Category: 401(k) planning

Will You Outlive Your Nest Egg in Retirement?

Will You Outlive Your Nest Egg in Retirement?

If this question is on the forefront of your mind as you approach retirement, you are not alone. According to recent studies, this is the primary concern of soon-to-be retirees just like you:

  • 43% of workers fifty or older say that outliving their money is their most significant retirement-related fear.
  • 57% of financial planners state that running out of money is their clients’ most pressing retirement concern.
  • 60% of older Americans fear outliving their savings more than death itself.

 

Truly, these figures speak to sleepless nights and anxiety of many older Americans, especially considering that many are less afraid of the grim reaper than an empty pocketbook.

 

But before you jump on the bandwagon of restless worry, I think it is important to step back and consider whether your fears are founded at all. Although there is definitely reason to believe that many Americans are financially unprepared for retirement, this doesn’t mean that you are. In fact, most of the clients I work with at my offices in Sidney and Troy have saved enough for a modest or beyond modest standard of living in retirement.

 

So, how do you find out? I have two words for you: income planning. In order to help ensure that you have enough money to last your entire life expectancy, you must analyze your situation and put an adaptable plan in place.

 

Although income planning is often a confusing and overwhelming process in all of the details, at its core, it is really only a few simple steps. Here is a rough sketch of what the income planning process looks like to get you thinking in the right direction:

 

  1. Check Your Income Sources

Almost everyone has steady sources of income that form the foundation of any good income plan. Start by figuring your Social Security benefit, and then add in your pension or income from rental properties (if you are lucky enough to have either of these). The key here is to add up any and all sources of reliable cash flow, perhaps even cash flow from part-time work in retirement (yes, I realize that seems crazy, but many retirees are choosing to work).

 

  1. Analyze Your Other Savings and Retirement Accounts

This includes investments and savings accounts as well as any qualified retirement account such as an IRA or 401(k). The idea is to calculate any lump sum amounts you will draw from to supplement your income sources. Once you’ve completed this step, you are ready to move on to the next (less enjoyable) step.

 

  1. Calculate Your Expenses

What I am talking about here is your basic expenses. This doesn’t include travel or big-ticket purchases such as boats or snowbird homes. This is about monthly necessities like food, water, shelter, car payments, mortgage payments, and the like. Start with what your bills are now, and then compare that to retirement. Will you have a car payment well into your retirement, or will you pay that off soon? What about your mortgage? How will your healthcare expenses change? For almost all retiring 65 and over, this means considering how much Medicare will cost them (read this blog to see) as opposed to their private insurance or employer plan.

 

  1. Run The Calculation

This step involves plugging all of those numbers into a system, either a homemade excel spreadsheet or an online program. This will help you figure out the chances of you making it your entire life expectancy without running out of money. With our clients, we use Money Guide Pro. This system runs a thousand different scenarios, calculating probabilities on various unknowns. It enables us to consider a wide variety of factors such as inflation, taxes, or potential dips or spikes in your investment portfolio that are difficult to calculate by hand.

 

  1. Add in Fun Extras

This is where it can get fun. If your chances of success are very high, you can add other “extra” expenses into your plan. Perhaps you want to go on a $5,000 trip every year to an exotic location. Perhaps you want to give back to your community so much every month. Whatever your dreams and goals are, you can add these in and rerun the calculation. You can continue to do this as long as your chances of success remain in a comfortable range!

 

Want Someone to Crunch The Numbers for You?

At Seniormark, we realize that income planning is easier said than done. But however difficult it may be, it simply must be done in order to answer the question weighing on so many minds: Will I outlive my nest egg in retirement?

 

Give Seniormark a Call for a free consultation at 937-492-8800 and put your fears to rest!

 

“Fear Not!” Is Still the Best Investment Advice

“Fear Not!” Is Still the Best Investment Advice

Here’s a crude snapshot of a conversation I had with my client a few months ago. I think you’ll find it heartbreaking:

“I see you have all your investments in a money market account.” (Note: this is an extremely low-risk investment option)

 

“Yeah…I did that when the market crashed in 2001. I started losing lots of money, and my portfolio dropped from $120,000 to $80,000. I got scared, so I pulled out and switched to a lower risk investment.” He paused. “I think I made a mistake.” Then he grew curious. “I have $100,000 now. How much would I have if I would’ve stayed put?”

 

I cringed a little bit. The question is a recipe for regret. “Are you sure you want to know that number?” He nodded. So I did a little number crunching. Here’s the grand reveal: “You would have $200,000 right now,” I told him.

 

The man was mild mannered. He didn’t overreact. “Ohhhhh…..that’s a lot of money,” he said. But even if he couldn’t sense the full effect of that sting, I felt it for him.

 

What kills me is that it was just one, fear-based decision. A natural, understandable fear, of course, but that doesn’t change the fact that it led to a poor investment decision, one that cost him $100,000.

 

In fact, fear almost always leads to poor investment decisions. It consistently causes investors to sell when the market hits rock bottom and buy back in when it is already well on its way to recovery.  In other words, fear causes investors to disobey the most fundamental rule of investing: buy low and sell high. It subdues logic in its cage and releases an irrational beast, bent on destroying your portfolio.

 

Case Study: The “Great Recession” of 2008

2001 isn’t the only time this happened, and my client certainly isn’t the only case. The “Great Recession” also caused a great deal of panic and poor decisions. If you check out this graph created by BlackRock Mutual Funds, you’ll see what I mean.

Allow me to help a bit with the interpretation. The blue line represents the stock market performance. The light blue bars represent money invested in mutual funds, or…in finance jargon… the “Net Equity Mutual Fund Flow”.

 

You’ll notice something quite peculiar if you attend to the circled section of December ’08, the stock market crash. During the fright and terror of that lowest dip, a lot of people sold their mutual funds. The blue bars at their lowest point (far below the axis) evidence this.

 

And when did investors buy back in? Note that the blue bars follow the stock market line very closely. By the time most people bought back in, the market was already near its next peak. People were selling low and buying high! This is not a good investment strategy.

 

A Little Advice For a Big Problem

No one knows what the market will do tomorrow. It might go up. It might go down. It might fluctuate a little. It might fall or rise dramatically. There are a lot of uncertainties in investing.

 

But one thing is for sure: the stock market consistently grows over the long haul. According to distinguished finance professor at Wharton, Jeremy Siegel, it has grown an average of 6.5-7% per year over the last 200 years. But one of the major problems is that fear zaps long-term vision, blinding investors to the future possibility of growth as they watch their hard-earned money plummet in the present.

 

So here is the little piece of advice: Like an angel who appears in the dead of night, “Fear not!” The sensationalist media of apocalyptic proportions is lying to you.

 

As long as your portfolio is truly diversified and matched to your risk tolerance, as long as you regularly review your investment strategy with a professional, don’t lose your head!

 

You’ve got nothing to fear but fear itself.

 

Need a risk analysis at no cost to you? Call Seniormark at 937-492-8800.

 

 

Investing Fact Check: No One Can Predict the Future

Investing Fact Check: No One Can Predict the Future

Not the common investor. Not your financial planner. Not even the “big wig” finance-savvy gurus.

 

I get it. It’s alluring to think you might have a competitive edge. The seductive power of huge yields in a short amount of time is almost magnetic. And it’s definitely a good marketing point for investment advisors who claim they can “beat the market”. But the truth is, market timing and stock picking just don’t work.

 

Of course, people score big sometimes. They might even get lucky a few years in a row. But, in a way, this is just dangerous. Like a gambler with a string of good hands, these people may begin to think they’re invincible, play hard for another year, and—eventually—return home with empty hands in their pockets and a droopy tail between their legs.

 

The results are in.

In fact, they’ve been in for a long time: When it comes to investing, you are your own worst enemy. Investor behavior consistently causes people to under perform over the long haul.

 

In Dalbar’s 22nd Annual Analysis of Investor Behavior, they discovered that the average investor under performed the S&P 500 by 3.66% in 2015. According to Dalbar, “while the broader market made incremental gains of 1.38%, the average equity investor suffered a more-than-incremental loss of -2.28%”. This type of data is consistent over the last 20 to 30 years. Over the last 20 years, the S&P 500 has outperformed the investor by 3.52%.

 

And with the “expert” investment managers, the results still aren’t that hot. In 2014, 86% of them failed to beat the market.

 

So why is this happening?

Maybe it has something to do with the fact that the average equity fund retention rate of 2015 was 4.10 years. This means that every 4.10 years the average investor changed his mutual fund to chase the hot returns of another investment option, ultimately trying to beat the market, ultimately believing they (or a financial guru) could predict the future.  If you just jumped down to this point, see the above statistics. It didn’t work.

 

So why do investors still believe it?

If it doesn’t work, then why do people still do it? There are many reasons why. Perhaps it is just lack of research and reflection. Or perhaps it is because people are looking at their stocks in a vacuum, thinking that their 6% return isn’t bad even though the S&P performed at 8%.

 

But I think the biggest reason is that they don’t look at the big picture. They see the ads that say “if you would’ve picked this stock last month, you would be up 40%” or “Here at (insert investing company name here), we’ve beat the market 3 years in a row”. They see the Warren Buffets of the world and forget that these are just isolated cases. When you zoom out and see the million other people who tried to beat the markets and failed, the truth comes into focus.

 

So—in the end—you can choose to do what many investors are doing.

 

Or you can choose the time-tested, statistically verified way: diversify your portfolio and wait…without touching it. If you’re retiring soon, I recommend this strategy. You don’t have time for risky moves. You don’t have time to make up for heavy losses.

 

Instead, you need an investment strategy that safeguards your portfolio from crippling losses, while allowing it to grow—slowly but surely—well into your retirement. It’s not flashy. It won’t get you on the cover of Money Magazine. But unlike trying to predict the future—

 

It works.

 

Want a Certified Financial Planner to analyze your portfolio at no cost to you? Call Seniormark at 937-492-8800 for a free consultation.

4 People You Need to See Before Retiring

4 People You Need to See Before Retiring

Retirement is an exciting transition, of course, but it is also a nerve-racking one. Information is flooding your inbox and mail, and weighty decisions are heaping on your fatigued shoulders.

 

But think back to previous life transitions: from elementary to high school and from high school (or college) to the workplace. These transitions were stressful as well.  But what made them manageable were the people.

 

The transition to retirement is no different. You need people to assist and advise you throughout this complex process. The following people may not be as involved as a personal mentor or teacher, but they can and will serve as guideposts throughout your journey.

 

A Social Security Office Representative

So…not exactly your BFF. I realize that. But this person has one vital piece of information to give you: your social security statement. This document details how much monthly benefit you qualify for from the federal government. It contains information you need to consider when planning for retirement. If you already have this filed away, then great! You can move on to guidepost #2.

 

Employer and/or Human Resource Department Employee

Depending on the size of your employer, you may not be very chummy with these people either, but hear me out because some employers provide retiree benefits such as health care or a pension. You need to find out more about these benefits (if they exist) in order to effectively plan for retirement. One important question to ask is how the benefits will interact with Medicare. For example, in the case of health insurance, who pays first—the employer or Medicare?

 

Your Doctor

I hope we’re getting a little bit closer to the heart! No? Well here’s the value: you may already have an idea of your overall health and prescription drugs, but if you don’t, your doctor will explain it thoroughly. This information comes in handy throughout the Medicare planning process, especially when shopping for a Part D prescription drug plan.

 

A Retirement Advisor

If this guy or gal is not your friend beforehand, there is a good chance he will be after all of this is over. A retirement advisor is a person who puts all of the pieces together.  He takes the information you gathered from the other 3 people and uses it to develop a retirement plan tailored to your unique needs. This covers planning for expenses (medical and otherwise), social security benefits, and Medicare planning.

 

As a bonus, the last people I would tell you to visit are your friends and family. Although I wouldn’t necessarily trust them with shopping your drug plan or determining your social security benefits, they are wonderful moral support as you approach this overwhelming milestone. So visit your kids, your grandkids, your siblings, and your lifelong friends. Nothing relieves stress more than knowing you don’t have to handle it all alone.

 

Looking for a retirement advisor ready to help you transition from work to play? Call Seniormark at 937-492-8800 for personal help at no cost to you!

 

I’m Retiring Soon—What Do I Do with My 401(k)?

I’m Retiring Soon—What Do I Do with My 401(k)?

As you may have realized, when you reach retirement age, you can pack up all your pictures and favorite fountain pens and desk knick-knacks, but you can’t just toss your 401(k) in a cardboard box, kick open the door, and journey off to new, work-free horizons.

 

You have to decide what to do with the hard-earned money you’ve saved at your employer, a decision that should be thought out carefully, so you can avoid mistakes that may hack away at your retirement livelihood.

 

To get you thinking in the right direction, I’d like to outline all of your options for what to do with your 401(k). Some are much better than others for most people, so I think it will be beneficial to run you through the four common choices retirees make and the potential strengths and weaknesses of each.

 

  1. Do Nothing

That’s right, you could take the path of least resistance and just leave it with your employer. And, surprisingly, there are viable reasons for doing so. For a small one, a 401(k) usually has good protection from creditors. But here’s the big one: keeping your money in a 401(k) will allow you to withdraw without penalty at age 55. Other options are not so friendly to early takers, socking you with penalties if you withdraw before 59 and a half. So, if you are retiring before 59 and a half, this is an important point to consider.

 

However, aside from that, there aren’t too many reasons you’d want to keep your 401(k) with your employer. It limits your investment options. Oftentimes, you can’t get good, individualized management help. And, if you’ve had a string of employers and left a pot of money with each, you’ve probably got a trail of 401(k) accounts following behind you, making your money difficult to manage. Scattered money leads to a scattered brain.

 

In other words, sticking with your employer is not your worst option, but it may be not your best.

 

  1. Take a Lump Sum Distribution—Cash It Out!

To fling us all the way over to the dark side, this is the worst option. In fact, this choice can cause you to loose a third of your 401(k) value in one foul swoop. How? I’ll give you a hint. It has something to do one of life’s two certainties.

 

No, not death…but taxes.

 

When you cash it all out at once, that money becomes part of your income for the year. This will often make you soar into higher tax brackets, and—next thing you know—Uncle Sam can snag tens of thousands of dollars from your hard earned money.

 

 

To take an example, let’s say your yearly income (as a couple filing jointly) is in the 15% bracket ($18,651 to 75,900 in 2017). If you take out a 401(k) with, let’s say, $200,000 in it, this will catapult you up 3 tax brackets to 33%! That’s $66,000 gone, in just one transaction.

 

To put it bluntly, this 401(k) strategy should only be used in emergencies. Even if you want to buy a big-ticket item like a car or a boat or a house, only cash out what you need and, if possible, cash it out in chunks to rein in the tax hikes.

 

  1. Transfer It to a Roth IRA

A Roth IRA is a phenomenal option for 20-somethings wanting to save money for their retirement. However, for the soon-to-be retiree, it usually isn’t. Why? Well, you run into the same tax problem that you do with the second option. Remember the 33% hit?

 

You see, unlike with a traditional IRA, with a Roth IRA, you pay taxes on your money up front. Then, you can withdraw the money tax-free later on. Therefore, the only time it makes sense to convert to a Roth IRA is if you know you will be in a higher tax bracket in the future, when you take it out. For retirees, this is rarely the case.

 

Perhaps a Roth IRA would be a good option if you knew you didn’t need the money, planned to let it grow tax-free until you die and pass it on to your kids. But I’m speaking in extreme rarities now. Most retirees are counting on their 401(k) to live.

 

  1. Transfer It to a Traditional IRA.

The last option is the most popular, and for good reason, too. As far as taxes go, you can transfer it electronically, avoiding all taxes up front. Then you can pay the taxes as you withdraw it, in a reasonable bracket for your income.

 

And, it also wins on many other fronts, fronts that the decision to leave it at your employer doesn’t.

 

For one, you are free to choose from the world of investment options. Like a talent scout seeks out the best players for his team, you can seek out the best performing investments to develop a killer portfolio that is both diversified and matched to your unique risk tolerance.

 

For another, you can consolidate any and all retirement accounts in one, so it is easier to manage.

 

And finally, you can get personalized help. The kind of help that isn’t from a representative to a crowd of employees or from a recording on your phone telling you to “press one to hear more options.” When you rollover your 401(k) to a traditional IRA, you have the option to sit down face-to-face with a professional, certified financial planner and develop that aforementioned killer portfolio together.

Now, it’s important to note that there is a fee involved with working with a financial planner, which is usually 1-2% of the assets he or she manages. Whether or not the fees are higher than the fees you currently pay at your employer is a toss up, so that is something to consider.

 

 

The point is, the decision of what to do with your 401(k) is an important and complicated one. Making the wrong choice can lead to major losses or lost opportunities. That is why we offer a 401(k) planning workshop to help you sort through it all and come to decision you can be confident about. Click here to discover more about our 401(k) workshop as well as our other workshop offerings.

Do You Know How Much Money Your 401(k) Could Lose This Year?

Do You Know How Much Money Your 401(k) Could Lose This Year?

In other words, I’m asking, “Do you know your risk?”

 

But I didn’t ask it that way because I know that, for a lot of people, risk is this abstract, distant, otherworldly life force. They know it has an effect on their portfolio, but not to what extent or—in all reality—how.

 

Tell me if this scenario resonates with you.

You are stuffed in a room with 100 or so of your coworkers of all ages. A well-dressed financial rep enters the room. He’s here to talk about your 401(k).

 

Speaking in generalities, he outlines 5 different portfolios from conservative to aggressive: “If you’re a riskier person, you might want to go with the more aggressive portfolio. If you’re more careful or getting ready to retire, you might want to go with one of these more conservative ones.”

 

After a good amount of explanation, he asks you to choose. So you do…kind of haphazardly. You pick one that you think matches your risk tolerance, or maybe you pick one considered to be “middle of the road”. You’re not sure what you got yourself into, but…hey…how bad can it possibly be?

 

Of course, this scenario plays out in a lot of different ways. But, from my 19 years of experience, it’s typical. The only problem is, it doesn’t reveal what’s really important to you: how much money you could lose or gain. You don’t really understand. You just choose, and risk remains some abstract, otherworldly concept.

 

So let’s get it back into orbit. In fact, let’s land it right in your neighborhood with some meat and bones substance. Do you remember which of those 5 portfolios you chose?

Well…here they are, demystified, showing you in-the-ballpark figures for how much you could stand to lose and gain in a given year:

  • Conservative (33 risk score): -10% or +20%
  • Moderately Conservative (47 risk score): -18% or +32%
  • Moderate (59 risk score): -24% or +40%
  • Moderately Aggressive (68 risk score): -28% or +46%
  • Aggressive (72 risk score): -32% or + 48%

Note: Risk Scores are based on a scale of 1-100 with 100 being the most aggressive.

 

They might have slight variance in risk scores, percentages, and names from company to company. Your particular portfolio may be a bit different, but this is the typical landscape of the 401(k) options offered to you.

 

This means that—with a $100,000 401(k)—you could stand to lose $32,000 with the aggressive option, $24,000 with the moderate option, and $10,000 with the conservative. All in one year.

 

In light of what you chose, how does that make you feel?

If you are comfortable with the loss and gain, you made a good choice. If you’re scared, you didn’t, and you need someone to make adjustments so your portfolio matches your risk tolerance. Simple, right?

 

You have just experienced a wonderful taste of a personalized risk analysis.

This is what I do with my clients. I sit them down. I analyze their portfolio. I tell them what percentage they could lose or gain in a year.  And then I ask a very important, very telling question: “If you were to lose (insert dollar amount of potential loss here), would you be comfortable with that?”

 

They have one of three reactions:

  1. “Oh no, that’s way too much.”
  2. “Yes, I’m comfortable with that.”
  3. “Yes, and I would be comfortable with more loss if it means more gain.”

 

In my practice, working mostly with soon-to-be retirees, I usually get the first reaction the most. And for good reason too! People who will be retiring soon should have a conservative portfolio. They shouldn’t invest aggressively like a 25 year-old because they just don’t have the time to make up for losses.

 

But if they never check the risk of their portfolio, they will never make those necessary adjustments.  And when the economy takes a turn for the worse (eventually it will), they could lose one-third of their money when they need it most. They might even make a fear-based decision to pull their money out, locking them into those losses for good.

 

I don’t usually show so much urgency, but I know how important it is. I’m not going to knock down your door, but I will implore you now.

 

Don’t let this be you.

 

Need a personalized risk analysis at no cost to you? Call Seniormark at 937-492-8800 for a free consultation.

 

Wondering what to do with your 401(k) after you retire?  Consider attending our 401(k) workshop offering, designed to help you answer your most pressing questions. There are no high-pressure sales attempts here, just an in-depth and informative discussion about your options. Click here to discover more.