Risk Management Is About More Than Your Investments
A lot of financial services professionals talk about “risk” when it comes to your stock market investments. But risk can encompass more than your investment risk tolerance. The broader definition of financial risk is the possibility of loss from any unexpected life event.
For instance, what will happen to your family’s income if one spouse passes away, becomes disabled or unable to work, or needs long-term care? What happens to your kids’ education fund, or your retirement? Risk management in this case means shifting risk of financial loss from adverse events to an insurance company in order to protect your family’s assets and lifestyle.
New Innovations in Life Insurance
First and foremost, life insurance offers financial protection to your family by helping mitigate the risks that you face from life’s unexpected tragedies, as it has done for hundreds of years. But in the last decade, life products have expanded and improved to offer much more.
Many new types of insurance policies and policy rider innovations have come about in order to answer the needs of Baby Boomers–10,000 of whom are turning 65 every day and will continue to do so until 2030.1
Life insurance companies are now covering a whole host of pre-retiree and retiree risks with permanent universal insurance policies and fixed annuities which offer features like:
1) Lifetime income in retirement
2) Spousal survivorship benefits
3) Long-term care coverage if needed
4) Disability coverage if needed
5) Income tax advantages
6) Tax-advantaged wealth transfer or death benefit
Universal Life Insurance or Fixed Annuities as Part of the Retirement Portfolio
In addition to the many retirement risks they can help address, new types of life insurance policies and fixed annuities may have other attractive advantages. Some of the newest policies offer the chance for growth by earning interest linked to market performance. And this potential growth comes with guaranteed* principal backed by the financial strength of the insurance carrier.
These are just some of the reasons more and more financial advisors are including permanent life insurance and/or annuities as part of the retirement portfolio itself.
Let’s Talk About Your Family
1 Pew Research Center “Baby Boomers Retire.” http://www.pewresearch.org/fact-tank/2010/12/29/baby-boomers-retire/ (accessed September 10, 2018).
This article is for informational purposes only and is not intended to provide any recommendations or tax or legal advice. We encourage you to discuss your tax and legal needs with a qualified tax and/or legal professional.
*Guarantees and protections for fixed or fixed indexed annuities and/or universal or indexed universal life policies are subject to the claims-paying ability of the issuing insurance company. These policies are contracts purchased from a life insurance company. They are designed for long-term retirement goals, and also intended for someone with sufficient cash and liquid assets for living expenses and unexpected financial emergencies, including, for example, medical expenses. Depending on the product, they may include surrender charges, rider charges, life insurance premium charges and/or other fees as detailed in the individual contract.
An indexed annuity or indexed life insurance product is not a registered security or stock market investment. As such, it does not directly participate in any stock, equity or bond investments, or index. Gains on indexed accounts are based on participation rates and other conditions offered by the issuing insurance company. Depending on the nature of funds used to purchase annuities, withdrawals may be subject to income tax and withdrawals before age 59½ may be subject to a 10% early withdrawal federal tax penalty.
When you hear “risk of longevity,” what exactly is meant? Longevity refers to “long life” or “length of life.” Simply put, longevity risk is the risk that someone will outlive their wealth and available income.
It’s a fact that people are living longer. Not only has the average life expectancy increased, but one out of every four 65-year-olds living today will live past the age of 90. One out of 10 will live past 95--the number of people living to age 100 increased more than 43% from 2000 to 2014!
From a financial point of view, living a long time can drastically affect many of your retirement costs, impacting and presenting a “risk” to many different items in your budget—right when you will be living on a fixed income.
Let’s examine some of the issues affected by longevity:
1. Health Care
Health care expenses are a huge chunk of any retirement budget—even with Medicare. A healthy 65-year-old couple can expect to spend approximately $266,589 to cover health care expenses not covered by Medicare Part A during their retirement for Medicare Parts B, D and a supplemental insurance policy (sometimes called Part C). This assumes at least one of them worked and paid Medicare taxes and so their Medicare Part A premiums are covered.
And that total doesn’t even include dental, vision, co-pays, deductibles and out-of-pockets. When you add those in, a couple’s costs rise to $394,954 throughout retirement. Living longer not only increases yearly health care outlays, but your chances of developing a serious health issue increase as you get older.
Your odds of becoming incapacitated also increase with age, which could lead to the need for nursing care. In fact, 70% of people over 65 end will up needing some form of assistance. The average yearly cost of a semi-private room in a nursing facility is $80,300.
Yes, you can qualify for Medicaid to cover your nursing home stay—if you spend down all of your assets to poverty level. There are options to this scenario that you definitely want to consider.
Prices will continue to get higher through the years—in fact, inflation is part of the Federal Reserve’s monetary policy. Inflation undermines your purchasing power over time. While it’s true that if the Consumer Price Index (CPI) rises in a given year, retirees sometimes get a COLA (Cost-of-Living Adjustment) increase on their Social Security benefit check, you’d best not count on that. For the last few years, there has been no COLA, primarily because of low oil/gasoline prices. It goes without saying that the longer you live, the more you will spend on consumer goods and living expenses.
4. Excess Withdrawal / Inadequate Income
If your portfolio isn’t structured properly to provide enough income for a long life, you really are at risk of running out of money. Unexpected family expenses or needing to withdraw money during a market downturn can affect your nest egg negatively for the long term (kind of like compound interest in reverse). The death of a spouse is also a risk to your income, as Social Security benefits will likely decrease and taxes will increase due to fewer household exemptions.
The point of this article is not to inspire fear, but to inspire early, realistic retirement planning. Don’t worry about the future--let’s make some solid plans!
There has been a lot of talk about 401(k) since the House passed the Secure Act. It will still need to be voted on by the Senate and passed to the president but there are many large companies that are lobbying for it’s approval. I think this is a perfect time to review one of the bill’s most controversial provisions allowing more annuities in 401(k) plans. No one can argue that many Americans are aware of the word “annuity” and are quick to judge so let’s have a quick review of the history of annuities.
The annuity concept has been traced back to the Roman Empire. In return for their service, soldiers and their beneficiaries would receive annual payments for life known as “annuas,” the basis for the word annuity.
In the 17th century, these contracts were structured in the form of a “tontine” by feudal lords. Investors would contribute to a large pool of cash and receive annual payments for life. Upon death the payments ended and the remainder was redistributed among the group. If you were lucky enough to outlive everyone else in this arrangement you received the balance of the pool.
Despite their simple structure in the beginning, annuities have become increasingly sophisticated over time. When you invest in something, typically you assume all the risk. Since annuities are not investments, but are contracts with an insurance carrier, they allow you to transfer investment risk to the carrier. The risk you assume is that annuity payouts are subject to the claims-paying ability of the insurance company. (The only exception might be “variable annuities,” which are linked to a market index and rise—and fall—in value with the index.)
Recent innovations like fixed indexed annuities allow for growth in relation to an index, but the owner is protected from loss of principal if the index falls. With people living much longer and pensions quickly becoming a thing of the past, annuities can help provide income throughout retirement without the fear of running out of money. If you are considering the purchase of an annuity, it’s important to speak with a financial professional who understands them, and can explain the fine print of an annuity contract.
These investments are not for everyone and in the event that you employer has decided to open this option to you it’s best to discuss it with an Insurance Professional. Let me know if there is any way I can help you get clarity.
I highly encourage everyone to get a plan together yet many people still have trouble following through with the steps. I am going to reveal the steps you need to take leading up to your retirement date and you might be shocked to know that you need to start 10 years before you’d like to retire.
As you imagine going into retirement you might dream of traveling or tending your garden. I think everyone’s goal out of retirement is to be able to reap the benefits of the many years of hard work. Stress should be the last thing on your mind but for many retirees, they have some top regrets like; not saving enough, relying on social security to heavily, and not paying down debt. How does one avoid these issues?
1. Not saving enough
Take advantage of employee sponsored 401(k) is the obvious choice but statistics range from 30%-40% of private sector employees don't have access to a 401(k). In that case, saving a Traditional IRA and Roth IRA wouldn't be enough. Individual accounts for savings are instrumental in creating cash flow. For those who also don't have access to a pension, universal life insurance products widely known by Tony Robbins have become a great savings tool as well.
2. Relying too heavily on Social Security
When discussing cash flow there are many tools out there that retirees and individuals should consider to make up the difference. Dividends from an individual account, annuities, life insurance, and investment properties. All of these have their pro's and con's but if you are able to speak with a professional about products or investments well before retirement in your 40's or even 30's quick conversations can have a lasting impact. In reality, you should also keep in mind that the Social Security benefit will be pushed back later and you may never get it.
3. Debt in retirement
Growing up we were told not all debts are equal and that some are good for tax purposes or to build credit, these rules don't apply when you retire. 10 years prior to retirement you should seriously consider a debt consolidation strategy to co-inside with your retirement date. I say 10 years to make sure you are not caught up in with tax burdens from large withdrawals from an IRA. You will always want to talk to a tax professional about consequences.
Above all the most important action is to put a timeline together. When you are able to review it regularly with a professional they can help guide you to avoid major pitfalls. I think you will look forward to my next post “Retirement Checklist”.
After I got my first source of steady income at 22 I kept thinking "Why am I giving my money away to rent when I could have a house paid off by 50"? I pictured what I'd do in retirement, take my suped-up golf cart to the course and then head to the store for groceries. I had to make sure there were a couple of restaurants that were in walking distance too. I even wanted to be close to a hospital in case I got hurt. When I found my checklist home I bought it, not with my father not with a spouse all alone as a single woman at 23. I lived in it for a year before I was offered a job in San Francisco, then I ended up turning it into a rental down the line.
As millennials, my husband and I are looking to purchase another rental property and my mindset is still the same. If we can start purchasing rental properties now they should be paid off by the time we need retirement income. We don't have pensions and while we are paying into social security "full retirement age" will most likely be pushed back to age 70.
Why is passive income through rentals so attractive? Here are my top 4 reasons.
When evaluating properties not all are created equal and realistically you should have a property manager helping you along the way. But if you are able to start now you could have multiple properties paid outright to improve your income stream in retirement. Now start asking a professional if you might fit your retirement plan.
With Women’s History month coming to a close it’s be wonderful to celebrate the strides that women have made to get us to have equality but it never ceases to amaze me how finances can be so lopsided. There are still practices out there that will funnel questions through my husband about our finances (not knowing my background) and keep little eye contact with me. Why is that?
It wasn’t until recently that the finance industry was EXCLUSIVELY run - and dealt primarily with men. While most data is comparable between men and women about preparing a plan, what is their biggest concerns, and what’s important in retirement. The biggest difference between men and women is where they turn for advice. Over half of women surveyed cited they would go to workplace resources as their first choice, where most men cited online resources*. As I write this blog post I am aware that my primary intended audience will not find this information because of that stat.
Here are my tips on becoming financial fit:
As you look for someone to handle your finances you need to come up with an outline to guide you. Along with that you must feel confident in the relationship that you have with your advisor and have regular communication. I look forward to sitting down with you to go over your goals and plan to move forward to an early retirement.
*Empowered - Embrace responsibility northamericancompany.com
It seems like the answer should be fairly straight forward but in reality it depends on several factors the biggest one being taxes. If you are looking to take out a lump sum of money to pay off your mortgage before you go into retirement you may want to reconsider the taxable implications of how you have received this money. Let’s take 2 different examples of paying off a $50,000 mortgage and your taxable income is $38,500 as a single filer.
Example A: IRA Distribution
Withdrawing money from these accounts will be taxed at ordinary income. If you are going to need $50,000 you will need to pay taxes on that distribution. If you add the $38,500 wages to the $50,000 distribution you may jump from a 12% bracket to 24% 1. In that case you will need to pull out roughly $66,000 to cover your taxes
Example B: Investment Account
The basics on withdrawing from these accounts are conditional so I have made a map that will guide you in the amount of taxes that you may have to pay.
Another great option is what I like to call bridging. This is when you have decided that you have saved enough in your retirement account and instead of maxing out contributions you reduce it to the min for the match and save the rest in a high yield savings account. This is not for everyone and you will need to be aware of the tax implications that it will cause you. With that being said if you are looking to use the funds less than 12 months you will have protection of principal and growth at rate from 2% or more with full liquidity.
Reducing your debt in retirement is always a best practice because you never know what will happen. I highly recommend before you make a decision like this is to talk to your CPA and financial advisor to see how a longer term plan can reduce your taxable liability and coordinate timing of your retirement.
Sources: https://taxfoundation.org/2019-tax-brackets/ 1
Happy Valentine’s Day! I have to admit this is one holiday that I could never get behind because of two reasons. First, were men "had to" buy women gifts or cards to prove their affection to one another, most of the time in front of others. Second, I worked in the restaurant industry for 10 years. If that's not explanation enough I would recommend you pick up a shift at your local steakhouse on this day.
While I may be scorned from the celebration I know that it’s a good reminder to keep you relationship top of mind. And if you are a financial advisor, like me, it’s the perfect time to remind you that the number one stress in relationships is MONEY.
If you are in a deeply committed relationship there is nothing more sexy than to renew your commitment to your mutual financial success. Here are some ideas to say “I do” to this month.
• Vow to protect yourselves from emergencies
During the government shutdown early this year we learned that 40% of Americans don’t have enough money set aside to handle even a $400 emergency. Whether you determine you want an amount equal to six months’ or 12 months’ worth of living expenses, vow to set aside an emergency fund in liquid, readily-accessible accounts so that you have adequate cash on hand should you need it.
• Vow to make saving and retirement planning a priority for you both
Even though retirement accounts are held separately, it’s important to have a shared vision about your retirement together. Be sure to meet with your retirement planner or financial advisor to discuss your future goals and time horizon. Other financial goals should also be prioritized so that you’re both on the same page, like saving up for the kids’ college expenses or the daughters’ weddings.
• Vow to protect your family finances by shifting risk
Along the same lines as an emergency fund, work with a financial advisor to determine how much risk you both face from other potentially life-altering events. What would happen if one of you suddenly became unable to work or function due to a disability? What if you required nursing care? What if one of you suddenly passed away?
Insurance companies offer policies designed to shift many of life’s unexpected financial risks away from your family. Be sure to compare policies offered by multiple highly-rated insurance companies to help ensure you get the best coverage for your premium dollar.
• Vow not to keep secrets about money and keep the communication flowing
Hopefully you’ve been honest from the beginning of your relationship about your level of debt, how you handle sticking to a budget, or whether or not you have a low credit score. Understanding each other’s financial position and money habits is the first part of being able to take control of your finances together in order to achieve mutual goals as a couple.
And remember that it’s important that both of you understands your overall combined financial picture, even if one of you pays the bills or the other takes the lead role in investing. Don’t delegate this, make it a point to stay in the loop with financial decisions. Even if you have separate bank accounts to handle the day-to-day finances, you both need to understand where you’re at and where you’re headed when it comes to your financial future as a couple, especially your plan for retirement.
Even if it doesn’t seem exactly romantic, talking about money can make your relationship a more perfect union for the long-term. Aiming “for richer” rather than “for poorer” together can strengthen your matrimonial bonds.
If your relationship is maturing and you are looking for a mediator to help guide you with couples financial counseling and advising. Text me (425) 610-9226 Book an appointment.
CNN, “40% of Americans can't cover a $400 emergency expense.” https://money.cnn.com/2018/05/22/pf/emergency-expenses-household-finances/index.html (accessed February 11, 2019).
Forbes, “6 Financial Vows Couples Should Take To Heart.” https://www.forbes.com/sites/judithward/2019/01/23/6-financial-vows-couples-should-take-to-heart/?ss=personalfinance#1a8149385241 (accessed February 11, 2019).
Many times at the end of my meetings, after we have discussed all the statements that they have brought and we have the projections lined up. The client will say “I had an old 401(k) but I never did anything about it. I don’t have any statements anymore and I think they changed to a different company. “
As a common occurrence I have come up with the process for your to get back your old 401(k). First, call your previous employer HR department and ask them for the current 401(k) providers. Company sponsored plans move all the participants over to the new custodian and will have the providers information to give to you.
Most likely you will have to go through the phone tree and verify your identity. At that point you will be passed along to a representative who will verify this information again and they will ask you how can they help you! This is when you are going to ask to proceed with an IRA Rollover.
What does that mean? You are no longer working at the company and you will be opening up your new account to deposit your funds into so that you can manage it on your own. You can set up an account at any custodian like Schwab, Vanguard, or TD Ameritrade. These are the market leaders for low cost trading and have a plethora of investment options.
The helpful representative will ask you if you have seen the 30 day tax notification. This notification will be provided by the company within 30 days or you can view the one in the source notes. You will have 60 days after you receive the payment to make the deposit. If you do not do a direct rollover, the Plan is required to withhold 20% of the payment for federal income taxes 1.
At that point the representative will confirm the address and name of the new firm you would like the payment made out to. This check will either be mailed to you or the receiving firm.
My Company closed down and I can’t find my 401(k)
Whether you had to resign abruptly or was terminated from your job one of the last things you think to do is rollover your 401(k) into a self directed IRA. But many people can never find the time to do this and naturally in retirement you now have all the time in the world to find that lost money. But in the case where the company has been dissolved we are here to help.
Companies are required by law to mail abandoned funds to the owner’s last known address. If they’re returned or the owner can’t be reached, the assets must be relinquished to the state. In Washington it’s easy enough to find these funds visit www.ucp.dor.wa.gov/. Then enter your first and last name then search.
You will go through a claim process to get receive these funds and will need to verify your identity. Filing electronically will be the fastest way to process your claim. Lost 401(k) holding mutual funds could take up to 90 days to process. Create your username and password to check in along the way.
When you do receive your funds make sure to deposit it into your IRA within 60 days to avoid the 20% taxation. If you need help along the way we are always here to help. Feel free to contact us at 425-610-9226
https://www.irs.gov/retirement-plans/retirement-plan-participant-notices-distributions 1 https://www.irs.gov/pub/irs-drop/n-09-68.pdf