, and the bond market isn’t good. For instance, due to rising interest rates, there was a bond market pullback in early 2017, which undoubtedly affected those with 2020 target date funds.
Based on your age and timeline for needing retirement money, liquidity may be a factor. Most annuities have a surrender term, usually spanning anywhere from 3–10 years. Many annuities enable you to access 10% of your investment per year, which is arguably more than you’ll need during retirement if you’ve planned well. But if you must access all of it, you will pay a surrender penalty.
Most experts recommend that you wait until maturity to access your bond investment. Early withdrawal puts you at the risk of the bond price rising or falling, and this may not be favorable to you. You could sell the bond at a discount and receive less than the principal. Holding the bond until maturity ensures you get your money back.
It’s all about balance and diversity
You’ve heard the proverb: Don’t put all your eggs in one basket. It’s especially true with retirement savings. Both annuities and bonds have their pros and cons. The best solution is to diversify and spread your assets into both annuities and bonds, as well as other investment and insurance products (like a Roth IRA and health savings account).
Whatever investments you choose, make sure your portfolio aligns with your comfort level for risk and your goals for retirement. This will help you find a balance that gives you peace of mind during your working years and financial security in retirement.