Category Archives: RIA

Questions and answers about retirement

A couple facing retirement asks:

I will retire in the Spring of 2018 (by then I will have turned 65). My wife is a teacher and will retire in June of 2018. When we chose 2018 as our retirement date, we paid off our house. At the same time we replaced one of our older cars with a new one and paid cash. We have no debt. We will begin drawing down on our investments shortly after my wife retires. Also we both plan to wait until we are 66 to draw on Social Security. Our current nest egg is divided 50/50 in retirement accounts and regular brokerage accounts. About 60% are in equities and mutual funds. The rest is in bonds and cash. I’ve read about the 4% rule, adjusting annually up depending on inflation, expenses and market performance. As of today, based on our retirement budget, we can generate enough cash only using our dividends to live on. In our case this approach would have us taking interest and dividends from all accounts, including IRA, 457 B and 403 B before we are 70 years old. Seems that this approach would make it easier to deal with market volatility, yet it does not seem to be favored by the experts.

My answer:

There are a number of different strategies for generating retirement income. The 4% rule is based on a study by Bill Bengen in 1994. He was a young financial planner who wanted to determine – using historical data – the rate at which a retiree could withdraw money in retirement and have it last for 30 years. The rule has been widely adopted and also widely criticized. It’s a rule of thumb, not a law of nature and there are concerns that times have changed.

Based on your question you have determined that the dividends from your investments have generated the kind of income you need to live on in retirement. Like the 4% rule, there is no guarantee that the dividends your portfolio produces in the future will be the same as they have in the past. Dividends change. Prior to the market melt-down in 2008 some of the highest dividend paying stocks were banks. During the crash, the banks that survived slashed their dividends. Those that depended on this income had to put off retirement because their retirement income disappeared.

I would suggest that this is an ideal time to consult a certified financial planner who will prepare a retirement plan for you. A comprehensive plan should include your income sources, such as pensions and social security. The expense side should include your basic living expenses in addition to things you would like to do. This includes the cost of new cars, travel and entertainment, home repair and improvement, provisions for medical expenses, and all the other things you want to do in retirement. It will also show you the effects of inflation on your expenses, something that shocks many people who are not aware of the effects of inflation over a 30-year retirement span.

Most sophisticated financial planning programs forecast the chances of meeting your goals based on a “total return” assumption for your investments. Of course, the assumptions of total return are not guaranteed. Many plans include a “Monte Carlo” analysis which takes sequence of returns into consideration.

That’s why the advice of a financial advisor who specializes in retirement may be the most important decision you will make. An advisor who is a fiduciary (like an RIA) will monitor your income, expenses and your investments on a regular basis and recommend changes that give you the best chance of living well in retirement.

Finally, tax considerations enter into your decision. Most retirees prefer to leave their tax sheltered accounts alone until they are required to begin taking distributions at age 70 ½. Doing this reduces their taxable income and their tax bill.

I hope this helps.

If you have questions about retirement, give us a call.

 

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Answering the important retirement questions.

With over 100 million people in America closing in on retirement, big questions arise.  Most investment advisors are oriented toward providing advice on how to build assets, but lack the tools and experience to advise their clients about how to live well during decades of retirement.

The most common advice that retirees get involves invoking the “4% Rule.”  That number is based on a 60-year-old-study that may well be out of date.  Individuals and families should be getting better guidance because now retirement often spans decades.  Many people are retiring earlier and living longer.

There are many critical decisions that must be made before people leave their jobs and live on their savings and a fixed income.

  • When should I claim Social Security benefits?
  • What happens if I live too long? Will I run out of money?
  • What would happen to my income if my spouse died early?
  • Will I need life insurance once I retire? If so, how much?
  • What are the effects of Long-Term-Care on my retirement plans?
  • Can I afford the items on my “wish list?”
  • Will I leave some money to my heirs?

Some Registered Investment Firms (RIAs) have the sophisticated financial planning tools to answer these questions.  They are often CFPs® and focus on retirement planning.  Once a plan is prepared, these same RIAs, acting as fiduciaries, are often asked to help their clients manage their assets to meet their retirement income goals.

If you are approaching retirement and have questions or concerns, contact us.  We’ll be glad to provide you with the answers.

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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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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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FIVE FACTS THAT PROVE AMERICANS ARE TERRIBLE AT MANAGING MONEY

I read this headline recently and wanted to share it with you.  Here’s the short version.

  1. About 1 in 4 literally have no emergency savings.
  2. We are more worried about paying for our next vacation than about saving enough for retirement.
  3. Millions of us hide money from our spouses and partners.
  4. We prioritize paying the wrong bills first.
  5. We’ve racked up $1 trillion in credit card debt — and that’s just a fraction of what we owe.

That’s troubling.

Very few of our clients suffer from these five issues, but we have had people coming through our doors who are searching for help to get out of debt and on the path to financial stability.

But even people who save and invest and have given serious though to retirement are not necessarily good at making investment decisions.

Having the right instincts and putting money in an investment account doesn’t mean that you are making the best decisions.  Navigating the complex world of modern investing is both a skill and an art that most people do not have the time or patience to learn.

That’s why more and more people are turning from brokers to independent Registered Investment Advisors (RIAs), fiduciaries who manage portfolios for a fee.  Turning the selection of investments over to an RIA, receiving regular reports of progress toward their financial goals, makes sense to people who understand the benefits of using professionals to accomplish complex tasks.

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Planning makes a difference

Happy senior couple walking on beach

Do you want to have fun in retirement?  Planning can make the difference and it doesn’t have to be difficult.  Working with a financial professional that understands your retirement goals can help you create a plan to make the most of your money – now and in retirement.

The partners at Korving and Company are Certified Financial Planning™ professionals – fiduciaries – who specialize in retirement.  We help people plan their retirement and continue to work with them during retirement.

There are 5 reasons why you should work with a financial professional to create a retirement plan.

  1. Focus on your goals in retirement and how you will pay for them.
  2. Address your concerns and expectations for retirement.
  3. Identify things that could pose a threat to your retirement and manage them.
  4. Feel more educated, confident and in control of your financial future.
  5. To help you navigate the complexity of financially moving into retirement.

 

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7 Services that a Registered Investment Advisor (RIA) Provides

Investing is serious business.  How well you manage your investments can make the difference between a comfortable retirement and working ‘till you drop.  Most people use a financial advisor of some kind.

Back in the day, people opened an account with a major investment firm and used a broker who would call and make recommendations to buy or sell.  They were essentially stock and bond salesmen whose loyalty was to their firms.

That has all changed.

The trend now is away from the major firms and toward Registered Investment Advisors – RIAs.  RIAs are fiduciaries whose duty is to put their clients’ interests ahead of their own.  They help people plan their future and take over the every-day investing decisions for them.

What can an individual expect from an RIA?

  • Asset management. This means creating a portfolio appropriate to the client, making changes in the best interest of the client, and reacting to market conditions.
  • Financial planning. Organizing a client’s financial affairs.  Determining the best way of achieving the client’s objective.  Reviewing the client’s insurance and estate planning needs.
  • Reporting and record keeping. Maintaining the organization of finances.  Performance reporting.  Maintaining cost and purchase data.
  • Life planning. Helping the client uncover what they really want to accomplish and creating a roadmap to getting there.
  • Retirement planning. Providing a path to living well once the paycheck stops and people are dependent on fixed income sources and their personal savings.  Retirement is a major life change.  RIAs typically offer comprehensive retirement plans that help people decide when to retire and what how well they can live.
  • Estate planning. Leaving money to heirs and charities must be carefully planned or large portions of an estate can go to taxes or the wrong individuals.
  • Concierge services. This can include attending meetings with attorney, accountants or bankers.  It can include services such as buying cars, arranging for travel or hiring someone to pay bills.  Relations between an RIA and a client are often so close that they are even consulted on issues such are marriage or divorce.
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Being There

Anyone who has been in a long-term committed relationship understands what “being there” means.

One of the benefits of a stable relationship is that you have someone you can rely in when you need help.  Couples support each other.  Even as traditional roles have evolved, most families still have a division of labor when it comes to certain chores and tasks.  The fact is that some people are good at one thing and not so good at others.  What’s great about compatible couples is that they complement each other and, as a result, they are stronger, smarter and wiser together.

This is why the loss of a companion is such a traumatic experience.

All of a sudden, the person you have relied on is no longer there.  There is a big void in your life.  You may find yourself wondering what you are going to do.

While we don’t promote ourselves as the substitute spouse, in a financial sense we quite often find ourselves in that role.

When a spouse or long-time companion dies, our surviving clients often call on us to provide financial guidance.  Having dealt with hundreds of these transitions, we know the ins and outs of the estate settlement process.  We know the common pitfalls and things that can go wrong and are there to provide advice and guidance to help lift the burden and take care of things correctly and efficiently.

We relieve people from having to do it themselves.

We’ve written a set of books on this issue to help people plan ahead before their time comes, called BEFORE I GO.  The book and workbook are a wonderful compliment to traditional estate planning documents and help to fill in the missing information that those documents tend to leave out.

For a copy of these guides, you can contact us or you can buy them on Amazon.com.  Click HERE for a link.

Let us know if you have any questions or if you or anyone you’re close to needs an experienced and helpful hand working through one of these situations.

 

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Consolidating your assets

In 1945, two brothers, Jacob and Samuel, were rescued from the Nazi extermination camp of Buchenwald. The rest of their family had been killed. The brothers joined other refugees that left Europe after World War II. Jacob came to the United States, became an engineer, and worked many years for a major corporation. Samuel immigrated to Australia and became an accountant.

Several years ago, Jacob died. He had never married. Samuel — by now quite elderly —came to the United States to settle Jacob’s affairs. What he found was financial chaos. Jacob had always lived frugally and invested widely. Unfortunately, he kept very poor records. Samuel spent several weeks rummaging through files, boxes, drawers, and even under couch pillows trying to gather together all the certificates, statements, and even uncashed dividend checks that Jacob had left behind. We will never be certain that all of Jacobs’s assets have been located.

Few people leave behind as chaotic a financial tangle as Jacob did, but I find that more than half of the people I advise after a death are not certain that they can identify all of a deceased’s investment assets.

The first lesson from this example is this: DO NOT KEEP STOCK OR BOND CERTIFICATES AT HOME OR IN A SAFE DEPOSIT BOX. KEEP ALL FINANCIAL ASSETS IN BROKERAGE ACCOUNTS.

Modern brokerage accounts now allow access via checkbook, electronic funds transfer (EFT) and charge cards. Have all dividends and interest payments deposited in your account; and, if you need cash, you may write a check. There is no reason for your heirs to search through your papers to find uncashed dividend checks.

As people get older, financial advisors and estate planning attorneys often advise clients to consolidate their assets. This is sound advice and greatly simplifies the job of managing an estate at death.

It is often possible to consolidate assets — even mutual funds that you have bought outside of a brokerage account — with a single financial advisor or team of advisors. This has the advantage of giving your financial advisor a better view of your assets and thus providing more comprehensive plans and advice. It also makes it easier for the surviving spouse or heirs to identify your investment assets.

Investment accounts with brokerage firms, money managers, and mutual funds typically make up the bulk of the assets of most families. It is not unusual for a family to have multiple accounts.

Be sure to make a list of your investment accounts. You may use that investment section of the workbook to do so.

From BEFORE I GO by Arie Korving.  Available at Amazon.

 

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Even the “rich” can’t afford retirement.

Investment Approach

Registered Investment Advisors (RIAs) deal with people at all wealth levels but most are upper income even if they are not billionaires.  There is a retirement crisis and it’s not just hitting the working class.

The typical median wage earner making $50,000 a year and retiring at 67 can expect Social Security to pay him and his wife about $2400 per month.  To maintain their previous spending levels this leaves a gap of about $1000 a month that has to be made up from savings. But many of these middle income people have not saved for their retirement.  Which means working longer or reducing their lifestyle.

This problem is also hitting the higher income people.  How well is the person earning over $200,000 a year going to do in retirement?  The issues that even these so-called “rich” face are the same:  increased longevity, medical care, debts and an expensive lifestyle are all issues that have to be considered.

“The $200,000+ executive expects a fine house, two cars, two holidays a year, private schools, to pay for his kid’s university tuition, and so it goes on. And this is not to mention the tax bill he’s paying on his earned income. A bunch of all this was really debt-funded, so effectively the executive spent chunks of his retirement money during his working days.”

When high income people are working, they usually don’t watch their pennies or budget.  But once retired, that salary stops.  That’s when savings are required to bridge the gap between their lifestyle and income from Social Security and (if they’re lucky) pension payments.  At that point the need for advance planning becomes important.

Before the retirement date is set, the affluent need to create a retirement plan.  He or she needs to know what their basic income needs are; the cost of utilities, food, clothing, insurance, transportation and other basic needs.  Once the basics are determined, they can plan for their “wants.”  This includes things such as replacing cars, the cost of vacation travel, charitable gifts, club dues, and all the other expenses that are lifestyle issues.  Finally, there are “wishes” which may include a vacation home, a boat, a wedding, a legacy.  The list can be a long one but it should be part of a financial plan.

If the plan tells us that the chances of success are low, we can move out our retirement date, increase our savings rate or reduce our retirement spending plans.

This kind of planning will reduce the anxiety that is typically associated with the retirement decision making.

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