Category Archives: Retirement

Once you sell out, when do you get back in?

I recently heard about a 62-year-old who was scared out of the market following the dot.com crash in 2000.  For the last 17 years his money has been in cash and CDs, earning a fraction of one percent.  Now, with the market reaching record highs, he wants to know if this is the right time to get back in.  Should he invest now or is it too late?

Here is what one advisor told him:

My first piece of advice to you is to fundamentally think about investing differently. Right now, it appears to me that you think of investing in terms of what you experience over a short period of time, say a few years. But investing is not about what returns we can generate in one, three, or even 10 years. It’s about what results we generate over 20+ years. What happens to your money within that 20-year period is sometimes exalting and sometimes downright scary. But frankly, that’s what investing is.

Real investing is about the long term, anything else is speculating.   If we constantly try to buy when the market is going up and going to cash when it goes down we playing a loser’s game.  It’s the classic mistake that people make.  It’s the reason that the average investor in a mutual fund does not get the same return as the fund does.   It leads to buying high and selling low.  No one can time the market consistently.  The only way to win is to stay the course.

But staying the course is psychologically difficult.  Emotions take over when we see our investments decline in value.  To avoid having our emotions control our actions we need a well-thought-out plan.   Knowing from the start that we can’t predict the short-term future, we need to know how much risk we are willing to take and stick to it.  Amateur investors generally lack the tools to do this properly.  This is where the real value is in working with a professional investment manager.

The most successful investors, in my view, are the ones who determine to establish a long-term plan and stick to it, through good times and bad. That means enduring down cycles like the dot com bust and the 2008 financial crisis, where you can sometimes see your portfolio decline.  But, it also means being invested during the recoveries, which have occurred in every instance! It means participating in the over 250%+ gains the S&P 500 has experience since the end of the financial crisis in March 2009.  

The answer to the question raised by the person who has been in cash since 2000 is to meet with a Registered Investment Advisor (RIA).  This is a fiduciary who is obligated to will evaluate his situation, his needs, his goals and his risk tolerance.  And RIA is someone who can prepare a financial plan that the client can agree to; one that he can follow into retirement and beyond.  By taking this step the investor will remove his emotions, fears and gut instincts from interfering with his financial future.

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What Makes Women’s Planning Needs Different?

While both men and women face challenges when it comes to planning for retirement, women often face greater obstacles.

Women, on average, live longer than men.  However, women’s average earnings are lower than men, according to a recent article in “Investment News,”  in part because of time taken off to raise children.  What this means is that on average, women tend to receive 42% less retirement income from Social Security and savings than men.

The combination of longer lives and lower expected retirement income means that women have a greater need for creative financial advice and planning.  The problem is finding the right advisor, one who understands the special needs and challenges women face.

A majority of women who participated in a recent study said they prefer a financial advisor who coordinates services with their other service professionals, such as accountants and attorneys.  They want explanations and guidance on employee benefits and social security claiming strategies.  They want advisors who take time to educate them on their options and why certain ones make more sense.  Yet many advisors do not offer these services.

Men tend to focus on investment returns and talk about beating an index.  Women tend to focus more on quality of life issues and experiences, on children and grandchildren, on meeting their goals without taking undue risk.

If your financial advisor doesn’t understand you and what’s important to you, it’s time you look for someone who does.

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The Fate of Social Security for Younger Workers – And Three Things You Should Do Right Now

We constantly hear people wonder whether Social Security will still be there when they retire.  The question comes not just from people in their 20’s, but also from people in their 40’s and 50’s as they begin to think more about retirement.  It’s a fair question.

Some estimates show that the Social Security Trust Fund will run out of money by 2034.  Medicare is in even worse shape, projected to run out of money by 2029.  That’s not all that far down the road.

So how do we plan for this?

The reality is that Social Security and Medicare benefits have been paid out of the U.S. Treasury’s “general fund” for decades.  The taxes collected for Social Security and Medicare all go into the general fund.  The idea that there is a special, separate fund for those programs is accounting fiction.  What is true is that the taxes collected for Social Security and Medicare are less than the amount being paid out.

What this inevitably means is that at some point the government may be forced to choose between increasing taxes for Social Security and Medicaid, reducing or altering benefits payments, or going broke.

Another question is whether the benefits provided to retirees under these programs will cover the cost living.  Older people spend much more on medical expenses than the young, and medical costs are increasing much faster than the cost of living adjustments in Social Security payments.  If a larger percentage of a retiree’s income from Social Security is spent on medical expenses, they will obviously have to make cuts in other expenses – be they food, clothing, or shelter – negatively impacting the lifestyle they envisioned for retirement.

The wise response to these issues is to save as much of your own money for retirement as possible while you are working.  There is little you can do about Social Security or Medicare benefits – outside of voting or running for public office – but you are in control over the amount you save and how you invest those savings.

As we face an uncertain future, we advocate that you take these three steps:

  1. Increase your savings rate.
  2. Prepare a retirement plan.
  3. Invest your retirement assets wisely.

If you need help with these steps, give us a call.  It’s what we do.

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Three Ways to Stay Financially Healthy Well into Your 90s

Image result for living to old age picture

According to government statistics, the average 65-year-old American is reasonably expected to live another 19 years.  However, that’s just an average.  The Social Security administration estimates that about 25% of those 65-year-olds will live past their 90th birthday.  We were reminded of these statistics when we recently received the unfortunate notice that a long-time client had passed away.  He and his wife were both in their 90s and living independently.

People often guesstimate their own life expectancy based on the age that their parents passed.  Genetics obviously has a bearing on longevity.  Modern medicine has also become a big factor in how long we can expect to live.  Diseases that were considered fatal 50 years ago are treatable or curable today.  For many people facing retirement and the end of a paycheck, the thought of someday running out of money is their biggest fear.  And there is no question that living longer increases the risk to your financial well-being.

The elderly typically incur costs that the young do not.  As we get older, visits to the doctor – or the hospital – become more frequent.  There’s also the onset of dementia or Alzheimer’s that so many suffer from.  And, as our bodies and minds age, we may not be able to continue living independently and may have to move to a long-term care facility.

As we approach retirement, we should face these issues squarely.  Too many people refuse to face these possibilities, and instead just hope things will work out.  As a wise man once said, hope is not a plan.

So here is a three step plan to help you remain financially healthy even if you live to be 100:

  1. Create a formal retirement plan. Most Financial Planners will prepare a comprehensive retirement plan for you for a modest fee.  We recommend that you choose to work with an independent Registered Investment Advisor who is also a Certified Financial Planner™ (CFP®).  Registered Investment Advisors are individuals are fiduciaries who are legally bound to put your interests ahead of their own and work solely for their clients, not a large Wall Street firm. CFP® practitioners have had to pass a strenuous series of examinations to obtain their credentials and must complete continuing education courses in order to maintain them.
  2. Save. Save as much of your income as possible, creating a retirement nest-egg.  Some accounts may be tax exempt (Roth IRA) or tax deferred (regular IRA, 401k, etc.), but you should also try to save and invest in taxable accounts once you have reached the annual savings limit in tax advantaged accounts.
  3. Invest wisely. This means diversifying your investments to take advantage of the superior long-term returns of stocks as well as the lower risk provided by bonds.  While it’s possible to do this on your own, most people don’t have the education, training or discipline to create, monitor and periodically adjust an investment strategy that has the appropriate risk profile to last a lifetime.  We suggest finding a fee-only independent Registered Investment Advisor to manage your investments.  They will, for a modest fee, create and manage a diversified portfolio of stocks, bonds, mutual funds and/or exchange traded funds designed to meet your objectives.

The idea of saving for long retirement should not be avoided or feared.  With the proper planning and preparation, retirement gives us the opportunity to enjoy the things that we never had time for while we were working, and, can indeed be your Golden Years.

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Will you be able to retire? Good Question!

Imagine yourself as a 46-year-old woman married to a 48-year-old-man.  Both of you have a career.

  • Your combined income is around $250,000.
  • Savings in retirement plans totals about $400,000.
  • You would like to retire when he is 62 and you are 60.

Can you?

Unless you have prepared a retirement plan you don’t know.

There are a lot of moving parts that affect your retirement.  One of the biggest questions is how much it will cost you to live when you retire.  Each person is different; expectations for your retirement lifestyle are different than your neighbor’s.  Here are just a few of the things that factor into how much it will cost to live once you retire:

  • Your basic living expenses; your “needs.”
  • The cost of your “wants” and “wishes” above your basic expenses (travel, cars, weddings, education, gifts, etc.).
  • Life, disability, health and long term care insurance.

Then there are the other factors that determine what it will cost you to retire.

  • The age at which you want to retire.
  • The number of years in retirement.
  • What happens when one of you passes on?

What are your income sources in retirement?

  • Spousal income and, in two income families, the age at which each spouse retires.
  • Your pension benefits.
  • The age at which you apply for Social Security.

What are your personal investment assets to supplement your income sources?

  • The value of your investment assets at retirement.
  • The estimated return on your investment assets.
  • Your risk tolerance.
  • The rate of inflation during retirement.

The good news for this couple is that they have a decade or more to adjust their savings or their retirement goals.  Unfortunately, too many people leave the planning until too late.

The time to start planning is now.

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The Importance of 401(k)s.

Pensions are fading fast.  If you work for a private company the chances are good that your retirement plan is a 401(k), not a pension plan.   Even if you work for the government, the chances are that the entity you work for will resemble Illinois eventually.

That leaves you with the responsibility for your retirement.  There are two problems with the 401(k).

The first is that too many people do not participate.  Even when employers match their employee’s contribution, not everyone takes advantage of this “free money.”

The second problem is that most people don’t have enough information on the investment choices they are given in their 401(k).    Investing is complicated.  Most plans offer dozens of choices and few people know enough about investing to use them to create an appropriate portfolio.

Employers are not equipped to provide the information.  Most do not want to assume the liability that giving investment advice exposes them to.  An RIA (Registered Investment Advisor) who is also a CFP™ can provide the guidance people need to make sense of the investment option in a 401(k).   Find a CFP™ in your area.

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Fixing the Public Employees’ pension crisis

Public employee pensions are time bombs set to explode.  The State of Illinois finances are in such a state of crisis that its comptroller, Susana Mendoza, has told the legislature that over 90% of its monthly revenue is now being commandeered for court-ordered payments, primarily to pay current pensioners.  If Illinois does not pass a new budget within a few days there will be a financial crisis.

According to Forbes:

Public employee pension plans around the country are facing a shortfall of at least $1 trillion, and some of the largest plans are beginning to radically cut promised benefits because they have not stashed away enough to meet their obligations.

There is only so much money to go around.  Promises that can’t be kept won’t be kept … and that includes pensions.

One sign of things to come is a bill signed by Pennsylvania Governor Tom Wolf.  It reforms the state pension system that makes it more sustainable.

 “Let’s be clear: This plan addresses our liability in the only real and responsible way possible, by changing the structure of pension benefits,” said Mr. Wolf. “The fact is, we cannot accelerate the shrinking of our liability on the backs of our current employees, and this bill recognizes this in a real, concrete way.”

The bill moves new workers not in high-risk jobs such as state police and corrections officers into a hybrid retirement system.   Half of their retirement benefits will come from pensions paid for by the taxpayer and the other half will come from a 401(a) defined contribution plan.  A 401(a) is similar to a 401(k) but for public employees.  There are differences, but both transfer responsibility for retirement income to the employee and away from the employer.

The law is projected to save more than $5 billion and shield taxpayers from $20 billion or more in additional liabilities if state investments fail to meet projections, said a news release issued from the office of Republican Sen. Jake Corman, the bill’s chief sponsor.

We suspect that Pennsylvania is just the first state to adopt a system that transfers the responsibility for public employees’ retirement income away from the taxpayer and toward the employee.  It levels the playing field between public and private employees.

It will also make financial planning increasingly important for everyone.

Click HERE for questions about financial planning.

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What is the difference between a 401(k) and a pension plan?

Both plans are designed to provide income for retirement.  There are some very important differences.

A 401(k) is a type of retirement plan known as a “defined contribution plans.”  That means that you know how much you are saving but not how much it is worth when you are ready to retire.  That depends on your ability to invest your savings wisely.  The benefit is that your savings grow tax deferred.  Many employers match your contribution with a contribution of their own, encouraging you to participate.

A pension plan is known as a “defined benefit plan.”  That means that you are guaranteed a certain amount of income by the plan when you retire.  The responsibility of funding the plan and investing the plan assets are your employer’s.

Because your employer is liable for anything that goes wrong with the pension they have promised their employees, many employers have discontinued pension plans and replace them with 401(k) type plans.  This shift the responsibility for your retirement income from the company to you.

If you have a 401(k) for your retirement and are unsure about the best investment options available to you, get the advice of a financial planner who is experienced in this field.

For more information, contact us.

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Putting RMDs to Work

When you’re over 70 ½ and have a retirement plan you have to start taking money out of the plan (with rare exceptions).  But even if you remember to take annual RMDs (Required Minimum Distributions) you could use help preparing for and managing the process. This includes reinvesting RMDs you don’t need immediately for living expenses.

It isn’t as simple as “Here’s your RMD, now go take it.”  Baby Boomers often retire with IRA and 401(k) balances instead of the defined benefit plans their predecessors often had.  And the rules are often complicated.  Take the retiree who has an IRA and a 401(k) that he left behind with a previous employer.

Many are surprised to learn that they have to take separate RMDs on their 401(k) and their traditional IRA.  RMDs must be calculated separately and distributed separately from each employer-sponsored account. But RMDs for IRAs can be aggregated, and the total can be withdrawn from one or multiple IRAs.  That’s one of the reasons that advisors suggest rolling your 401(k) into an IRA when leaving an employer for a new job or when retiring.

Steep penalties apply.  The failure to take a required minimum distribution results in a penalty of 50% of the RMD amount.

According to a 2016 study from Vanguard, IRAs subject to RMDs had a median withdrawal rate of 4% and a median spending rate of 1%. For employer plans subject to RMDs, the median withdrawal rate was 4% and the median spending rate was 0%.  A mandatory withdrawal doesn’t mean a mandatory spend.  Most retirees don’t need the income they are required to take from their plans.  As a result the money usually goes right back into an investment account.

If you have an investment account that is designed for your risk tolerance and goals, the money coming out of your retirement account should be invested so as to maintain your balanced portfolio.

For questions on this subject, please contact us.

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What does planning mean for you?

Financial planning is about more than assets, investments and net worth.  It’s about what you want to do with your money and why.  It’s about identifying your concerns, expectations and goals.  It’s about how you feel and what you want.

Financial planning helps address common fears and concerns such as health care costs, outliving your money and the best time to file for Social Security benefits.

The “Confidence Meter” helps you gauge how likely you are to reach your goals and whether you are on track instead of focusing on headlines.

Financial planning takes your risk tolerance into account.  You will get a “Risk Number” that guides you to the kind of investment you should have.

Learn more about how financial planning can help you by contacting us at Korving & Company today.

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