Planning Income For Life: Using The Bucket Strategy in Retirement

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Constructing a portfolio this way may help you ride through a bear market in retirement.

The bucket approach may help you through different market cycles in retirement.

This investing strategy, credited to a Florida financial planner named Harold Evensky, has simple and complex variations. It assigns fixed-income and equity investments to different “buckets” with the goal of providing sufficient cash flow to retirees during different stages of their “second acts.” (1,2)

The simplest version involves just two buckets.

One holds the equivalent of 1-5 years of cash reserves (in deposit accounts and/or fixed-income investments), and the other holds everything else in the investment portfolio. When you need to fund your expenses, you turn to the cash and the fixed-income vehicles and leave equities untouched. Rebalancing your portfolio (that is, selling investments in an overweighted asset class) lets you increase the size of your cash bucket. (1,2)

Other versions of the bucket approach have longer time horizons.

In one variation designed to be used for at least 25 years, a cash reserve bucket is created to fund the first two years of retirement, its size approximating 10% of the portfolio; the cash comes from FDIC-insured sources or Treasuries. A second bucket, intended to generate somewhat greater income, is planned for the rest of the first decade of retirement; this bucket is filled with longer-duration, fixed-income investments and comprises about 35% of the portfolio. The third bucket (the other 55%) is designed for the years afterward and contains a sizable equities position; the goal here is to realize some growth and compounding for a decade, then tap into that bucket for income. (1,2)

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In glimpsing the details of the bucket approach, you can also see the big picture.

Suppose a bear market occurs just as you retire. Since your retirement income strategy pulls cash from deposit accounts and fixed-income investments first, your equity positions have time to rebound. You have a chance to avoid selling low (and selling off part of your retirement fund).

Is the bucket approach foolproof?

No, but no investing strategy is. In the worst-case scenario, you drain 100% of the cash bucket(s) and end up with an all-equities portfolio. That is hardly what you want in retirement. Bucket allocations must be carefully calculated, and periodic bucket rebalancing is also needed.

The bucket approach may have both financial and psychological merits.

Most retirees use the 4% rule (or something close) when withdrawing income: they take distributions from various accounts and asset classes, perhaps with little regard for tax efficiency. If Wall Street stumbles and their portfolios shrink, they may panic and make moves they will later regret – such as selling low, abandoning stocks, or even running toward alternative investments in desperation.

When you use a bucket approach, you first turn to cash and/or liquid securities for retirement income rather than equities. Psychologically, you know that if a bear market arrives early in your retirement, your equity holdings will have some time to recover. This knowledge is reassuring, and it may dissuade you from impulsive financial decisions.

Sources

  1. seattletimes.com/business/about-to-retire-heres-how-to-cope-with-stock-market-shocks/
  2. news.morningstar.com/articlenet/article.aspx?id=839521
  3. https://am.jpmorgan.com/us/en/asset-management/gim/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.

Are we in for another round of high oil prices?

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Oil prices have a stealthy way of luring investors into the complacency of a trading range, before taking a dramatic turn on the cusp of a single geopolitical factor (often in the Middle East) or variety of coinciding factors.

Supply and demand

With any asset, it all comes back to the confluence of supply and demand that drives final pricing. The prior range of $45-55 was largely kept in check by the various supply and demand factors falling into balance. In normal conditions, demand is far more predictable than supply over the long-term, with steady growth being the norm in most nations as populations and industries grow, and the secular trend of emerging market demand growing at a faster rate than that of developed markets. Recessions and shifts to better energy efficiency can alter this pattern a bit, but growth remains the base case.

Supply remains the wildcard

We’ve been told we’re awash in domestic oil, thanks to new North American finds resulting from increasingly efficient extraction techniques, such as directional drilling, which is pulling more oil from nooks and crannies deeper in the ground (and ocean floor). Also, the advent and increased cost-effectiveness of shale oil production has allowed for the opening of large swaths of locked oil previously unusable. This potential volume has threatened global supply, traditionally managed by OPEC, and particularly the leader of the group, Saudi Arabia. The problem has stemmed from the Saudis and neighboring countries needing a certain price per barrel in order to maintain adequate incoming revenue to balance government budgets—these breakevens have generally been well over $75/barrel. In response, OPEC has implemented production cuts in order to artificially constrain supply and keep prices higher. In the past, this has been difficult, due to widespread ‘cheating’ (producing more than promised) by members, but in this case, with everyone needing more revenue, compliance seems to have improved. This last week’s pullout of the Iran nuclear deal by the U.S. and potential for re-imposed sanctions has created another problem for supply abroad (the Chinese tend to be heavier users of Iranian oil). Internal political tension in Venezuela, another large producer, has also threatened supplies.

U.S. infrastructure is an issue

Many of these issues appear manageable, however, one that has created problems for the safety valve of U.S. shale acting as the swing producer is infrastructure. While the oil is there, pipeline and rail capacity hasn’t kept up, due to a lack of upswing in capex spending in recent years. Oil companies and pipeline operators will typically tend to push more significant infrastructure investments if prices are expected to stay high and they have a better chance of recouping their initial fixed costs, so this tends to be a multi-year effort rather than a short-term remedy.

Crude could trade in the range of $60-70 over the next several years

Price movements, especially those due to fickle geopolitics, can be impossible to predict, but it appears consensus from a variety of sources is for crude to trade in the range of $60-70 over the next several years. Not surprisingly, estimates for future prices tend to anchor themselves around current prices. This is a bit higher than the expected range in the $50’s not that long ago, but certainly not exorbitant.

Source

  1. LSA Portfolio Analytics

The Major 2018 Federal Tax Changes

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Comparing the old rules with the new.

The Tax Cuts and Jobs Act made dramatic changes to federal tax law.

It is worth reviewing some of these changes as 2019 approaches and households and businesses refine their income tax strategies.

Income tax brackets have changed.

The old 10%, 15%, 25%, 28%, 33%, 35%, and 39.6% brackets have been restructured to 10%, 12%, 22%, 24%, 32%, 35%, and 37%. These new percentages are slated to apply through 2025. Here are the thresholds for these brackets in 2018.(1,2)

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The standard deduction has nearly doubled.

This compensates for the disappearance of the personal exemption, and it may reduce a taxpayer’s incentive to itemize. The new standard deductions, per filing status:

  • Single filer: $12,000 (instead of $6,500)
  • Married couples filing separately: $12,000 (instead of $6,500)
  • Head of household: $18,000 (instead of $9,350)
  • Married couples filing jointly & surviving spouses: $24,000 (instead of $13,000)

The additional standard deduction remains in place.

Single filers who are blind, disabled, or aged 65 or older can claim an additional standard deduction of $1,600 this year. Married joint filers are allowed to claim additional standard deductions of $1,300 each for a total additional standard deduction of $2,600 for 2018. (2,3)

The state and local tax (SALT) deduction now has a $10,000 ceiling.

If you live in a state that levies no income tax, or a state with high income tax, this is not a good development. You can now only deduct up to $10,000 of some combination of a) state and local property taxes or b) state and local income taxes or sales taxes per year. Taxes paid or accumulated as a result of business or trade activity are exempt from the $10,000 limit. Incidentally, the SALT deduction limit is just $5,000 for married taxpayers filing separately. (1,4)

The estate tax exemption is twice what it was.

Very few households will pay any death taxes during 2018-25. This year, the estate tax threshold is $11.2 million for individuals and $22.4 million for married couples; these amounts will be indexed for inflation. The top death tax rate stays at 40%. (2)

More taxpayers may find themselves exempt from Alternative Minimum Tax (AMT).

The Alternative Minimum Tax was never intended to apply to the middle class – but because it went decades without inflation adjustments, it sometimes did. Thanks to the tax reforms, the AMT exemption amounts are now permanently subject to inflation indexing.

AMT exemption amounts have risen considerably in 2018:

  • Single filer or head of household: $70,300 (was $54,300 in 2017)
  • Married couples filing separately: $54,700 (was $42,250 in 2017)
  • Married couples filing jointly & surviving spouses: $109,400 (was $84,500 in 2017)

These increases are certainly sizable, yet they pale in proportion to the increase in the phase-out thresholds. They are now at $500,000 for individuals and $1 million for joint filers as opposed to respective, prior thresholds of $120,700 and $160,900. (2)

The Child Tax Credit is now $2,000.

This year, as much as $1,400 of it is refundable. Phase-out thresholds for the credit have risen substantially. They are now set at the following modified adjusted gross income (MAGI) levels:

  • Single filer or head of household: $200,000 (was $75,000 in 2017)
  • Married couples filing separately: $400,000 (was $110,000 in 2017) (2)

Some itemized deductions are history.

The list of disappeared deductions is long and includes the following tax breaks:

  • Home equity loan interest deduction
  • Moving expenses deduction
  • Casualty and theft losses deduction (for most taxpayers)
  • Unreimbursed employee expenses deduction
  • Subsidized employee parking and transit deduction
  • Tax preparation fees deduction
  • Investment fees and expenses deduction
  • IRA trustee fees (if paid separately)
  • Convenience fees for debit and credit card use for federal tax payments
  • Home office deduction
  • Unreimbursed travel and mileage deduction

Under the conditions set by the reforms, many of these deductions could be absent through 2025. (5,6)

Many small businesses have the ability to deduct 20% of their earnings.

Some fine print accompanies this change. The basic benefit is that business owners whose firms are LLCs, partnerships, S corporations, or sole proprietorships can now deduct 20% of qualified business income*, promoting reduced tax liability. (Trusts, estates, and cooperatives are also eligible for the 20% pass-through deduction.) (4,7)

Not every pass-through business entity will qualify for this tax break in full, though.

Doctors, lawyers, consultants, and owners of other types of professional services businesses meeting the definition of a specified service business* may make enough to enter the phase-out range for the deduction; it starts above $157,500 for single filers and above $315,000 for joint filers. Above these business income thresholds, the deduction for a business other than a specified service business* is capped at 50% of total wages paid or at 25% of total wages paid, plus 2.5% of the cost of tangible depreciable property, whichever amount is larger. (4,7)

* See H.R. 1 – The Tax Cuts and Jobs Act, Part II—Deduction for Qualified Business Income of Pass-Thru Entities

We now have a 21% flat tax for corporations.

Last year, the corporate tax rate was marginally structured with a maximum rate of 35%. While corporations with taxable income of $75,000 or less looked at no more than a 25% marginal rate, more profitable corporations faced a rate of at least 34%. The new 21% flat rate aligns U.S. corporate taxation with the corporate tax treatment in numerous other countries. Only corporations with annual profits of less than $50,000 will see their taxes go up this year, as their rate will move north from 15% to 21%. (2,4)

The Section 179 deduction and the bonus depreciation allowance have doubled.

Business owners who want to deduct the whole cost of an asset in its first year of use will appreciate the new $1 million cap on the Section 179 deduction. In addition, the phaseout threshold rises by $500,000 this year to $2.5 million. The first-year “bonus depreciation deduction” is now set at 100% with a 5-year limit, so a company in 2018 can now write off 100% of qualified property costs through 2022 rather than through a longer period. Please note that bonus depreciation now applies for used equipment as well as new equipment. (1,7)

Like-kind exchanges are now restricted to real property.

Before 2018, 1031 exchanges of capital equipment, patents, domain names, private income contracts, ships, planes, and other miscellaneous forms of personal property were permitted under the Internal Revenue Code. Now, only like-kind exchanges of real property are permitted. (7)

This may be the final year for the individual health insurance requirement.

The Affordable Care Act instituted tax penalties for individual taxpayers who went without health coverage. As a condition of the 2018 tax reforms, no taxpayer will be penalized for a lack of health insurance next year. Adults who do not have qualifying health coverage will face an unchanged I.R.S. individual penalty of $695 this year. (1,8)

Sources

  1. cpapracticeadvisor.com/news/12388205/2018-tax-reform-law-new-tax-brackets-credits-and-deductions
  2. fool.com/taxes/2017/12/30/your-complete-guide-to-the-2018-tax-changes.aspx
  3. cnbc.com/2017/12/22/the-gop-tax-overhaul-kept-this-1300-tax-break-for-seniors.html
  4. investopedia.com/taxes/how-gop-tax-bill-affects-you/
  5. tinyurl.com/ycqrqwy7/
  6. forbes.com/sites/kellyphillipserb/2017/12/20/what-your-itemized-deductions-on-schedule-a-will-look-like-after-tax-reform/ 
  7. americanagriculturist.com/farm-policy/10-agricultural-improvements-new-tax-reform-bill
  8. irs.gov/newsroom/in-2018-some-tax-benefits-increase-slightly-due-to-inflation-adjustments-others-unchanged

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.

7 Ways to Replace Your Income In Retirement

Thinking about retirement? Wondering where your income will be coming from. Here are the top 7 sources of income for your retirement:

 

INCOME SOURCE #1

SOCIAL SECURITY

Provides Foundation for Average Person’s Retirement

Social Security provides the foundation for the average person’s retirement income. So long as you’ve paid into the system, you will receive it. It’s a good starting point, but unfortunately it usually isn’t enough to help you maintain the lifestyle you may be accustomed to.

INCOME SOURCE #2

DEFINED BENEFIT PENSIONS

Employer Funds This Plan and Provides Lifetime Income

If you have a pension, congrats. Unfortunately pensions are becoming a thing of the past as the burden of retirement funding is falling on the employee. In a pension, the employer funds the plan and agrees to provide you a specified amount of lifetime income. This is a direct contrast to #3 the defined contribution plan

INCOME SOURCE #3

DEFINED CONTRIBUTION PLANS

These Are Your 401(k)’s and 403(b)’s

These are designed to help you , the employee, save for your retirement. They can be funded by both you and your employer but it is your responsibility to contribute and choose the investments. During retirement it is up to you to figure out how to convert these funds into retirement income

INCOME SOURCE #4

IRAs

Funded With Money You Contribute or Rollover

IRAs are individual retirement accounts funded with money you contribute or with money you have rolled over from an old employer’s retirement plan. You can begin withdrawing money from the account for retirement without penalty after you turn 59 1/2

INCOME SOURCE #5

ANNUITIES

Can Provide a Fixed or Variable Amount of Money

Annuities are insurance products that can provide a fixed or variable amount of money during retirement. You do give up some control over your money, however they can help you create guaranteed income for life.

INCOME SOURCE #6

TAXABLE INVESTMENTS

Often Held in Savings or Brokerage Accounts

These are any investments you hold outside your retirement plans. These assets could be held in savings accounts or brokerages accounts. Depending on how have this money invested you can use the dividends, interest and capital gains on these investments to help create retirement income.

INCOME SOURCE #7

JOBS

You May Still Need or Want to Work in Retirement

Even though you are retired you may still want or need to work. If you are healthy and able to still work, a job can help with your retirement income strategy.

 

7 Things to Put on Your Year-End Financial Checklist

The end of the year is a key time to review your financial “health” and well-being. To that end, here are seven aspects of your financial life to think about as this year leads into the next.

#1 | YOUR INVESTMENTS

Review your approach to investing and make sure it suits your objectives. Look over your portfolio positions and revisit your asset allocation.

#2 | YOUR RETIREMENT PLANNING STRATEGY 

Does it seem as practical as it did a few years ago? Are you able to max out contributions to IRAs and workplace retirement plans, like 401(k)s? Is it time to make catch-up contributions? Finally, consider Roth IRA conversion scenarios. If you are at the age when a Required Minimum Distribution (RMD) is required from your traditional IRA(s), be sure to take your RMD by December 31. If you don’t, the IRS will assess a penalty of 50% of the RMD amount on top of the taxes you will already pay on that income. (While you can postpone your very first IRA RMD until April 1, 2018, that forces you into taking two RMDs next year, both taxable events.)1

   

#3 | YOUR TAX SITUATION

How many potential credits and/or deductions can you and your accountant find before the year ends? Have your CPA craft a year-end projection including Alternative Minimum Tax (AMT). In years past, some business owners and executives didn’t really look into deductions and credits because they just assumed they would be hit by the AMT. The recent rise in the top marginal tax bracket (to 39.6%) made fewer high-earning executives and business owners subject to the AMT – their ordinary income tax liabilities grew. The top bracket looks as though it will remain at 39.6% for 2018 even if tax reforms pass. So, examine accelerated depreciation, R&D credits, the Work Opportunity Tax Credit, incentive stock options, and certain types of tax-advantaged investments.2

Review any sales of appreciated property and both realized and unrealized losses and gains. Look back at last year’s loss carry-forwards. If you’ve sold securities, gather up cost-basis information. Look for any transactions that could potentially enhance your circumstances.

 

#4 | YOUR CHARITABLE GIFTING GOALS

Plan charitable contributions or contributions to education accounts, and make any desired cash gifts to family members. The annual federal gift tax exclusion is $14,000 per individual for 2017, meaning you can gift as much as $14,000 to as many individuals as you like this year, tax-free. A married couple can gift up to $28,000, tax-free, to as many individuals as they like. (The limits rise to $15,000 and $30,000 in 2018.) The gifts do count against the lifetime estate tax exemption amount, which is $5.49 million per individual (and therefore, $10.98 million per married couple) in 2017.3,4

You could also gift appreciated securities to a charity. If you have owned them for more than a year, you can deduct 100% of their fair market value and legally avoid capital gains tax you would normally incur from selling them.5

Besides outright gifts, you can explore creating and funding trusts on behalf of your family. The end of the year is also a good time to review any trusts you have in place.

 #5 | YOUR LIFE INSURANCE COVERAGE

Are your policies and beneficiaries up-to-date? Review premium costs and beneficiaries, and think about whether your insurance needs have changed.

 

#6 | LIFE EVENTS

Did you happen to get married or divorced in 2017? Did you move or change jobs? Buy a home or business? Did you lose a family member or see a severe illness or ailment affect a loved one? Did you reach the point at which Mom or Dad needed assisted living? Was there a new addition to your family this year? Did you receive an inheritance or a gift? All of these circumstances can have a financial impact on your life as well as the way you invest and plan for retirement and wind down your career or business. They are worth discussing with the financial or tax professional you know and trust.

 

#7 | DID YOU REACH ANY OF THESE FINANCIALLY IMPORTANT AGES IN 2017? 

If so, act accordingly.

  • Did you turn 70½ this year? If so, you must now take Required Minimum Distributions (RMDs) from your IRA(s).
  • Did you turn 65 this year? If so, you are likely now eligible to apply for Medicare.
  • Did you turn 62 this year? If so, you can choose to apply for Social Security benefits.
  • Did you turn 59½ this year? If so, you may take IRA distributions without a 10% early withdrawal tax penalty.
  • Did you turn 55 this year? If so, you may be allowed to take distributions from your 401(k) account without penalty, provided you no longer work for that employer.
  • Did you turn 50 this year? If so, you can make “catch-up” contributions to IRAs (and certain qualified retirement plans).1,5

Sources:

  1. This material was prepared, in part, by MarketingPro, Inc.
  2. fool.com/retirement/2017/04/29/whats-my-required-minimum-distribution-for-2017.aspx [4/29/17]
  3. businessinsider.com/trump-gop-tax-reform-plan-bill-text-details-rate-2017-10 [11/2/17]
  4. irs.gov/Businesses/Small-Businesses-&-Self-Employed/Frequently-Asked-Questions-on-Gift-Taxes [10/23/17]
  5. turbotax.intuit.com/tax-tips/estates/the-gift-tax-made-simple/L5tGWVC8N [11/10/17]
  6. kiplinger.com/article/taxes/T055-C032-S014-4-year-end-tax-savings-tips-to-try-by-thanksgiving.html [10/17]
  7. merrilledge.com/article/ready-set-retire-8-deadlines-you-need-to-know [11/10/17]

What Is Covered Under Each Part of Medicare

Whether your 65th birthday is on the horizon or decades away, you should understand the parts of Medicare – what they cover, and where they come from.

Medicare was created in 1965 as a national health insurance program for seniors. It was made up of two original components, Part A and Part B.

Part A = Hospital Insurance

National Health Insurance Program for Seniors

It provides coverage for inpatient stays at medical facilities. It can also help cover the costs of hospice care, home health care, and nursing home care – but not for long, and only under certain parameters.

Part B = Medical Insurance

Part B Covers:

  • Physical Therapy
  • Physician Services
  • Medical Equipment
  • Medical Services

Part B is medical insurance and can help pick up some of the tab for physical therapy, physician services, expenses for durable medical equipment (scooters, wheelchairs), and other medical services such as lab tests and varieties of health screenings.

Keep in mind, Part B isn’t free. You pay monthly premiums to get it along with a yearly deductible. The premiums vary according to the Medicare recipient’s income level.

Part C = Medicare Advantage

Part C Covers:

  • Prescription Drug Coverage
  • Vision
  • Dental

Part C are medicare advantage plans. Insurance companies offer these Medicare-approved plans. Part C plans offer seniors all the benefits of Part A and Part B and more: many feature prescription drug coverage, vision and dental benefits. To enroll in a Part C plan, you need have Part A and Part B coverage in place.

Medigap

Addresses Gaps in Part A & B Coverage

Medigap Covers:

  • Copayments
  • Coinsurance
  • Deductibles

Medigap plans address the gaps in Part A and Part B coverage. If you have Part A and Part B already in place, a Medigap policy can pick up some copayments, coinsurance, and deductibles for you.

Part D = Prescription Drug Plans

While Part C plans commonly offer prescription drug coverage, insurers also sell Part D plans as a standalone product to those with Original Medicare.

Visit Medicare.Gov for More Info

I hope this helps to demystify medicare a bit. There is a lot more to know about these plans but this should be enough to get you started in the right direction. If you need more information be sure to visit Medicare.Gov.


Sources:

  1. This material was prepared, in part, by MarketingPro, Inc.
  2. mymedicarematters.org/coverage/parts-a-b/whats-covered/
  3. medicare.gov/coverage/skilled-nursing-facility-care.html
  4. medicare.gov/your-medicare-costs/part-b-costs/part-b-costs.html
  5. tinyurl.com/hbll34m
  6. medicare.gov/sign-up-change-plans/when-can-i-join-a-health-or-drug-plan/when-can-i-join-a-health-or-drug-plan.html
  7. medicare.gov/supplement-other-insurance/medigap/whats-medigap.html
  8. ehealthinsurance.com/medicare/part-d-cost
  9. medicare.gov/part-d/coverage/part-d-coverage.html
  10. medicare.gov/sign-up-change-plans/when-can-i-join-a-health-or-drug-plan/five-star-enrollment/5-star-enrollment-period.html

 

5 Reasons You’re Not Ready To Retire (And What To Do About It)

Thinking about retirement? Not quite sure if you are ready? Here’s what you can do to get ready for a successful retirement:

REASON #1:

YOU DON’T HAVE A PLAN

Know Your Expenses And How You Will Pay For Them

This is a sure sign you are not ready. You need to know what your expenses are during retirement and how you are going to pay for them. Without a well thought out plan there is no way you are ready to retire. So, spend the time to build your plan or sit down with a CERTIFIED FINANCIAL PLANNER™ to help you.

REASON #2:

YOU HAVE TOO MUCH DEBT

Difficult to Pay Off When Living on a Fixed Income

Too much debt can really derail your retirement plan. Once you retire and are living on a fixed income it will become increasingly difficult to pay that debt off. In addition, too much debt can make dealing with financial emergencies nearly impossible.

REASON #3:

YOU HAVEN’T BUILT A RETIREMENT PORTFOLIO

You Need to Convert Your Savings Into Lifetime Income

During the accumulation phase of your retirement savings years, your goal is to save and grow your portfolio. As you enter retirement you need to refocus that goal and create a decumulation portfolio. Basically you need to convert your savings into lifetime income. In order to do this you’ll need to change your investment strategy. If you are still investing your portfolio with the sole purpose of growing it than you are probably not ready for retirement.

REASON #4:

YOU AND YOUR SPOUSE DON’T AGREE

The Change in Income Can Affect Your Lifestyle

So far I’ve just been talking about the financial aspects of retirement, but there is more to it than that. It’s important that you and your spouse are on the same page. Maybe you are ready but they are not. The change in income can affect your lifestyle so you want to make sure that you talk about this change and work through the issues this may cause before you decide to retire.

REASON #5:

YOU DON’T KNOW WHAT YOU’LL DO

This Can Lead to Overspending or Depression

Once you retire you will have a lot of time on your hands. Have you thought about what you will do with it? Not having a gameplan for your time can lead to overspending and even depression. Make sure you think through what you want to do, how you will pay for it and if it is really feasible. If you haven’t given this any thought, you are definitely not ready.


Sources:
1. This material was prepared, in part, by MarketingPro, Inc.

Will You Be Prepared When the Market Cools Off?

Markets have cycles, and at some point, the major indices will descend.

We have seen a tremendous rally on Wall Street, nearly nine months long, with the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average repeatedly settling at all-time peaks. Investors are delighted by what they have witnessed. Have they become irrationally exuberant?

The Major Indices Do Not Always Rise.

That obvious fact risks becoming “back of mind” these days. On June 15, the Nasdaq Composite was up 27.16% year-over-year and 12.67% in the past six months. The S&P 500 was up 17.23% in a year and 7.31% in six months. Performance like that can breed overconfidence in equities. (1,2)

The S&P last corrected at the beginning of 2016, and a market drop may seem like a remote possibility now. Then again, corrections usually arrive without much warning. You may want to ask yourself: “Am I prepared for one?”(3)

TIP #1:

Are You Mentally Prepared?

Corrections have been rare in recent years. There have only been four in this 8-year bull market. So, it is easy to forget how frequently they have occurred across Wall Street’s long history (they have normally happened about once a year).(3,4)

The next correction may shock investors who have been lulled into a false sense of security. You need not be among them. It will not be the end of the world or the markets. A correction, in a sense, is a reality check. It presents some good buying opportunities, and helps tame irrational exuberance. You could argue that corrections make the market healthier. In big-picture terms, the typical correction is brief. On average, the markets take 3-4 months to recover from a fall of at least 10%.(4)

TIP #2:

Are You Financially Prepared?

Some people have portfolios that are not very diverse, with large asset allocations in equities and much smaller asset allocations in more conservative investment vehicles and cash. These are the investors likely to take a hard hit when the big indices correct.

You can stand apart from their ranks by appropriately checking up on, and diversifying, your portfolio as needed. Thanks to the recent rally, many investors have seen their equity positions grow larger, perhaps too large. If you are one of them (and you may be), you may want to try to dial down your risk exposure.

TIP #3:

Do You Have an Adequate Emergency Fund?

A correction is not quite an emergency, but it is nice to have a strong cash position when the market turns sour.

TIP #4:

Are Your Retirement and Estate Plans Current?

A prolonged slump on Wall Street could impact both. Many older baby boomers had to rethink their retirement strategies in the wake of the 2007-09 bear market.

TIP #5:

Consistently Fund Your Retirement Accounts

Finally, a deep dip in the equity market should not stop you from consistently funding your retirement accounts. In a downturn, your account contributions, in essence, buy greater amounts of shares belonging to quality companies than they would otherwise.

A correction will happen – maybe not tomorrow, maybe not for the rest of 2017, but at some point, a retreat will take place. React to it with patience, or else you may end up selling low and buying high.

Sources.

  1. money.cnn.com/data/markets/nasdaq/ [6/15/17]
  2. money.cnn.com/data/markets/sandp/ [6/15/17]
  3. fortune.com/2017/03/09/stock-market-bull-market-longest/ [3/9/17]
  4. investopedia.com/terms/c/correction.asp [6/15/17]
  5. 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.

Should You Borrow From Your 401(k) if You Need Cash?

Thinking about borrowing money from your 401(k), 403(b), or 457 account? Think twice. Here are 6 reasons 401(k) loans are a bad idea.

REASON #1
Damages Retirement 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.

So in borrowing from a 401(k), 403(b), or 457, you siphon down your 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 plans charge a $75 origination fee for a loan, and of course they charge interest – often around 5%. The interest paid will eventually return to your account, but that interest still represents money that could have remained in the account and remained invested.

REASON #2
Contributions Could Be Halted

May not be able to make additional contributions due to outstanding loans

Some workplace retirement plans suspend regular employee salary deferrals when a loan is taken. They can resume when you settle the loan.

REASON #3
Potential for Docked Pay

Your Take-Home Pay Could 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.

REASON #4
A. May Have to Pay Back Immediately

30-60 Days: If You Quit, Get Laid Off Or Are Fired

This applies if you quit, get laid off or are fired. You will have 30-60 days (per the terms of the plan) to repay the loan in full, with interest.

If you are younger than age 59½ and fail to pay the full amount of the loan back, the IRS 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.1,2

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 will not turn 59½ in the year in which repayment is due). If you default on the loan, the retirement plan may bar you from making future contributions.1

B. 5 Years To Repay

If Terms Are Not Met Unpaid Balance is Taxable

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 will not turn 59½ in the year in which repayment is due). If you default on the loan, the retirement plan may bar you from making future contributions.1

REASON #5
You Get Taxed Twice!

Repay with after-tax dollars AND Taxed on withdrawals

When you borrow from an employee retirement plan, you invite that prospect. One, you will be repaying your loan with after-tax dollars. Two, those dollars will be taxed again when you withdraw them for retirement (unless your plan offers you a Roth option).

REASON #6
Why Go Into Debt to Pay Off Debt?

It’s Better to Go to a Reputable Lender for a Personal Loan

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.

SMART TIP:

Your 401(k) Plan is NOT a Bank Account

Always remember, you should never confuse your retirement plan with a bank account.


Sources:

  1. cnbc.com/id/101848407 [9/14/14]
  2. mainstreet.com/article/why-you-cant-borrow-your-401k-and-only-way-you-should [7/24/14]
  3. This material was prepared in part by MarketingPro, Inc.

Market and Economic Update for the Second Quarter of 2017

It has been an awfully good year in most of the capital markets so far. Just like a great summer day with blue skies and bright sunshine, most stock markets have happily been rising and the economy has been chugging along. Bonds of many types have been profitable. We open our account statements and we’re pleased with the progress.

2Q.2017.Chart

The Economy Has Been Looking Good

From an economic standpoint there has been much to be cheerful about. Corporate earnings in the first quarter came in above expectations and sharply higher than preceding quarters. Unemployment is very low and while we haven’t seen a dramatic uptick in wages we are seeing what looks close to full employment. GDP growth continues to show positive numbers even if the pace of growth is somewhat slower than we would like it to be. Good things haven’t been confined to our shores either; Europe’s economy, in spite of Brexit and some tough election cycles, has continued to firm, China continues to grow, even with concerns about banking and debt, India and other parts of Asia show steady progress, and South American economies continue to improve despite the political turmoil in Brazil and elsewhere.

No Signs of Recession Yet

There doesn’t seem to be any sign of recession on the horizon as yet; the Fed continues to be both transparent about and circumspect towards the execution of rate changes. Our government is promising lower taxes and less regulation, items that can cheer even the most gloomy business owner.

So What Could Possibly Go Wrong?

It’s important to remember (or perhaps re-remember) that markets don’t move in a straight line, not very often at any rate. We’ve had 16 periods of downward market movement since the bull began running back in early 2009! It is entirely possible that we are ready for another, and we think it a useful endeavor to remind ourselves of this every so often. Bear markets begin when markets or economies get pretty far out of alignment and while we don’t think we’re seeing any of that right now, the garden variety market correction can strike at any time.

Planning & Diversification

As always, our defense is two-fold, good planning and diversification. In regards to the former, we sure don’t want to get too excited about stock market gyrations that concern money we won’t be touching for a long time; we know we can’t really time the market and we also know that over the long-term stocks tend to give superior returns in spite of that very same volatility. We also know we don’t want to have to eat our “seed corn” and so shorter term money should be invested in other areas.

What Will The Second Half of 2017 Bring?

We of course don’t know if the second half of 2017 will be as productive as the first has been. As mentioned earlier, we don’t think we’re on the verge of a recessionary time and that bodes well for the economy over the short and intermediate term. US stocks appear a bit richer than average, but that has been the case for some time and that modest overvaluation has moderated a bit in light of the robust first quarter earnings.

We’re also cognizant of the fact that reasonable investment time horizons are often greater than many folks’ attention spans and this can create volatility once someone in the proverbial theater yells “fire”! Watching that sort of “running for the exits” is always disconcerting. It is the age old story: we tolerate shorter term volatility for longer term performance; it isn’t always fun but over time it works exceedingly well.


Source:

  1. Prepared by LSA Portfolio Analytics