Can You Reduce Required Minimum Distributions?

Posted On June 25, 2017 By Scott Stratton, CFP(R), CFA In Retirement Planning, Tax Strategies / 1 Comment

After age 70 1/2, owners of a retirement account like an IRA or 401(k) are required to withdraw a minimum percentage of their account every year. These Required Minimum Distributions (RMDs) are taxable as ordinary income, and we meet many investors who do not need to take these withdrawals and would prefer to leave their money in their account.

The questions many investors ask is Can I avoid having to take RMDs? And while the short answer is “no, they are required”, we do have several ways for reducing or delaying taxes from your retirement accounts.

1. Longevity Annuity. In 2014, the IRS created a new rule allowing investors to invest a portion of their IRA into a Qualified Longevity Annuity Contract (QLAC) and not have to pay any RMDs on that money. What the heck is a QLAC, you ask? A QLAC is a deferred annuity where you invest money today and later, you switch it over to a monthly income stream that is guaranteed for life. Previously, these types of deferred annuities didn’t work with IRAs, because you had to take RMDs. Luckily, the IRS saw that many retirees would benefit from this strategy and provided relief from RMDs.

Investors are now permitted to place up to 25% of their retirement portfolio, or $125,000 (whichever is less), into a QLAC and not have to pay any RMDs during the deferral period. Once you do start the income stream, the distributions will be taxable, of course.

For example, a 70 year old male could invest $125,000 into a QLAC and then at age 84, begin receiving $31,033 a year for life. If the owner passes away, any remaining principal will go to their heirs. (Source of quote: Barrons, June 26, 2017)

In retirement planning, we refer to possibility of outliving your money as “longevity risk”, and a QLAC is designed to address that risk by providing an additional income stream once you reach a target age. Payouts must begin by age 85. A QLAC is a great bet if you have high longevity factors: excellent health, family history of long lifespans, etc. If you are wondering if your money will still be around at age 92, then you’re a good candidate for a QLAC.

2. Put Bonds in your IRA. By placing your bond allocation into your IRA, you will save taxes several ways:

You won’t have to pay taxes annually on interest received from bonds.
Stocks, which can receive long-term capital gains rate of 15% in a taxable account, would be treated as ordinary income if in an IRA. Bonds pay the same tax rate in or out of an IRA, but stocks lose their lower tax rate inside an IRA. You have lower overall total taxes by allocating bonds to IRAs and long-term stocks to taxable accounts.
Your IRA will likely grow more slowly with bonds than stocks, meaning your principal and RMDs will be lower than if your IRA is invested for growth.

3. Roth Conversion. Converting your IRA to a Roth means paying the taxes in full today, which is the opposite of trying to defer taking RMDs. However, it may still make sense to do so in certain situations. Once in a Roth, your money will grow tax-free. There are no RMDs on a Roth account; the money grows tax-free for you or your heirs.

If you are already in the top tax bracket and will always be in the top tax bracket, doing a Roth Conversion allows you to “pre-pay” taxes today and then not pay any additional taxes on the future growth of those assets.
If not in the top bracket (39.6%), do a partial conversion that will keep you in your current tax bracket.
If there is another bear market like 2008-2009, and your IRA drops 30%, that would be a good time to convert your IRA and pay taxes on the smaller principal amount. Then any snap back in the market, or future growth, will be yours tax-free. And no more RMDs.
Trump had proposed simplifying the individual tax code to four tax brackets with a much lower top rate of 25%, plus eliminating the Medicare surtaxes. We are holding off on any Roth conversions to see what happens; if these low rates become a reality, that would be an opportune time to look at a Roth Conversion, especially if you believe that tax rates will go back up in the future.

4. Qualified Charitable Distribution. You may be able to use your RMD to fund a charitable donation, which generally eliminates the tax on the distribution. I wrote about this strategy in detail here.

5. Still Working. If you are over age 70 1/2 and still working, you may still be able to participate in your 401(k) at work and not have to take RMDs. The “still working exception” applies if you work the entire year, do not own 5% or more of the company, and the company plan allows you to delay RMDs. If you meet those criteria, you might want to roll old 401(k)s into your current, active 401(k) and not into an IRA. That’s because the “still working exception” only applies to your current employer and 401(k) plan; you still have to pay RMDs on any IRAs or old 401(k) accounts, even if you are still working.

We can help you manage your RMDs and optimize your tax situation. Remember that even if you do have to take an RMD, that doesn’t mean you are required to spend the money. You can always reinvest the proceeds back into an individual or joint account. If you’d like more information on the QLAC or other strategies mentioned here, please send me an email or give us a call.

What Are Today’s Projected Returns?

Posted On June 18, 2017 By Scott Stratton, CFP(R), CFA In Financial Planning, Portfolio Management /

One of the reasons I selected the financial planning software we use, MoneyGuidePro, is because it offers the ability to make projections based on historical OR projected returns. Most programs only use historical returns in their calculations, which I think is a grave error today. Historical returns were outstanding, but I fear that portfolio returns going forward will be lower for several reasons, including:

Above-average equity valuations today. Lower dividend yields than in the past.
Slower growth of GDP, labor supply, inflation, and other measures of economic development.
Higher levels of government debt in developed economies will crowd out spending.
Very low interest rates on bonds and cash mean lower returns from those segments.

By using projected returns, we are considering these factors in our financial plans. While no one has a crystal ball to predict the future, we can at least use all available information to try to make a smarter estimate. The projected returns used by MoneyGuidePro were calculated by Harold Evensky, a highly respected financial planner and faculty member at Texas Tech University.

We are going to compare historical and projected returns by asset class and then look at what those differences mean for portfolio returns. Keep in mind that projected returns are still long-term estimates, and not a belief of what will happen in 2017 or any given year. Rather, projected returns are a calculation of average returns that we think might occur over a period of very many years.

Asset Class	Historical Returns	Projected Returns
Cash	4.84%	2.50%
Intermediate Bonds	7.25%	3.50%
Large Cap Value	10.12%	7.20%
Small Cap	12.58%	7.70%
International	9.27%	8.00%
Emerging Markets	8.85%	9.30%

You will notice that most of the expected returns are much lower than historical, with the sole exception of Emerging Markets. For cash and bonds, the projected returns are about half of what was achieved since 1970, and even that reduced cash return of 2.50% is not possible as of 2017.

In order to estimate portfolio returns, we want two other pieces of data: the standard deviation of each asset class (its volatility) and the correlation between each asset class. In those areas, we are seeing that the trend of recent decades has been worse for portfolio construction: volatility is projected to be higher and assets are more correlated. It used to be that International Stocks behaved differently that US Stocks, but in today’s global economy, that difference is shrinking.

This means that our projected portfolios not only have lower returns, but also higher volatility, and that diversification is less beneficial as a defense than it used to be. Let’s consider the historical returns and risks of two portfolios, a Balanced Allocation (54% equities, 46% fixed income), and a Total Return Allocation (72% equities, 28% fixed income)

Portfolio	Historical Return	Standard Deviation	Projected Return	Standard Deviation
Balanced	8.53%	9.34%	5.46%	10.59%
Total Return	9.18%	12.20%	6.27%	14.23%

That’s pretty sobering. If you are planning for a 30-year retirement under the assumption that you will achieve historical returns, but only obtain these projected returns, it is certainly going to have a big impact on your ability to meet your retirement withdrawal needs. This calculation is something we don’t want to get wrong and figure out 10 years into retirement that we have been spending too much and are now projected to run out of money.

As an investor, what can you do in light of lower projected returns? Here are five thoughts:

Use projected returns rather than historical if you want to be conservative in your retirement planning.
Emerging Markets are cheap today and are projected to have the highest total returns going forward. We feel strongly that they belong in a diversified portfolio.
We can invest in bonds for stability, but bonds will not provide the level of return going forward that they achieved in recent decades. It is very unrealistic to assume historical returns for bond holdings today!
Investors focused on long-term growth may want more equities than they needed in the past.
Although projected returns are lower than historical, there may be one bright spot. Inflation is also quite low today. So, achieving a 6% return while inflation is 2% is roughly comparable in preserving your purchasing power as getting an 8% return under 4% inflation. Inflation adjusted returns are called Real Returns, and may not be as dire as the projected returns suggest.

Replacing Retirement With Work/Life Balance

Posted On June 4, 2017 By Scott Stratton, CFP(R), CFA In Retirement Planning /

72% of workers over the age of 50 plan to keep working in retirement, according to a 2014 Study. It seems to me we need a new word for “retirement”, because it no longer has the same meaning as it did 50 years or even 20 years ago. And then when we talk about Retirement Planning, people think it doesn’t apply to them.

Today’s workers are redefining how we think about work, life, money, and prosperity. The idea of achieving The Good Life varies from person to person, but there is a rising recognition that our sense of satisfaction and well being comes from a work/life balance and not simply having more money.

The traditional Retirement of working full-time to age 65, collecting your pension, and never working again, is disappearing. This change doesn’t just affect people in their sixties. Workers in their thirties, forties, and fifties are saying “Why should I work 50 hours a week during the prime of my life and not enjoy myself?”

And older adults don’t want to be thrown on the trash heap of obsolescence. They still have much to contribute, enjoy the challenge of work, and want to know that they can make a difference in the world.

The revolution is in how we think about work. People are no longer content to sacrifice their life for a company, career, or 401(k) account. Some call this The New Retirement, and while it does replace our old ideas about Retirement, these approaches have nothing to do with age. You could be 65 or 35 and embracing a whole different approach to work and retirement.

Below are 8 ways people are working and living differently today. Which are you? Which do you want to be? Where is your ideal work/life balance?

1) The Encore Career. Leave behind your practical first career and embark on something that fills you with joy. For some it may be working in the non-profit sector, or on a hobby, or passion. For others, it may be volunteer work if they do not need an income.

2) The Frugals. Many Americans will have to work forever to afford a huge house, new cars, and luxury lifestyle. More people today are rejecting consumerism with the belief that working to try to “Keep up with Joneses” is actually preventing you from enjoying your life. The Frugals are self-reliant and happy to find what they need used, on sale, or go without!

3) The Minimalists. They may live in a tiny house, have a very small wardrobe, or just hate clutter. It is surprising to me how many Minimalists used to have a lot of debt (student loans, car payments, credit cards. mortgages), and made a 180-degree turn to believing that less is more. Simplicity is happiness. Like the Frugals, Minimalists recognize that if you cut your annual expenses from $50,000 to $25,000, you only need half the assets or income to support your needs. That changes your reasons for work.

4) The Part-Timer. Also called the Phased Retirement, it’s a move from working full-time to less than full-time. Many part-timers work just enough to cover their bills. While that sounds spartan, if you are not touching your IRA or 401(k) for years, you are still letting those assets grow! Some companies are happy to have their veteran employees continue part-time, bringing their wealth of experience and knowledge to projects. And for many people, working 10-20 hours a week is the perfect amount to be enjoyable and rewarding, without being exhausting or too stressful.

5) The Retirement Entrepreneurs. Leave behind the 9-5 gig and start your own business as a consultant or by providing a good or service where you have some expertise. Be your own boss, have flexible hours, and work as much or as little as you need. Coupled with a pension, Social Security, or planned withdrawals, and you can still generate plenty of income. Or better yet, “retire” at 50 and use the business to bridge the years until you can tap into those real retirement income sources. In the past, many new businesses were very capital intensive, took long hours (50 hours or more per week), and had high rates of failure. Today’s lifestyle entrepreneurs want the 4-Hour Work Week, to not be an hourly slave, but to make money without huge risks or time commitments. And in the internet age, it can be done!

6) Multiple Income Streams. Many of the most financially secure people I know do not just have one job, they have multiple sources of income. Maybe one job is their main gig, and they also do consulting work, are a Reservist, own real estate, or have a weekend business. This gives you options. If one income stream takes off, you can drop the others and work part-time. In the mean time, you can save aggressively to become independent sooner.

7) The Traveler. Many people want to be able to see the world and spend more time with family. Today, with a laptop and a cell phone, more and more jobs are no longer tied to a desk. Smart people are looking for those positions – or creating them – so that they can work from anywhere. What if you could do your work from the Beach in the winter and the mountains in the summer?

8) The Contract Worker. In many fields, there are needs for short-term positions that may last 1-9 months. Some people will take a contract for 6 months, work hard, and then take off the next 6, 12, or 18 months. They can wait until they find another contract opportunity that interests them.

Francis Bacon said that Money makes a good servant but a bad master. Today more workers are asking how work can support their life and dreams, and not the other way around. They don’t want to be working forever and risk missing out on life. So, let’s put together your budget, look at the numbers, and start making plans. Financial Planning today is no longer just Retirement Planning – it’s helping you achieve your own path to independence, however you want to define it.

Resources for Helping an Aging Parent

Posted On May 28, 2017 By Scott Stratton, CFP(R), CFA In Retirement Planning /

Many Americans are helping to care for an aging parent or relative. Even if you’re not today, you may well find yourself in that situation in 5, 10, or 15 years from now. Sometimes that care is directly assisting with daily living, but often that care may be helping someone navigate the challenges of maintaining their independence for as long as possible.

Below are links to resources which can help. Organization and planning are key, and these are areas where a CFP professional like myself can help in ways that go way beyond just managing investments. We’ve organized this into three categories: Planning, Health, and Financial.

PLANNING

The Retirement Problem: What Will You Do With All That Time? From Knowledge@Wharton

Can We Talk? A Financial Guide for Baby Boomers Assisting Their Elderly Parents (book)

10 Tips for Holding a Family Meeting from Psychology Today

HEALTH

Getting Started With Medicare from Medicare.gov

NCQA Health Insurance Plan Ratings for comparing Medicaid Supplement Policies available in your state.

Long Term Care: Costs, How to Pay, Staying in Your Home, from the US Department of Health and Human Services

10 Early Signs and Symptoms of Alzheimer’s from the Alzheimer’s Association

Advance Care Planning from the National Institute on Aging

FINANCIAL

Social Security Retirement Planner

10 Things You Can Do to Avoid Fraud from the FTC

Getting Your Affairs in Order from the National Institute on Aging

Estate Planning for Second Marriages from the American Bar Association

Working with a financial planner is a way to bring a third party to help facilitate important discussions. There are so many vital questions to consider: Where would you like to live as you age? What health issues may impact this decision? Do you have a plan for care or extra help? Who will manage your assets and pay your bills? How will you communicate decisions and wishes to your family?

Planning for health issues, financial objectives, and family communication means parent’s wishes can be honored if or when a crisis occurs. Aging can be very stressful on family members, not to mention potentially a significant financial obligation. I think a lot of us would rather not think about our parents or relatives as aging, but we are doing everyone a disservice if we don’t talk about this and plan ahead.

Extracted from: Planning Concerns for the Aging Population, Susan Korngay, Journal of Financial Planning, April 2017, pp. 27-30.

What is the Best Way to Take Retirement Withdrawals?

Posted On May 21, 2017 By Scott Stratton, CFP(R), CFA In Retirement Planning / 1 Comment

If you are looking to retire in the near future or are recently retired, you may be interested to learn that how you take withdrawals from your portfolio may have a dramatic impact on the success of your retirement plan. Here’s a summary of a recent article in the Journal of Financial Planning.

Researchers considered a 60/40 portfolio with 4% withdrawals for retirement to examine different withdrawal strategies. They used historical equity returns since 1970, an assumed 2% rate of return for bonds, 1% in fees, 3% annual inflation increases, and a 30 year retirement horizon. They tested four different ways of withdrawing funds from a $1 million portfolio and calculated the percentage of success of each approach as well as the median portfolio value that was left over at the end of 30 years.

Strategy	Success Percent	Median Ending Value
Spend Stocks First	72%	$912,593
Annual Rebalancing	80%	$730,302
Simple Guardrail	94%	$1,390,418
Spend Bonds First	97%	$4,222,468

Most advisors suggest annual rebalancing. This approach keeps your portfolio pegged at a 60/40 allocation even as 4% annual withdrawals are taken. Note the success rate here was 80%, which means that in 1 out of 5 trials, the strategy failed to provide 30 years of inflation adjusted withdrawals. Annual Rebalancing also had the lowest Median Ending Value, which is important for a cushion if you or your spouse should live longer than 30 years, or if you would like to leave assets to heirs or charity.

The best result was obtained by Spending Bonds First. That means that a retiree would not touch their stocks at all while they spent down their entire 40% in bonds. At 4% withdrawals, it would take about 11 years until you had depleted your bonds and for the following 19 years, you would have a 100% equity portfolio. This type of strategy is sometimes called a “Rising Equity Glidepath” by Michael Kitces and other researchers.

Spending Bonds First might provide the best return because it begins with more than a decade of stock growth, with no withdrawals, which in most periods would have been a significant rate of return. However, this approach is controversial, because most practitioners (and regulators) believe that the typical retiree in their seventies or eighties does not have the risk tolerance to be 100% in equities. But, if you did have the stomach for this type of approach, there is evidence from this article and several others that validates the potential benefits of spending bonds first.

The Simple Guardrail may be easier for most retirees to tolerate and for advisors to adopt because it does not require moving to a 100% equity portfolio. The guardrail is simply this: no withdrawals are taken from stocks following a down year to give them a chance to rebound. The portfolio is also rebalanced back to 60/40 annually. While it doesn’t have the dramatically higher median ending value of Spending Bonds First, the guardrail still offers a noticeable improvement in success versus standard rebalancing, from 80% to 94%.

While Spending Bonds First may offer the best hypothetical results, it may be too aggressive for most retirees. The Simple Guardrail improves results on a more basic premise of giving equities an opportunity to rebound after a down year. In our next down year in equities, we will be talking with clients who are taking distributions about this idea.

The study is interesting, but it assumes one account and does not consider the real world complexities of taxes, multiple types of accounts, or Required Minimum Distributions. We look very thoroughly at each client’s withdrawal strategy to fulfill their income needs in the most efficient manner possible.

Source: Determinants of Retirement Portfolio Sustainability and Their Relative Impacts, DeJong and Robinson, Journal of Financial Planning, April 2017, pp. 54-62.

Robots and The Future of Work

Posted On April 3, 2017 By Scott Stratton, CFP(R), CFA In Financial Planning /

Technology will change work in ways we can only begin to imagine. Self-driving cars and trucks, for example, could eliminate 4 million transportation jobs in the next 10 or 20 years in the US alone. But it’s not just blue collar jobs which will be replaced. In medicine, we will increasingly see hospitals turning to artificial intelligence for diagnoses and incredibly precise robots for surgical procedures. It’s not that we won’t have human doctors, just that many of the tasks that they currently spend hours on every week could be done by computers with better accuracy, more consistency, and lower cost.

In finance, Blackrock, one of the world’s largest asset managers, announced last week they would be reducing the number of actively managed funds they offer, to focus more on quantitative investing using computer models. Rather than using human research and analysis, they are finding that computers may be better stock pickers, especially after costs are considered.

Jobs in manufacturing today are more likely lost to automation than to outsourcing to another country with a lower cost of labor. In almost every industry, fewer workers will be needed, and eventually we will even have robots designing, building, and repairing other robots.

With human workers being replaced by robots, Bill Gates has proposed taxing robots for the economic value of their productivity, rather than taxing humans based on their income. (Gates’ comments appeared in the Wall Street Journal, Forbes, and elsewhere this month.) This would help address the loss of tax revenue as companies employ fewer humans to create the same or higher economic output.

A frequently discussed use of a “robot tax” would be to create a universal living wage for all people, to help offset the loss of income from automation. It’s a novel idea.

It will be interesting to see what jobs will look like 25 and 50 years from now. Change is inevitable. Just as Henry Ford made horse drawn buggies obsolete, today’s technologies will inevitably cause some industries to go away. Instead of trying to save jobs in manufacturing, trucking, or coal mining, we might be smarter to not stand in the path of progress, and focus on being a leader in technology, automation, and clean energy.

Those are challenges for countries. I see two distinct challenges for individuals:

1) Are you in a profession which could be replaced by automation or new technology? If so, can you adapt while maintaining or improving your current income? Can you keep from becoming obsolete in a rapidly changing economy? Smart workers will manage their careers and proactively change jobs before it is forced upon them.

2) Your financial security will depend on your savings. Social Security is projected to be bankrupt by 2034 (when I turn 62, just my luck…), and many municipal and corporate pensions are significantly underfunded. It’s easy to bemoan that we deserve what was promised to us, but that doesn’t change the math: people are living longer, the ratio of workers to retirees has fallen dramatically, and the money simply isn’t there. What seemed feasible in 1950 or 1980 we know doesn’t work with 2017’s demographics.

There is no easy fix to just keep these programs as they are today without enormous tax increases. There will be cuts to retirement programs, whether that occurs through increasing the retirement age, reducing benefits, etc. I believe they will continue to exist, just perhaps not in their current form. People who will derive the bulk of their retirement income from Social Security are at the greatest risk of poverty.

It may seem depressing to think about how the future may displace workers, but technological progress is going to be net positive for society. We will reduce mundane and dangerous jobs, lower costs of goods and services, and increase our total wealth and consumption. And people who say that we don’t make anything anymore aren’t considering the impact and future benefits that are going to come from US leaders like Apple, Tesla, Google, and hundreds of other medical, software, and energy innovations. Work will change – for the better.

Can You Be Too Conservative?

Posted On February 13, 2017 By Scott Stratton, CFP(R), CFA In Retirement Planning /

As you approach retirement, you are probably thinking quite a bit about making your investment portfolio more conservative. We generally recommend that investors start dialing back their risk five years before retirement.

However, it is possible to be too conservative. Retirement is not an single date, but a long period of sustained withdrawals. We typically think in terms of a 30-year time horizon, which is not unrealistic for a 60 to 65-year old couple, given increasing longevity today.

The old rule of thumb was to subtract your age from 100 to determine your allocation to stocks. For example, a 65-year old would have 35% in stocks and 65% in bonds. Unfortunately, this old rule of thumb doesn’t work for today’s longer life expectancies.

Researchers analyzing the “4% rule” used for retirement income planning, typically find that optimal allocation for surviving a 30-year distribution period has been roughly 50 to 60 percent stocks. For most new retirees, we generally suggest dialing back only to 50/50 or 60/40 in recognition that the portfolio still needs to grow.

We still need growth in a retirement portfolio to help you preserve purchasing power as inflation erodes the value of your money. At 3% inflation, your cost of living will double every 24 years. So if you are retiring today and thinking that you just need $40,000 a year, you should be expecting that need to increase to $80,000 or more, to maintain your standard of living.

Another reason retirees should not be overly conservative: interest rates are very low today. Bonds had a much better return over the past 30 years than they will over the next 30 years. That’s not even a prediction, it’s just a fact. When we use projected returns rather than historical returns in our Monte Carlo simulations, it suggests that bond-heavy allocations are not as likely to succeed as they were for previous retirees. See: What Do Low Interest Rates Mean For Your Retirement?

The other side of today’s low interest rates is that some investors are reaching for yield and investing in much lower-quality junk bonds. While retirees often focus heavily on income producing investments, financial planners and academic researchers prefer a “total return” approach, looking at both income and capital gains.

We don’t want to take high risks with the bond portion of our portfolios, because we want bonds to provide stability in the years when the stock market is down. High Yield bonds have a high correlation to equities and can have significant drops at exactly the same time as equities.

We manage to a specific, target asset allocation and rebalance annually to stay at that level of risk. That gets our focus away from stock picking and looking at the primary source of risk: your overall asset allocation of stocks, bonds, and other investments. While no one can predict the future, a disciplined approach can help avoid mistakes that will compound your losses when market volatility does occur.

The Boomer’s Guide to Surviving a Lay-Off

Posted On December 19, 2016 By Scott Stratton, CFP(R), CFA In Financial Planning, Retirement Planning /

Most people in their fifties and sixties have a very specific vision of their retirement. But if you find yourself unexpectedly getting laid off at age 55, or 63, you are probably feeling extremely stressed about your plans being thrown off course. The reality is that many people retire earlier than they had originally intended due to being laid off, or because of health or family reasons.

We build detailed retirement analysis packages looking at when you can retire, how much you can spend, and how long your money will last. As much science and math goes into those calculations, we should recognize that things don’t always go as planned and that we may have to adjust our plans. If you find yourself unexpectedly out of a job, I want you to know that things will be okay and we can help give you a more informed dissection of what to do next. Here are five steps to get started:

1) Address immediate needs

Figure out your health insurance. COBRA may be very expensive, so take the time to compare COBRA to an individual plan. A lay-off is a qualifying event, so you may be eligible to join your spouse’s health plan without waiting until the next open enrollment period. Avoid gaps in your coverage. Researching your health insurance will likely take more hours than you want to spend, but it’s important to get it right.
Please note that if you are over 65 and did not sign up for Medicare because you had employer group coverage, that post-employment, you have an 8-month Special Enrollment Period to sign up for Medicare without incurring the lifetime surcharge. COBRA is not considered group coverage and will not delay the start of this 8-month window.
File for unemployment benefits so you can receive benefits as soon as you are eligible. You should never quit a job in advance of a layoff; doing so could jeopardize your eligibility for unemployment.

2) Create your household budget

Are you burning cash? How much money will you have left in 6, 12, or 24 months? Making a budget is how you will know. Uncertainty creates fear; planning creates clarity.
Can you live off one spouse’s income? Can you cut expenses? This is often not that difficult to do, but we resent it, because it was unplanned and forced upon us against our wishes. But we cannot stick our heads in the sand and ignore a new financial reality. If you are going to make changes, make them without delay.

3) Start your job search immediately

You have to document weekly job search activity to receive unemployment benefits, so you might as well get started!
It may take you much longer than expected to get your next job. Some of this may unfortunately be due to age discrimination, so I would not discount that consideration. However, many veteran employees have a skill set that was unique to one employer. You may need other skills for what the marketplace requires today. Lay-offs typically occur in jobs where there is a reduction in demand. Your next job may need to be very different.
Be careful of anchoring to your past income. If you are holding out that your next job will be the same work at the same pay as your old job, that may not be a realistic expectation.
Polish your resume and application; consider getting professional help with these materials. Most applications are done online today, so your words represent you. Practice your interview skills and be prepared to answer any question. Network with colleagues and meet with someone every week to chat about your next steps.

4) Consider retiring early

Maybe you are 63 and were planning to retire at 65. The layoff could be a blessing in disguise and will allow you to retire now. Make your budget and let’s take a look at your retirement plan. If you can afford it, why not go for it?
You may realize that you don’t enjoy your work as much as you used to and have other interests now. If you used to make $100,000, you might not be willing to work 50 hours a week for $65,000. Or you may decide that starting a new career isn’t going to be very fulfilling, if all you are doing is marking time for 2-3 years. Consider all your options.

5) Delay spending your nest egg

Can you hold off on withdrawals for a few years and get by on a spouse’s income or from existing cash and unemployment benefits? Postponing withdrawals by even two or three years can have a significant impact on the longevity of your portfolio.
Try to avoid dipping into your IRA and 401(k) at age 60, if you were not planning to touch those monies until age 66. The best withdrawal strategy remains to wait until age 70 1/2 and then take only your Required Minimum Distributions.
Lay-offs are one of the most common reasons people start Social Security benefits early. If you have longevity concerns – and most people should – you want to delay those benefits for as long as you can, even to age 70. You get an 8% increase in benefits by delaying for each year past full retirement age. Patience pays.
Take a part-time or seasonal job if it means you can avoid tapping your retirement accounts. Unemployment benefits are based on weekly income, so you would be better off working 40 hours in one week and zero the following week, versus working 20 hours both weeks.

Bonus: 6) Take care of your emotional needs

It’s easy to focus on the financial aspects of a lay-off, but the emotional impacts are even greater. If you are not yet financially ready for retirement, a very real concern is running out of money in your seventies or later. We need to address those fears with a revised financial plan.
It’s natural to feel resentment and even betrayal when you were planning on giving a company the rest of your working years, and they decide instead to kick you to the curb. It’s important to not take this personally. A lay-off does not have anything to do with your value as a human being, a parent, or even as an employee. If you still feel enthusiasm, optimism, and joy in your work, then your positive attitude will be as valuable to your next employer as your experience!
We need to have a sense of identity, self-worth, and purpose that is not tied to our job. We are more than just an accountant, teacher, or engineer. Many people who are laid off go through the same work withdrawal they would have experienced at retirement. They don’t have their old routine, colleagues, or sense of belonging. Can you fulfill those needs in another way, such as through part-time work, free-lancing, or volunteering? What exactly is it that you miss?

While you can do all these steps on your own, what may give you the most confidence to move forward is to meet with me and prepare a new financial plan. I’ve met a lot of folks in the same situation and can help. We will put together a detailed analysis reflecting your new situation, evaluate all your options, and chart a new course.

Sometimes we choose change and sometimes it is thrust upon us. Change isn’t always easy or what we would have preferred, but ultimately, it’s our attitude that determines how successfully we can adapt.

6 Steps at Age 60

Posted On September 12, 2016 By Scott Stratton, CFP(R), CFA In Retirement Planning / 1 Comment

The sixties are a decade of financial change. Are you prepared? Here’s my checklist to confirm if your finances are in good order at age 60.

1) 12.5X annual income. At this point, you should have saved at least 12.5 times your annual income in your investment and retirement accounts. Why 12.5 times? When you retire, we will recommend an initial 4% withdrawal rate. To replace one-half your income from investments, you would need 12.5X. For example, if your income is $100,000, we’d want at least $1,250,000 in investments to provide $50,000 a year in distributions.

Why replace only half your income? Won’t that be a significant drop in your standard of living? As an employee today, you are subject to payroll taxes (7.65%) which will not apply to your retirement income. Since you are saving today for retirement, that “expense” will go away in retirement. Plus the 50% is only withdrawals – when we include Social Security, and possibly pension income, your income replacement rate may be 70% or higher.

You may disagree with this, because at age 60, you have no immediate plans to retire. Therefore, you think this does not apply to you. Wrong. The 2016 Retirement Confidence Survey from the Employee Benefits Research Institute finds “a considerable gap exists between workers’ expectations and retirees’ experience about leaving the workforce.” Although 37% of workers expect to work past age 65, only 15% of retirees actually retired at this age. Most reported retiring for reasons beyond their control, such as layoffs, health issues, or family reasons. So, just because you plan to keep working does not guarantee that you will actually be able to do so.

Even if you do not retire for another five years, the market might not be higher over this short time frame. Certainly that was the experience for people who retired in January of 2009. If you already have 12.5X your income by age 60, then you aren’t dependent strong market performance in your last years of work to get you to the finish line.

2) Estate plan. If your will and documents are more than five years old, it’s time to revisit your estate plan for an update. This should include:

Checking the beneficiaries on your retirement plans, IRAs, life insurance, and annuities.
Updating your Will.
Establishing Directives and Powers of Attorney if you should become incapacitated.
Considering if you have the potential for an Estate Tax liability; considering whether trusts are needed for asset protection, tax planning, or special needs.

3) Health Care. Modern healthcare is extending the human lifespan. Even more significant than the added years is the high quality active lifestyle that people are leading in their seventies and even eighties today. Many of the miracles of modern medicine are in the early detection, treatment, and cure of common diseases such as cancer and heart disease. If you want to enjoy these life-saving advances, you have to participate and have regular screenings and testing as recommended by your physician. Don’t ignore minor symptoms, bring them to your doctor’s attention as soon as possible.

I think many of us are reluctant to go see a doctor when we feel well or can find an excuse to not go. Without your health, you are not going to be able to enjoy the fruits of your decades of work. Make a small, but essential, investment in your future by taking care of your self.

4) Long-Term Care Plan. Note, this says plan, it does not say insurance. Not everyone needs to have Long-Term Care Insurance, some people can afford to self-insure. No one wants to think of themselves as being in a nursing home. However, as people are living longer, more of us will need assistance. Today, many LTC insurance policies include coverage for home health care and aides, meaning that the policy may actually be the reason why you can stay at home and not have to go to a nursing home.

At age 50, people aren’t interested in buying LTC when it is 30+ years away. At age 70, a policy will be prohibitively expensive, and you won’t want to buy one even if you could afford it. Age 60 is the sweet spot for buying LTC insurance. Here’s what you should do: determine if you can afford long-term care in the future without the insurance. If not, contact me for more information. If leaving money to heirs or charity is a top priority for you, you should actually consider the insurance as it will reduce the possibility of depleting your assets if you should need care.

5) Social Security Statement. Create your account on ssa.gov and download your statement.

These estimates assume you continue to work until the age of retirement. Know your Full Retirement Age, and learn about how benefits are reduced for early retirement and increased for delaying up to age 70.
The spouse with the higher benefit will provide a benefit for both lives, under the survivorship benefit. Therefore, you should try to maximize the benefit of the higher earning spouse by delaying, if possible, to age 70.
Statements do not list spousal benefits, and all amounts are in today’s dollars. Benefits will accrue Cost of Living Adjustments to keep pace with inflation.

6) Health Insurance. Keeping your benefits is essential until age 65, when you become eligible for Medicare. When you do receive Medicare, you will still have to pay premiums for Part B, as well as any Supplement, Advantage, or drug plans. Don’t neglect to include these costs in your retirement budget!

Back in 2008, I realized that many of my clients had similar questions once they were within five years of retirement. This is a crucial final period of preparation for your decades ahead. To help educate pre-retirees about these issues, I wrote Your Last 5 Years: Making the Transition From Work to Retirement as your guidebook. Email me for a copy or order one from Amazon!

To Roth or Not to Roth?

Posted On August 29, 2016 By Scott Stratton, CFP(R), CFA In Retirement Planning /

The question of “Roth or Traditional” has become even more complicated today with the advent of the Roth 401(k). Which should you choose for your 401(k)? Like many financial questions, the answer is “it depends”.

In asking the same question for an IRA, investors often look at their eligibility for the Roth versus their ability to deduct the Traditional IRA contribution. For the 401(k), that’s not an issue – there are no income restrictions or eligibility rules for a Traditional 401(k) or a Roth 401(k). You should also know that while you may choose Roth or Traditional contributions, any company match will always go in the Traditional bucket.

How to choose, then? Here are five considerations to making the decision:

1) If you are going to be in a lower tax bracket in retirement, it’s preferable to defer taxes today and pay taxes later. If this describes your situation, then you are likely better off in the Traditional 401(k). A majority of people should have an expectation of lower taxes in retirement.

2) The problem is that we don’t know what future tax rates will be. We do know that we are running massive budget deficits and that the accumulated national debt is a growing problem. While every politician wants to promise lower taxes to get votes, that seems unrealistic as a long-term solution to our budget issues. Retirees are often surprised that their taxes do not in fact vanish in retirement. Pension, Social Security, RMDs, etc. are all taxable income.

Link: Taxes and Retirement

If you believe you will be in the same or higher tax bracket in Retirement, then the advantage goes to the Roth. While you will not realize a tax benefit today from a Roth contribution, your money will grow tax-free. If you are going to pay the same tax rates in the future as today, you would be indifferent, in theory. Except that…

3) When you reach retirement, a $1 million Roth gives you $1 million to spend, whereas $1 million in a Traditional IRA or 401(k) may be worth only $750,000, $600,000, or less after you take out Federal and State income taxes. This means saving $18,000 in a Roth 401(k) is worth more than the same $18,000 in a Traditional 401(k), because the Roth money will be available tax-free.

If you are in a lower tax bracket or can comfortably pay the taxes, then the Roth may be preferable. In retirement, if you have both Roth and Traditional accounts, you can choose where to take withdrawals to best manage your taxes. (We call this tax diversification.)

4) The only caveat to the Roth contribution is that contributing to a Traditional 401(k) can lower your Adjusted Gross Income (AGI). If having a lower AGI would make you eligible for a tax credit, or eligible for an IRA contribution, then it may be beneficial to choose the deductible contribution.

For example: The Saver’s Tax Credit

5) There are no Required Minimum Distributions from a Roth account. If you are in the fortunate position to have plenty of retirement assets, making Roth contributions will add to tax-free assets, rather than creating an RMD liability for when you turn 70 1/2.

Last thought: for the past two decades, I have met people who don’t want to invest in a Roth because they think the government will take away the tax-free benefit in the future. I don’t see this happening. The government actually prefers Roths because it increases current tax revenue rather than the Traditional, which decreases current taxes. And I don’t see Roth accounts being used or abused by Billionaires or corporations – the amounts are so small and used mainly by working families.