Why You Shouldn’t Take a Loan From Your Retirement Plan

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Thinking about borrowing money from your 401(k), 403(b), or 457 account?

Think twice about that because these loans are not only risky, but injurious, to your retirement planning.

A loan of this kind damages your retirement savings prospects.

A 401(k), 403(b), or 457 should never be viewed like a savings or checking account. When you withdraw from a bank account, you pull out cash. When you take a loan from your workplace retirement plan, you sell shares of your investments to generate cash. You buy back investment shares as you repay the loan. (1)

In borrowing from a 401(k), 403(b), or 457, you siphon down invested retirement assets, leaving a smaller account balance that experiences a smaller degree of compounding. In repaying the loan, you will likely repurchase investment shares at higher prices than in the past – in other words, you will be buying high. None of this makes financial sense.(1)

Most plan providers charge an origination fee for a loan (it can be in the neighborhood of $100), and of course, they charge interest. While you will repay interest and the principal as you repay the loan, that interest still represents money that could have remained in the account and remained invested.1,2

As you strive to repay the loan amount, there may be a financial side effect. You may end up reducing or suspending your regular per-paycheck contributions to the plan. Some plans may even bar you from making plan contributions for several months after the loan is taken. (3,4)

Your take-home pay may be docked.

Most loans from 401(k), 403(b), and 457 plans are repaid incrementally – the plan subtracts X dollars from your paycheck, month after month, until the amount borrowed is fully restored. (1)

If you leave your job, you will have to pay 100% of your 401(k) loan back.

This applies if you quit; it applies if you are laid off or fired. Formerly, you had a maximum of 60 days to repay a workplace retirement plan loan. The Tax Cuts & Jobs Act of 2017 changed that for loans originated in 2018 and years forward. You now have until October of the year following the year you leave your job to repay the loan (the deadline is the due date of your federal taxes plus a 6-month extension, which usually means October 15). You also have a choice: you can either restore the funds to your workplace retirement plan or transfer them to either an IRA or a workplace retirement plan elsewhere.(2)

If you are younger than age 59½ and fail to pay the full amount of the loan back, the I.R.S. will characterize any amount not repaid as a premature distribution from a retirement plan – taxable income that is also subject to an early withdrawal penalty. (3)

Even if you have great job security, the loan will probably have to be repaid in full within five years.

Most workplace retirement plans set such terms. If the terms are not met, then the unpaid balance becomes a taxable distribution with possible penalties (assuming you are younger than 59½.(1)

Would you like to be taxed twice?

When you borrow from an employee retirement plan, you invite that prospect. You will be repaying your loan with after-tax dollars, and those dollars will be taxed again when you make a qualified withdrawal of them in the future (unless your plan offers you a Roth option). (3,4)

Why go into debt to pay off debt?

If you borrow from your retirement plan, you will be assuming one debt to pay off another. It is better to go to a reputable lender for a personal loan; borrowing cash has fewer potential drawbacks.

You should never confuse your retirement plan with a bank account.

Some employees seem to do just that. Fidelity Investments says that 20.8% of its 401(k) plan participants have outstanding loans in 2018. In taking their loans, they are opening the door to the possibility of having less money saved when they retire. (4)

Why risk that? Look elsewhere for money in a crisis. Borrow from your employer-sponsored retirement plan only as a last resort.

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▲The toxic effect of loans and withdrawals

The top chart shows that employees who took loans and a withdrawal from their account may end up with significantly lower balances in the end. The bottom chart shows that the employee did not get the benefit of contributions and company match when paying back their loans. To avoid this scenario, stress the importance of an emergency reserve and savings for other goals outside of the retirement account. If the employee must borrow, if they keep contributing while paying back the loan that may mitigate the negative impact of the loan.

Sources

  1. gobankingrates.com/retirement/401k/borrowing-401k/
  2. forbes.com/sites/ashleaebeling/2018/01/16/new-tax-law-liberalizes-401k-loan-repayment-rules/
  3. cbsnews.com/news/when-is-it-ok-to-withdraw-or-borrow-from-your-retirement-savings/
  4. cnbc.com/2018/06/26/the-lure-of-a-401k-loan-could-mask-its-risks.html
  5. https://am.jpmorgan.com/us/en/asset-management/gim/protected/adv/insights/guide-to-retirement

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Covering the Cost of College Using 529 Plans, Coverdell ESAs, UTMA or UGMA accounts

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You can plan to meet the costs through a variety of methods.

How can you cover your child’s future college costs?

Saving early (and often) may be the key for most families. Here are some college savings vehicles to consider.

529 plans

Offered by states and some educational institutions, these plans let you save up to $14,000 per year for your child’s college costs without having to file an IRS gift tax return. A married couple can contribute up to $28,000 per year. (An individual or couple’s annual contribution to the plan cannot exceed the IRS yearly gift tax exclusion.) These plans commonly offer you options to try and grow your college savings through equity investments. You can even participate in 529 plans offered by other states, which may be advantageous if your student wants to go to college in another part of the country. (1,2)

While contributions to a 529 plan are not tax-deductible, 529 plan earnings are exempt from federal tax and generally exempt from state tax when withdrawn, as long as they are used to pay for qualified education expenses of the plan beneficiary. If your child doesn’t want to go to college, you can change the beneficiary to another child in your family. You can even roll over distributions from a 529 plan into another 529 plan established for the same beneficiary (or for another family member) without tax consequences. (1)

Grandparents can start a 529 plan, or other college savings vehicle, just as parents can; the earlier, the better. In fact, anyone can set up a 529 plan on behalf of anyone. You can even establish one for yourself. (1)

529 plans have been improved with two additional features. One, you can now use 529 plan dollars to pay for computer hardware, software, and computer-related technology, as long as such purchases are qualified higher education expenses. Two, you can now reinvest any 529 plan distribution refunded to you by an eligible educational institution, as long as it goes back into the same 529 plan account. You have a 60-day period to do this from when you receive the refund. (3)

Investors should consider the investment objective, risks, charges, and expenses associated with 529 plans before investing. More information about 529 plans is available in each issuer’s official statement, which should be read carefully before investing. A copy of the official statement can be obtained from a financial professional. Before investing, consider whether your state offers a 529 plan that provides residents with favorable state tax benefits.

Coverdell ESAs

Single filers with adjusted gross income (AGI) of $95,000 or less and joint filers with AGI of $190,000 or less can pour up to $2,000 annually into these tax-advantaged accounts. While the annual contribution ceiling is much lower than that of a 529 plan, Coverdell ESAs have perks that 529 plans lack. Money saved and invested in a Coverdell ESA can be used for college or K-12 education expenses. Coverdell ESAs offer a broader variety of investment options compared to many 529 plans, and plan fees are also commonly lower.(4)

Contributions to Coverdell ESAs aren’t tax-deductible, but the account enjoys tax-deferred growth and withdrawals are tax-free so long as they are used for qualified education expenses. Contributions may be made until the account beneficiary turns 18. The money must be withdrawn when the beneficiary turns 30 (there is a 30-day grace period), or taxes and penalties will be incurred. Money from a Coverdell ESA may even be rolled over tax-free into a 529 plan (but 529 plan money may not be rolled over into a Coverdell ESA). (2,4)

UGMA & UTMA accounts

These all-purpose savings and investment accounts are often used to save for college. When you put money in the account, you are making an irrevocable gift to your child. You manage the account assets. When your child reaches the “age of majority” (usually 18 or 21, as defined by state UGMA or UTMA law), he or she can use the money to pay for college. However, once that age is reached, that child can also use the money to pay for anything else.(5)

Imagine your child graduating from college debt-free. With the right kind of college planning, that may happen.

JPM_CPE_19
▲Comparing college savings vehicles
  • 529 plan: Potential for tax-free investing for qualified education expenses;* high levels of flexibility, control and contribution maximums along with special gift and estate tax benefits.
  • Custodial account: Less tax efficiency and control than other accounts; higher impact on financial aid eligibility.
  • Coverdell account: Potential for tax-free investing for any qualified education expense; more restrictions and lower contributions than other accounts.
  • Key takeaway: Not all college savings plans are the same. Differences among accounts can have a major impact on current taxes and future college funds.

* Earnings on non-qualified withdrawals may be subject to federal income tax and a 10% federal penalty tax, as well as state and local income taxes. Federal law allows distributions for tuition expenses in connection with enrollment or attendance at an elementary or secondary public, private or religious school (“K-12 Tuition Expenses”) of up to $10,000 per beneficiary per year. Under New York State law, distributions for K-12 Tuition Expenses will be considered non-qualified withdrawals and will require the recapture of any New York State tax benefits that have accrued on contributions.

Sources

  1. irs.gov/uac/529-Plans:-Questions-and-Answers 
  2. time.com/money/3149426/college-savings-esa-529-differences-financial-aid/ 
  3. figuide.com/new-benefits-for-529-plans.html
  4. time.com/money/4102891/coverdell-529-education-college-savings-account/ 
  5. franklintempleton.com/investor/products/goals/education/ugma-utma-accounts?role=investor
  6. investopedia.com/articles/personal-finance/102915/life-insurance-vs-529.asp
  7. https://am.jpmorgan.com/us/en/asset-management/gim/protected/adv/products/college-savings-plan/college-planning-essentials

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

How to Use a Bucket Strategy to Help Guard Against Market Volatility

 

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Image by TRIXIE BRADLEY from Pixabay

The Bucket Strategy can take two forms.

1. The Expenses Bucket Strategy:

With this approach, you segment your retirement expenses into three buckets:

  • Basic Living Expenses – food, rent, utilities, etc.
  • Discretionary Expenses – vacations, dining out, etc.
  • Legacy Expenses – assets for heirs and charities

This strategy pairs appropriate investments to each bucket. For instance, Social Security might be assigned to the Basic Living Expenses bucket. If this source of income falls short, you might consider whether a fixed annuity can help fill the gap. With this approach, you are attempting to match income sources to essential expenses. (1)

The guarantees of an annuity contract depend on the issuing company’s claims-paying ability. Annuities have contract limitations, fees, and charges, including account and administrative fees, underlying investment management fees, mortality and expense fees, and charges for optional benefits. Most annuities have surrender fees that are usually highest if you take out the money in the initial years of the annuity contact. Withdrawals and income payments are taxed as ordinary income. If a withdrawal is made prior to age 59½, a 10% federal income tax penalty may apply (unless an exception applies).

For the Discretionary Expenses bucket, you might consider investing in top-rated bonds and large-cap stocks that offer the potential for growth and have a long-term history of paying a steady dividend. The market value of a bond will fluctuate with changes in interest rates. As rates fall, the value of existing bonds typically drop. If an investor sells a bond before maturity, it may be worth more or less than the initial purchase price. By holding a bond to maturity an investor will receive the interest payments due, plus their original principal, barring default by the issuer. Investments seeking to achieve higher yields also involve a higher degree of risk. Keep in mind that the return and principal value of stock prices will fluctuate as market conditions change. And shares, when sold, may be worth more or less than their original cost. Dividends on common stock are not fixed and can be decreased or eliminated on short notice.

Finally, if you have assets you expect to pass on, you might position some of them in more aggressive investments, such as small-cap stocks and international equity. Asset allocation is an approach to help manage investment risk. Asset allocation does not guarantee against investment loss.

International investments carry additional risks, which include differences in financial reporting standards, currency exchange rates, political risk unique to a specific country, foreign taxes and regulations, and the potential for illiquid markets. These factors may result in greater share price volatility.

2. The Timeframe Bucket Strategy:

This approach creates buckets based on different timeframes and assigns investments to each. For example:

  • 1 to 5 Years: This bucket funds your near-term expenses. It may be filled with cash and cash alternatives, such as money market accounts. Money market funds are considered low-risk securities but they are not backed by any government institution, so it’s possible to lose money. Money held in money market funds is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Money market funds seek to preserve the value of your investment at $1.00 a share. However, it is possible to lose money by investing in a money market fund. Money market mutual funds are sold by prospectus. Please consider the charges, risks, expenses, and investment objectives carefully before investing. A prospectus containing this and other information about the investment company can be obtained from your financial professional. Read it carefully before you invest or send money.
  • 6 to 10 Years: This bucket is designed to help replenish the funds in the 1-to-5-Years bucket. Investments might include a diversified, intermediate, top-rated bond portfolio. Diversification is an approach to help manage investment risk. It does not eliminate the risk of loss if security prices decline.
  • 11 to 20 Years: This bucket may be filled with investments such as large-cap stocks, which offer the potential for growth.
  • 21 or More Years: This bucket might include longer-term investments, such as small-cap and international stocks.

Each bucket is set up to be replenished by the next longer-term bucket. This approach can offer flexibility to provide replenishment at more opportune times. For example, if stock prices move higher, you might consider replenishing the 6-to-10-Years bucket, even though it’s not quite time.

A bucket approach to pursue your income needs is not the only way to build an income strategy, but it’s one strategy to consider as you prepare for retirement.

FINAL-2019-GTR-2_22_HIGH-RES-37

▲ Structuring a portfolio in retirement – the bucket strategy

Experiencing market volatility in retirement may result in some people pulling out of the market at the wrong time or not taking on the equity exposure they need to combat inflation. Leveraging mental accounting to encourage better behaviors–aligning a retirement portfolio in time-segmented buckets–may help people maintain a disciplined investment strategy through retirement with an appropriate level of equity exposure. The short-term bucket, invested in cash and cash equivalents, should cover one or more years of a household’s income gap in retirement–with the ideal number of years determined based on risk tolerance and market conditions over the near term. A ‘cushion’ amount should also be maintained to cover unexpected expenses. The intermediate-term bucket should have a growth component, with any current income generated through dividends or interest moved periodically to replenish the short-term bucket. The longer-term portfolio can be a long-term care reserve fund or positioned for legacy planning purposes, and pursue a more aggressive investment objective, based on the time horizon. (2)

Sources

  1. kiplinger.com/article/retirement/T037-C000-S002-how-to-implement-the-bucket-system-in-retirement.html
  2. https://am.jpmorgan.com/us/en/asset-management/gim/protected/adv/insights/guide-to-retirement

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

How Fixed-Income Can Help Protect Your Retirement Savings During Market Volatility

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When stocks soar, fixed-income investments have comparatively little allure.

Investors hungry for double-digit returns may regard them as bland, vanilla securities saddled with an opportunity cost, geared to risk-averse retirees who are “playing not to lose.”

An investment earning a consistent rate of return on a fixed schedule is not a negative. Fixed-income investments are something you may want as part of your portfolio, particularly when stocks fall.

Fixed-income investments have a steadiness that stocks lack.

Most are simple debt instruments: an investor transfers or pays money to a government or financial institution in exchange for a promise of recurring payments and eventual return of principal. (1)

Corporate and government bonds are popular fixed-income investments. U.S. Treasury bills, bonds, and notes, all backed by the federal government, pay interest based on the duration and nature of the security. States and municipalities also issue bonds to generate funds for infrastructure projects. Corporate bonds usually have 10-year or 20-year durations; the interest on them may exceed that of Treasuries and state and muni bonds, but the degree of risk is greater for the bondholder. Firms with subpar credit ratings issue bonds that are junk rated, offering a relatively higher return and higher risk. (1)

There are bond funds that also pay a set rate of return. Some of these funds trade like stocks and can be bought and sold during a trading day, not merely after the close. They typically contain a wide variety of both corporate and government bonds. (2)

Additionally, there are money market funds and money market accounts. They do differ. A money market fund is a managed investment fund made up of assorted fixed-income debt securities. A money market account is simply a high-yield bank account insured by the Federal Deposit Insurance Corporation (FDIC). (3)

Consider certificates of deposit as well. Banks create these debt securities to generate pools of capital to use for their business and personal loans. Some CDs have terms of less than a year; many are multiyear. Typically, the longer the commitment a CD investor makes, the greater the coupon (annual interest rate) on the CD. These investments are FDIC-insured up to $250,000. (1,3)

At some point, you might want less of your portfolio in equities. That realization might be prompted by a consideration of the markets or simply by where you are in life.

When the financial markets turn volatile, the last thing you want is to have all your investments moving in the same direction at the same time.

If your portfolio includes a balance of investments from different asset classes, some with little or no correlation to the stock market, then you may take less of a loss than someone whose portfolio is overloaded in equities.

The risk is, this “someone” could be you. Across a long bull market, the equity investments within your portfolio will usually outgain the non-equity investments. That can throw your original asset allocations out of whack and leave you mostly invested in stocks. If stocks plunge, the value of your portfolio can drop rapidly. (4)

The conventional wisdom is to lessen your equity position as you age. You may currently hold stocks across many sectors of the S&P 500, but that is not diversification. True diversification uses multiple asset classes – and conservative, fixed-income investments – to try to minimize risk.

Fixed-income investments may not always return as spectacularly as equity investments, but they are also less prone to spectacular losses. They are designed to provide some stability for an investor, and as you get older, stability becomes increasingly important.

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▲ Asset class returns

This chart shows the historical performance and volatility of different asset classes, as well as an annually rebalanced asset allocation portfolio. The asset allocation portfolio incorporates the various asset classes shown in the chart and highlights that balance and diversification can help reduce volatility and enhance returns. (5)

Sources

  1. thestreet.com/investing/fixed-income/what-is-fixed-income-investment-14758617
  2. investopedia.com/articles/investing/041615/pros-cons-bond-funds-vs-bond-etfs.asp
  3. thebalance.com/certificates-of-deposit-versus-money-markets-356054
  4. fool.com/investing/2018/01/29/heres-how-bull-markets-can-be-bad-for-your-portfol.aspx
  5. https://am.jpmorgan.com/us/en/asset-management/gim/protected/adv/insights/guide-to-the-markets/viewer

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Why Portfolio Diversification Is Important During Volatile Markets

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A multiple asset class portfolio prevents having all your investment eggs in one basket.

Diversification Helps You Manage Risk

We all want a terrific ROI, but risk management matters just as much in investing, perhaps more. That is why diversification is so important. There are two great reasons to invest across a range of asset classes, even when some are clearly outperforming others.

REASON #1:

Potentially Capture Gains in Different Market Climates

If you allocate your invested assets across the breadth of asset classes, you will at least have some percentage of your portfolio assigned to the market’s best-performing sectors on any given trading day. If your portfolio is too heavily weighted in one asset class, or in one stock, its return is riding too heavily on its performance.

Your portfolio is like a garden. A good gardener will plant a variety of flowers to ensure something is always blooming. The gardener knows that some flowers eventually die off or may not grow well but if there is enough diversity the overall picture will still look good.

REASON #2:

Potentially Less Financial Pain if Stocks Decline

If you have a lot of money in growth stocks and aggressive growth funds (and some people do), what happens to your portfolio in a correction or a bear market? You’ve got a bunch of losers on your hands. Tax loss harvesting can ease the pain only so much.

Diversification gives your portfolio a kind of “buffer” against market volatility and drawdowns. Without it, your exposure to risk is magnified.

ADVICE:

Don’t put all your eggs in one basket!

Believe the cliché: don’t put all your eggs in one basket. Wall Street is hardly uneventful and the behavior of the market sometimes leaves even seasoned analysts scratching their heads. We can’t predict how the market will perform; we can diversify to address the challenges presented by its ups and downs.

MI-GTM_3Q19_August_High-Res-60

▲ Asset class returns

This chart shows the historical performance and volatility of different asset classes, as well as an annually rebalanced asset allocation portfolio. The asset allocation portfolio incorporates the various asset classes shown in the chart and highlights that balance and diversification can help reduce volatility and enhance returns. (2)


Sources

  1. usatoday30.usatoday.com/money/perfi/retirement/story/2011-12-08/investment-diversification/51749298/1
  2. https://am.jpmorgan.com/us/en/asset-management/gim/protected/adv/insights/guide-to-the-markets/viewer
  3. This material was prepared, in part, by MarketingPro, Inc.

How to Value the Value of Working With a Financial Advisor

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Photo by Jeff Sheldon on Unsplash

A good professional provides important guidance and insight through the years.

What kind of role can a financial professional play for an investor?

The answer: a very important one. While the value of such a relationship is hard to quantify, the intangible benefits may be significant and long-lasting.

There are certain investors who turn to a financial professional with one goal in mind: the “alpha” objective of beating the market, quarter after quarter. Even Wall Street money managers fail at that task – and they fail routinely.

At some point, these investors realize that their financial professional has no control over what happens in the market. They come to understand the real value of the relationship, which is about strategy, coaching, and understanding.

A good financial professional can help an investor interpret today’s financial climate, determine objectives, and assess progress toward those goals. Alone, an investor may be challenged to do any of this effectively. Moreover, an uncoached investor may make self-defeating decisions. Today’s steady stream of instant information can prompt emotional behavior and blunders.

No investor is infallible

Investors can feel that way during a great market year, when every decision seems to work out well. Overconfidence can set in, and the reality that the market has occasional bad years can be forgotten.

This is when irrational exuberance creeps in. A sudden Wall Street shock may lead an investor to sell low today, buy high tomorrow, and attempt to time the market.

Market timing may be a factor in the following divergence: according to investment research firm DALBAR, U.S. stocks gained 10% a year on average from 1988-2018, yet the average equity investor’s portfolio returned just 4.1% annually in that period. (1)

A good financial professional helps an investor commit to staying on track

Through subtle or overt coaching, the investor learns to take short-term ups and downs in stride and focus on the long term. A strategy is put in place, based on a defined investment policy and target asset allocations with an eye on major financial goals. The client’s best interest is paramount.

As the investor-professional relationship unfolds, the investor begins to notice the intangible ways the professional provides value. Insight and knowledge inform investment selection and portfolio construction. The professional explains the subtleties of investment classes and how potential risk often relates to potential reward.

Perhaps most importantly, the professional helps the client get past the “noise” and “buzz” of the financial markets to see what is really important to his or her financial life.

The investor gains a new level of understanding, a context for all the investing and saving. The effort to build wealth and retire well is not merely focused on “success,” but also on significance.

This is the value a financial professional brings to the table. You cannot quantify it in dollar terms, but you can certainly appreciate it over time.MI-GTM_3Q19_August_High-Res-64

▲ Diversification and the average investor

The top chart shows the powerful effects of portfolio diversification. It illustrates the difference in movements between the S&P 500, a 60/40 portfolio and a 40/60 portfolio indicating when each respective portfolio would have recovered its original value at the peak of the market in 2007 from the market bottom in 2009. It shows that the S&P 500 fell far more than either of the two diversified portfolio and also took two or more years longer to recover its value. The bottom chart shows 20-year annualized returns by asset class, as well as how an “average investor” would have fared. The average investor asset allocation return is based on an analysis by Dalbar, which utilizes the net of aggregate mutual fund sales, redemptions and exchanges each month as a measure of investor behavior.

Sources

  1. cnbc.com/2019/07/31/youre-making-big-financial-mistakes-and-its-your-brains-fault.html
  2. https://am.jpmorgan.com/us/en/asset-management/gim/adv/insights/guide-to-the-markets/viewer

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

8 Common Retirement Planning Mistakes And How To Avoid Them

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Pursuing your retirement dreams is challenging enough without making some common, and very avoidable, mistakes. Here are eight big mistakes to steer clear of, if possible.

1) No Strategy

Yes, the biggest mistake is having no strategy at all. Without a strategy, you may have no goals, leaving you no way of knowing how you’ll get there – and if you’ve even arrived. Creating a strategy may increase your potential for success, both before and after retirement.

2) Frequent Trading

Chasing “hot” investments often leads to despair. Create an asset allocation strategy that is properly diversified to reflect your objectives, risk tolerance, and time horizon; then, make adjustments based on changes in your personal situation, not due to market ups and downs. (The return and principal value of stock prices will fluctuate as market conditions change. And shares, when sold, may be worth more or less than their original cost. Asset allocation and diversification are approaches to help manage investment risk. Asset allocation and diversification do not guarantee against investment loss. Past performance does not guarantee future results.)

3) Not Maximizing Tax-Deferred Savings

Workers have tax-advantaged ways to save for retirement. Not participating in your workplace retirement plan may be a mistake, especially when you’re passing up free money in the form of employer-matching contributions. (Distributions from most employer-sponsored retirement plans are taxed as ordinary income, and if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 70½, you must begin taking required minimum distributions.)

4) Prioritizing College Funding over Retirement

Your kids’ college education is important, but you may not want to sacrifice your retirement for it. Remember, you can get loans and grants for college, but you can’t for your retirement.

5) Overlooking Health Care Costs

Extended care may be an expense that can undermine your financial strategy for retirement if you don’t prepare for it.

6) Not Adjusting Your Investment Approach Well Before Retirement

The last thing your retirement portfolio can afford is a sharp fall in stock prices and a sustained bear market at the moment you’re ready to stop working. Consider adjusting your asset allocation in advance of tapping your savings so you’re not selling stocks when prices are depressed. (The return and principal value of stock prices will fluctuate as market conditions change. And shares, when sold, may be worth more or less than their original cost. Asset allocation is an approach to help manage investment risk. Asset allocation does not guarantee against investment loss. Past performance does not guarantee future results.)

7) Retiring with Too Much Debt

If too much debt is bad when you’re making money, it can be especially harmful when you’re living in retirement. Consider managing or reducing your debt level before you retire.

8) It’s Not Only About Money

Above all, a rewarding retirement requires good health. So, maintain a healthy diet, exercise regularly, stay socially involved, and remain intellectually active.

Sources

  1. theweek.com/articles/818267/good-bad-401k-rollovers

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

New Rules Allow for Longer 401(k) Loan Repayment After Leaving Your Job

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Photo by Alexander Mils on Pexels.com

The conventional wisdom about taking a loan from your 401(k) plan is often boiled down to: not unless absolutely necessary. That said, it isn’t always avoidable for everyone or in every situation. In a true emergency, if you had no alternative, the rules do allow for a loan, but they also require a fast repayment if your employment were to end. Recent changes have changed that deadline, offering some flexibility to those taking the loan. (Distributions from 401(k) plans and most other employer-sponsored retirement plans are taxed as ordinary income, and if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 70½, you must begin taking required minimum distributions.)

The new rules.

Time was, the requirement for repaying a loan taken from your 401(k)-retirement account after leaving a job was 60 days or else pay the piper when you file your income taxes. The 2017 Tax Cuts and Jobs Act changed that rule – now, the penalty only applies when you file taxes in the year that you leave your job. This also factors in extensions.

So, as an example: if you were to end your employment today, the due date to repay the loan would be the tax filing deadline, which is April 15 most years or October 15 if you file an extension. (1)

What hasn’t changed?

Most of what transpires after a 401(k) loan still applies. Your repayment plan involves a deduction from your paycheck over a period of five years. The exception would be if you are using the loan to make a down payment on your primary residence, in which case you may have much longer to repay, provided that you are still with the same employer. (1)

You aren’t just repaying the amount you borrow, but also the interest on the loan. Depending on the plan, you’re likely to see a prime interest rate, plus 1%. (1)

If you do take the loan, a good practice may be to continue making contributions to your 401(k) account, even as you repay the loan. Why? First, to continue building your savings. Second, to continue to take advantage of any employer matching that your workplace might offer. While taking the loan may hamper your ability to build potential gains toward your retirement, you can still take advantage of the account, and that employee match is a great opportunity.

Source

  1. kiplinger.com/article/taxes/T001-C001-S003-ex-workers-get-more-time-to-repay-401-k-loans.html 

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

The SECURE Act: What it is and How it Might Affect Your Retirement Plan

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The SECURE Act and Traditional IRA Changes

If you follow national news, you may have heard of the Setting Every Community Up for Retirement Enhancement (SECURE) Act. Although the SECURE Act has yet to clear the Senate, it saw broad, bipartisan support in the House of Representatives and could make IRAs a more attractive component of your retirement strategy. However, it also changes the withdrawal rules on inherited “stretch IRAs,” which may impact retirement and estate strategies, nationwide. Let’s dive in and take a closer look. (1)

Secure Act Consequences.

Currently, those older than 70 ½ must take withdrawals and can no longer contribute to their traditional IRA. This differs from a Roth IRA, which allows contributions at any age, as long as your income is below a certain level: less than $122,000 for single filing households and less than $193,000 for those who are married and jointly file. This can make saving especially difficult for an older worker. However, if the SECURE Act passes the Senate and is signed into law, that cutoff will vanish, allowing workers of any age to continue making contributions to traditional IRAs. (2)

The age at which you must take your Required Minimum Distributions (RMDs) would also change. Currently, if you have a traditional IRA, you must start taking the RMD when you reach age 70 ½. Under the new law, you wouldn’t need to start taking the RMD until age 72, increasing the potential to further grow your retirement vehicle. (3)

As it stands now, non-spouse beneficiaries of IRAs and retirement plans are required to withdraw the funds from its IRA, tax-sheltered status, but can do so by “stretching” the disbursements over time, even over their entire lifetime. The SECURE Act changes this and makes the use of “stretch” IRAs unlikely. Under the new law, if you leave a Traditional IRA or retirement plan to a beneficiary other than your spouse, they can defer withdrawals (and taxes) for up to 10 years max. (4)

What’s next?

Currently, the SECURE Act has reached the Senate, where it failed to pass by unanimous consent. This means it could move into committee for debate or it could end up attached to the next budget bill, as a way to circumvent further delays. Regardless, if the SECURE Act becomes law, it could change retirement goals for many, making this a great time to talk to a financial professional.

Sources

  1. financial-planning.com/articles/house-votes-to-ease-rules-for-rias-correct-trump-tax-law
  2. irs.gov/retirement-plans/amount-of-roth-ira-contributions-that-you-can-make-for-2019 
  3. congress.gov/bill/116th-congress/house-bill/1994
  4. law.com/newyorklawjournal/2019/04/05/what-to-know-about-the-2-big-retirement-bills-in-congress/

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

How the Sequence of Portfolio Returns Could Impact Your Retirement

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A look at how variable rates of return do (and do not) impact investors over time.

What exactly is the “sequence of returns”?

The phrase simply describes the yearly variation in an investment portfolio’s rate of return. Across 20 or 30 years of saving and investing for the future, what kind of impact do these deviations from the average return have on a portfolio’s final value?

The answer: no impact at all.

Once an investor retires, however, these ups and downs can have a major effect on portfolio value – and retirement income.

During the accumulation phase, the sequence of returns is ultimately inconsequential.

Yearly returns may vary greatly or minimally; in the end, the variance from the mean hardly matters. (Think of “the end” as the moment the investor retires: the time when the emphasis on accumulating assets gives way to the need to withdraw assets.)

An analysis from BlackRock bears this out. The asset manager compares three model investing scenarios: three investors start portfolios with lump sums of $1 million, and each of the three portfolios averages a 7% annual return across 25 years. In two of these scenarios, annual returns vary from -7% to +22%. In the third scenario, the return is simply 7% every year. In all three scenarios, each investor accumulates $5,434,372 after 25 years – because the average annual return is 7% in each case. (1)

Here is another way to look at it.

The average annual return of your portfolio is dynamic; it changes, year-to-year. You have no idea what the average annual return of your portfolio will be when “it is all said and done,” just like a baseball player has no idea what his lifetime batting average will be four seasons into a 13-year playing career. As you save and invest, the sequence of annual portfolio returns influences your average yearly return, but the deviations from the mean will not impact the portfolio’s final value. It will be what it will be. (1)

When you shift from asset accumulation to asset distribution, the story changes.

You must try to protect your invested assets against sequence of returns risk.

This is the risk of your retirement coinciding with a bear market (or something close).

Even if your portfolio performs well across the duration of your retirement, a bad year or two at the beginning could heighten concerns about outliving your money.

For a classic illustration of the damage done by sequence of returns risk, consider the awful 2007-2009 bear market. Picture a couple at the start of 2008 with a $1 million portfolio, held 60% in equities and 40% in fixed-income investments. They arrange to retire at the end of the year. This will prove a costly decision. The bond market (in shorthand, the S&P U.S. Aggregate Bond Index) gains 5.7% in 2008, but the stock market (in shorthand, the S&P 500) dives 37.0%. As a result, their $1 million portfolio declines to $800,800 in just one year. (2)

If you are about to retire, do not dismiss this risk.

If you are far from retirement, keep saving and investing knowing that the sequence of returns will have its greatest implications as you make your retirement transition.

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▲ Sequence of return risk – saving for and spending in retirement

Poor returns have the biggest impact on outcomes when wealth is greatest. Using the three sequence of return scenarios – Great start/bad end in blue, steadily average in grey and bad start/great end in green – this chart shows outcomes assuming someone is saving for retirement in the top chart and spending in retirement in the bottom chart.

  • The top chart assumes that someone starts with $0 and begins saving $10,000 per year. In the early years of saving, the return experience makes very little difference across sequence of return scenarios. The most powerful impact to the portfolio’s value is the savings behavior. However, the sequence of return experienced at the end of the savings timeframe when wealth is greatest produces very different outcomes.
  • The bottom chart shows the impact of withdrawals from a portfolio to fund a retirement lifestyle. If returns are poor early in retirement, the portfolio is what we call ‘ravaged’ because more shares are sold at lower prices thereby exacerbating the poor returns that the portfolio is experiencing. This results in the portfolio being depleted in 23 years – or 7 years before the 30 year planning horizon. If, instead, a great start occurs the beginning of retirement and the same spending is assumed, the portfolio value is estimated to be $1.7M after 30 years.

The key takeaway to understand is how important it is to have the right level of risk prior to as well as just after retirement because that is when you may have the most wealth at risk. You should consider to mitigate sequence of return risk through diversification, investments that use options strategies for defensive purposes or annuities that offer principal protection or protected income.

Sources

  1. blackrock.com/pt/literature/investor-education/sequence-of-returns-one-pager-va-us.pdf
  2. kiplinger.com/article/retirement/T047-C032-S014-is-your-retirement-income-in-peril-of-this-risk.html
  3. https://am.jpmorgan.com/us/en/asset-management/gim/protected/adv/insights/guide-to-retirement

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.