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

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.

How America Saves

Posted On July 4, 2016 By Scott Stratton, CFP(R), CFA In Retirement Planning /

Defined Contribution (DC) Plans are the backbone of retirement planning in America. Vanguard manages DC plans for 4 million Americans, with over $800 Billion in assets. So, I am always interested to read their annual report, How America Saves, which offers a window into the state of retirement preparation in America.

Link: How America Saves, 2016 Report

Looking through this year’s report, I see both reasons for optimism as well as concern. On the positive side, 78% of eligible employees participated in their company plan. And the average account balance was $96,288. It’s great that a majority of employees are participating.

However, it is surprising to discover the difference between the average and the median. (As a quick refresher, the median is the data point that is exactly in the middle – with half being higher and half being lower than this point.) The difference between the average and the median scores in Vanguard’s report belies a growing chasm between participants who save the minimum and those who save as much as they can.

While the “average” account balance was $96,288 in Vanguard Retirement Plans, the median participant had only $26,405. That means that half of all accounts have under $26,405, and that the average is skewed higher by very large accounts of $300,000, $400,000 and more.

The problem is that many participants are simply not contributing enough. The average deferral rate is 6.8%, but the median again is lower: 5.9%. Disappointingly, the average deferral rate is down from 7.3% in 2007, which means that most people are saving even less than they were 10 years ago.

People really do need to save 10% or more for their retirement. Instead, many invest only 3% or whatever is the default minimum. That’s because many participants only contribute up to the company match. In fact, when I ran a plan for a small company with a dozen employees, all but two only contributed up to the match. When you contribute the minimum over the course of a career, you are not thinking in term of the outcome. Will I have saved enough to fund a comfortable retirement? Am I on the path to financial independence?

However, there are good savers out there. 20% of the participants in a Vanguard plan are saving more than 10% of their salary into their retirement plan. These are the accounts which are bringing up the median of $26,405 to the average of $96,288. And this is what you want to do -you want to be a savings overachiever!

Over time, compounding makes a huge gap between people who contribute the minimum versus those who save more. To examine this, let’s consider two employees: Minimum Mike and Saver Sally. They both have the same salary of $45,000 and earn 3% raises over the next 35 years. Mike contributes 3% to his 401(k) and gets the company match of 3%. Sally contributes 10% and also receives the 3% match. Both earn a return of 7% compounded annually.

Here are their account balances after 35 years:
Minimum Mike: $567,615
Saver Sally: $1,230,417

Saving 10% really does make a big difference over the length of a career. Although the news media would like for you to believe that your financial future hangs by a thread on the outcome of the Brexit, or the Presidential Election, or whatever new crisis is on that day, the reality is that the biggest determinant of your long-term wealth is likely to be the percentage you contribute.

Being average is still a lot better than being median. If you want to be above average, start by increasing your deferral rate.

There is still time to increase your 401(k) or 403(b) contribution for 2016. The maximum contribution is $18,000 for 2016, with an additional catch-up of $6,000 if you are over age 50.

Can You Retire In Your Fifties?

Posted On June 27, 2016 By Scott Stratton, CFP(R), CFA In Retirement Planning /

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I recently wrote that most people should plan to work to age 70 before retiring. As a society, embracing 70 as the new full retirement age, would greatly alleviate the forthcoming retirement crisis and reduce the level of poverty in senior citizens. While there are many advantages to waiting until 70, I also see how attractive it would be to retire in your fifties while you are young and healthy.

With enough planning, saving, and advanced preparation you can retire in your fifties. But, retiring at 55 is not the same as retiring at 65. Social Security won’t kick in until 62, and if you read my previous article, you know I suggest waiting until 70. You won’t have Medicare until age 65, so you will need to have your own health insurance coverage, a significant expense which keeps many would-be retirees in the workforce until 65.

I’m going to go through the math of how you might be able to retire in your fifties, and then I’m going to tell you how most fifty-year old retirees actually did it. (Which may disappoint you…)

The “4% rule” suggests that the safe withdrawal rate from a 60/40 portfolio is to start at 4% and subsequently increase your withdrawals for inflation to maintain your standard of living. This research, assumes a 30 year retirement period, such as 65 to 95. If you retire at 50 or 55, it is likely that you or your spouse could live for another 40 or 50 years, especially with continued advances in medical care.

Unfortunately, the 4% rule has a higher failure rate when applied to periods longer than 30 years. That’s because market volatility, especially in the early years of a plan, increases the possibility that an account will be depleted. So, if someone wants to retire in their fifties today, they may need to use an even more conservative withdrawal rate, such as 3%. That way their account will still grow, net of withdrawals, to cope with the inflation that will occur over the next 40 plus years.

Currently, we have record low yields in the bond market, and relatively high valuations (Price/Earnings or P/E ratio) in the stock market. Looking forward, our expected returns should be lower than historical returns. This is another reason why a 4% withdrawal strategy may be too aggressive today for someone who wants to retire in their fifties.

Link: BlackRock CEO says retirement savers should expect returns of as little as 4%.

An alternative to the 4% Rule is the Actuarial Method, which is what the IRS uses for Required Minimum Distributions: you take your current life expectancy and use that as a divisor to determine your withdrawal rate. If you think your life expectancy is 33 years, use 1/33 or approximately 3%.

Then to retire in your 50’s here’s the rule of thumb: at a 3% withdrawal rate, you need your investment assets to equal 33 times your annual withdrawal. For example, if you plan to spend $100,000, you should have at least $3.3 million in your investment portfolio.

This is a pretty high hurdle for most investors. Few people in their 50’s will have accomplished this level of assets, especially if they are still paying mortgages or for their children’s college educations.

The majority of people I know who have actually retired in their fifties have something I have not mentioned: an employer pension. They may have worked for the military, a municipality, school district, or increasingly rarely, a large corporation, and stayed for 25 or 30 years, starting in their twenties. Now in their mid fifties, if they are debt free, it may be possible for them to retire with a pension that pays maybe to 50 to 80 percent of their previous salary. Their taxes will be much lower, so they will actually keep a higher percentage of their pension and there will not be any OASDI or Medicare taxes withheld.

If their pension covers their basic necessities, they can avoid dipping into their portfolio, which can be used for discretionary spending. When the market is up for several years, they can spend a little more on trips or buy a new car. If their portfolio is down, they can hold off on purchases until the market rebounds. And while they may be scrimping by for now, they may get a raise later when they or their spouse become eligible for Social Security. But the key ingredient remains the guaranteed monthly income from their pension.

Most of us will not have a pension, in which case, we will need to be very aggressive savers if we are to end up with a portfolio 33 times the size of our annual withdrawal requirements. If you want to retire in your fifties, I can help you do it. It will take years of planning, so the best time to get started is right away.

Do You Know Your Spouse’s Beneficiary Designations?

Posted On June 20, 2016 By Scott Stratton, CFP(R), CFA In Financial Planning /

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Beneficiary designations are important. The people you list on your IRAs, retirement plans, and life insurance policies will receive those monies regardless of the instructions in your will. What happens when you don’t indicate a beneficiary or if the beneficiary has predeceased you? In that case, the estate is named as the beneficiary of the account.

It is usually much better if you have a person indicated as the beneficiary rather than the estate, for the following reasons:

If a person is the beneficiary, they can receive the assets very quickly by completing a distribution form and providing a copy of the death certificate. When the estate is the beneficiary, you may tie up the assets in probate court for months, or even years.
A person can roll an inherited IRA into a Stretch IRA and keep the account tax-deferred. The beneficiary is required to continue taking Required Minimum Distributions, but even doing so, the IRA can last for many years. When a spouse is the beneficiary of an IRA, he or she can roll the assets into their own IRA and treat it as their own. By spreading distributions over many years, taxes may be lower than if you took a large distribution all in one year and are pushed into a higher tax bracket.
When the estate is the beneficiary, they do not have the option for a Stretch IRA. They can either distribute the IRA immediately or over 5 years. Either way, the estate will be paying taxes sooner than if the beneficiary was a person.
The tax rate on estates can be much higher than for individuals. An estate or trust will pay the maximum rate of 39.6% on income over $12,400 whereas a married couple would hit this tax rate only on taxable income that exceeds $466,950 (2016 rates).

For many individuals, a substantial portion of their estate may be in IRAs, retirement plans, life insurance and annuities, where the beneficiary designation is vitally important. In the last two months, the IRS has issued two Private Letter Rulings (PLR) specifically on beneficiary designations and the rights of surviving spouses. A PLR is official guidance from the IRS on how they interpret and enforce tax law, based on specific cases which are brought to the IRS.

In PLR 201618011, a spouse did not indicate any beneficiaries on her IRA. When she passed away, the absence of a beneficiary designation meant that the estate would be the beneficiary of the IRA. The husband was the sole beneficiary and executor of the estate under her will. The IRS ruled that in this scenario, the surviving spouse has the right to rollover the inherited IRA and treat it as his own, even though the decedent failed to designate a beneficiary. This exception is granted only for surviving spouses and does not apply to other beneficiaries, such as children.

On June 3, the IRS issued PLR 201623001, which is of particular interest to Texas residents as it deals with community property issues for married couples. (Texas is one of nine states with Community Property laws.) A man listed his son as the sole beneficiary of his three IRAs. He passed away and his wife claimed that she should be entitled to one-half of the IRA assets because they were community property of the marriage. The IRS ruled that Federal Law takes precedence over state law and rejected her claim.

Both of these rulings show how important it is to know your spouse’s beneficiary designations on all of their accounts. Even if you have a will that is up to date and perfectly legal, it won’t help you if you don’t indicate a beneficiary, or indicate the wrong person. Review your beneficiary designations every couple of years and especially if you have gotten married, divorced, or had births or deaths in your family.

Beneficiary designations are not exciting or complicated. However, a big part of financial planning is getting organized and taking care of these small details. If your beneficiary designations are wrong, it could have a major impact on your heirs and cost thousands in additional, unnecessary taxes.

Is This Amazing Technology A Danger To Your Career?

Posted On June 6, 2016 By Scott Stratton, CFP(R), CFA In Retirement Planning / 1 Comment

Last October, electric car maker Tesla introduced self-driving features into its cars overnight, with a software update installed via wifi. In January, General Motors invested $500 million into car-service Lyft with plans to begin testing driver-less car services for actual customers in one year. Google, Apple, Ford, Toyota and others are racing to produce self-driving cars and we are very, very close to seeing this incredible technology become a reality. Could your next car be an Apple iCar?

Technological change is nothing new, but we may be on the verge of seeing the rate of change increase dramatically, with significant implications for individuals and the economy as a whole. Some of these changes are fairly easy to predict, but there will be secondary and tertiary impacts which will be much more difficult to imagine. And while the changes will be net positive for society, cost savings often come about when jobs which are no long necessary become eliminated.

Self-driving cars will be much safer, virtually eliminating accidents from distracted driving, driver error, fatigue, or drunk driving. Driver-less trucks and taxis will gradually replace drivers, reducing transportation costs. Families will no longer need two, three, or four cars, and many will forgo car ownership altogether, being able to summon a vehicle for the relatively few minutes a day they require transportation. Your newborn child or grandchild may never even have a driver’s license!

Speeding tickets and traffic infractions will decline, creating budget gaps for cities who previously enjoyed significant revenue. Warren Buffett called self-driving cars a “real threat to insurers” like GEICO, which derive substantial revenue from car insurance. As insurance premiums fall for safer driver-less cars, you can expect that premiums for the remaining human drivers will skyrocket as they will quickly become the high risk vehicles on the road.

There are so many positives about driver-less cars that will make our lives better. However, if you are a truck driver, own an auto body shop, work for an insurance company or emergency room, you should expect less demand for your services, reduced revenue, and loss of jobs across your industry. For those individuals, the driver-less car will have the same effect as Henry Ford’s Model T had on carriage makers and buggy whip manufacturers a hundred years ago.

Innovation is great for society and the economy, but can come at a high cost for those individuals who get left behind. Last month, I wrote about the benefits of working until age 70. The greatest challenge for many people will not be their ability or willingness to work until 70, but just keeping their job for that long.

Last year, I met an individual who lost his job of 30 years at age 57 when his employer closed. He wanted to keep working and was not prepared, financially or emotionally, for retirement. However, his skill set was decades out of date. He wanted to hold out for his old salary and was unwilling to relocate or consider jobs that were not near. He looked for a job for three years before officially declaring himself retired at age 60. Now, he has no choice but to start Social Security at age 62 and lock-in a greatly reduced benefit. His retirement will be quite tight, which wouldn’t have been the case had he been able to work and save for another 8-10 years as he had originally planned.

To work to age 70, most folks will have several different careers and will need to continually educate themselves and possibly even retrain entirely if their profession is going to be impacted by innovations such as the driver-less car. Education will become life-long, instead of something which is completed and left behind in your early twenties. There is no doubt that it is a challenge to be a job seeker in your 50’s or 60’s, which is why the best thing for those at risk of job loss is to keep your skills and certifications fresh and to change jobs before you find yourself unemployed.

The two most valuable companies in the world today are Apple and Google, each with a valuation of roughly $500 Billion. That shows the remarkable economic opportunity behind innovation. And Google created that value in less than 18 years! As investors, it’s easy to recognize the growth achieved from new technology. For the sake of your individual financial plan, however, you first need to make sure that you will have an income to save and invest! Consider what are the risks to your career before those risks become a reality.