There are a lot of factors to consider when it comes to retirement planning. If you’ve ever plugged in assumptions on a retirement calculator to try to determine “your number” then you know what I’m talking about. One thing you want to avoid underestimating is your average life expectancy. This is a key number telling you how many years your retirement income will need to last. You will need to take into consideration factors such as your family medical history, your current health, etc. While people are generally living longer, your family history plays a primary role in how you should view your life expectancy. Remember, if you live into your 90’s you may need to plan for a lower investment withdrawal rate over your golden years.
In May we blogged about your retirement income stream, specifically the potential benefits of delaying your Social Security if you are able to do so. Did you also know that your Social Security is permanently reduced if you claim your benefits early? Remember, it is important to maximize any source of income during retirement. This includes Social Security, as well as other potential income streams like pensions and annuities.
For those who are willing to wait, or who can work a little longer, there are additional strategies you can consider in order to “maximize” the benefits you receive from Social Security. To help determine this, there are three key factors to consider: 1) how long you are planning to work, 2) your marital status and age differences, and 3) your health and family medical history. By sorting through these key points and working with a professional, you should be able to determine if strategies such as “file & suspend”, “switch strategies”, or “filing a restricted application” can benefit you by increasing the amount you receive over your lifetime. The benefits can be significant.
Featured in a recent Slott Report on Roth IRAs posted May 16th were some of the top Roth conversion mistakes common today. These are mistakes advisors work to help clients avoid – ones that can sometimes be overlooked or just misunderstood. One to be aware of: the incorrect valuation of assets when doing a Roth conversion. As Beverly DeVeny and Jared Trexler noted, “Many tax scams are based on undervaluing assets. This is also true when it comes to Roth IRA conversions. A fair market value must be used for the asset converted. A common example is an annuity contract with riders. Such riders can increase the fair market value of the annuity contract, increasing the tax you will owe if you do a Roth conversion of the IRA annuity.” When considering a Roth conversion, be sure you are working with a professional that can help you avoid this or other common mistakes.
Chuck Swindoll once said, “The longer I live the more I appreciate balance, and yet the more I see of extremes.” Most of us do appreciate balance. And most of us do see the extremes around us because they typically reveal something unexpected, or perhaps even dangerous. This naturally grabs our attention, at least for the moment.
As an investor, you have likely experienced times when the market seems to be overreacting to something. During these times it’s often best to step back and turn down the volume on the TV set. Remember, if you developed an investment strategy and the appropriate level of risk tolerance in your plan, then you’ve already prepared for extreme times. In other words, you have “balanced” your portfolio based on risk, goals and time horizon. This balancing act can help you get through these times with a degree of confidence that comes from being prepared.
And don’t forget, just like in life, we need to “rebalance” our investments from time to time. When your situation changes, or as you get older, you will likely change your goals and adjust your risk tolerance accordingly. Don’t fail to consider key changes in life and in turn adjust your investment portfolio. A periodic rebalancing can help smooth out the bumps in the road and help to keep you on track.
The only way to avoid mistakes is to avoid doing something. And even in this scenario, one can argue there is a greater mistake by incurring opportunity cost – meaning there is a cost to not doing something. I believe this is why my Dad always encouraged me to learn from my mistakes, to keep trying, and to do my best to do better “the next time around.”
Likewise, when investing, the only certain way to avoid making a mistake (to avoid a loss) is not to invest, and that could be the worst mistake of all. Many have told me over the course of the last year they wished they hadn’t stopped investing. Some did it out of fear, and many just out of uncertainty. When we invest and things don’t go as planned, it’s important to learn from this – about our tolerance for risk and more about our investment profile. But it doesn’t mean we should stop investing. And when losses occur, if we turn this into a learning experience it can help protect us from taking on too much risk in the future, or from making the same mistake twice.
Don’t become discouraged. Instead, invest early and often to help accumulate savings for the goals you have… whether a home, paying for an education, or retirement. And don’t stop! Over time, make adjustments as needed by working closely with your advisor and by learning from your mistakes (and also the mistakes you see others make).
In life we all experience times of trouble or difficulty. In fact, life tends to cycle from good times to bad and back again. But when rough times come, seldom is it a good thing to panic… to react by making decisions out of fear or emotion, or even worse, to run from the trouble at hand. One thing I’ve learned recently is when life has it’s difficult times, we are wise to lean into those troubles and work through them. And we aren’t successful in this by doing it alone… friends help, mentors, family and even God is there with us in the midst of our troubles.
Financially speaking, we must realize that our investments will also face turbulent times. Just as in life, markets cycle and various investments go in and out of season. The real question is when the volatile times come, how do we handle them? A little encouragement is to avoid two common mistakes: don’t react on emotion, and don’t try to face these times alone. When working with a financial advisor you aren’t alone. They can provide objectivity on your portfolio and help you through choppy markets.
The other lesson learned is that we do eventually get through the rough waters (at some point). Of course, stock markets don’t recover overnight. On average one 20% correction occurs every five years, but their recovery times vary. According to Bloomberg, in 1974 the market suffered a -37% loss and took over five years to recover… but from 1981-1982 the market suffered a -25% correction and only took 83 days to recover. And of course we are recently familiar with the corrections from 2000-2002 and also in 2008.
So what do we take away from this? In the tough times don’t panic and avoid making quick, emotional decisions. Remember the proverb that states, “The plan of the diligent lead to profit as surely as haste leads to poverty.”
XYZ Strategy #2 – Take control of things
“Are you talking about legal documents?” you may ask… as many don’t have them yet. After all, that’s something your parents need, but not you… right? No! There are several reasons to have some key, basic legal documents in place. While it’s true that some of this is based on personal preference, there are still some common needs that apply to all of us. Below are some thoughts that may help you in planning – but you should always seek out proper legal advice before implementing any strategy that is involved, especially end-of-life issues. Believe it or not, you can control distribution of your hard earned savings from the grave (or hospital bed).
1) Name your beneficiaries – while you can. And keep them updated! Did you realize that accounts and policies which require beneficiaries often supersede a Will and pass outside of your estate? That means whoever you name as beneficiary will receive the $’s. And it’s true that many people fail to name them… and their reasons cited as to why are often weak. So, make sure you name beneficiaries (and contingent beneficiaries) on your retirement accounts, IRAs, life insurance policies, etc. In addition, you can often name other accounts as “TOD” accounts which are authorized to “Transfer on Death” when one occurs. After you do this, remember to keep your beneficiaries updated as life goes on…
2) Protect your kids – from hurting themselves. Families today often fail to realize one of the most basic truths about their children: minors don’t know how to manage wealth. When we were young, we hadn’t developed sound spending and savings principles that we later leaned out of necessity, or from years of life experiences. But in adolescence most follow the crowd, spend on impulse, and waste $’s on unneeded things. This can wreck a hard-built plan pretty fast. Remember, as a child we didn’t think about our future because our parents took care of everything. But when the parents are no longer around, it can be difficult to manage life – and to pay the bills. Work with a competent attorney who can use a Will or even a trust to set up parameters that benefit your family. You can create “sprinkling clauses” to pass wealth on to children at specific ages instead of all at once. You can name that trusted guardian to raise your children like you would. And yes, you can even leave your baseball card collection to that charity you trust.
3) Let others help you – when you can’t help yourself. Often overlooked, make sure you have named someone to help out when you aren’t able to make decisions… health, life and yes, even investment decisions. If you become incompetent, you need a power of attorney in place that gives authority to a named individual to act on your behalf, and to sign for you (under certain circumstances). Yes, this even applies to your spouse. Make sure you check into this and have the proper documents in place before something happens… even before leaving the country or traveling to that remote area where no one can reach you by cell!