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.

Eight 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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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.

Don’t Let Emotions Influence Your Investment Decisions

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Are your choices based on evidence or emotion?

Information vs. instinct.

When it comes to investing, many people believe they have a “knack” for choosing good investments. But what exactly is that “knack” based on? The fact is, the choices we make with our assets can be strongly influenced by factors, many of them emotional, that we may not even be aware of.

Deal du jour.

You’ve heard the whispers, the “next greatest thing” is out there, and you can get on board, but only if you hurry. Sound familiar? The prospect of being on the ground floor of the next big thing can be thrilling. But while there really are great new opportunities out there once in a while, those “hot new investments” can often go south quickly. Jumping on board without all the information can be a bit like gambling in Vegas: the payoff could be huge, but so could the loss. A shrewd investor will turn away from spur-of-the-moment trends and seek out solid, proven investments with consistent returns.

Risky business.

Many people claim not to be risk-takers, but that isn’t always the case. Most proficient investors aren’t reluctant to take a risk, they’re reluctant to accept a loss. Yes, there’s a difference. The first step is to establish what constitutes an acceptable risk by determining what you’re willing to lose. The second step is to always bear in mind the final outcome. If taking a risk could help you retire five years sooner, would you take it? What if the loss involved working an extra ten years before retiring; is it still a good risk? By weighing both the potential gain and the potential loss, while keeping your final goals in mind, you can more wisely assess what constitutes an acceptable risk.

You can’t always know what’s coming.

Some investors attempt to predict the future based on the past. As we all know, just because a stock rose yesterday, that doesn’t mean it will rise again today. We know this, but often we “shrug off” this knowledge in favor of hunches. Instead of stock picking, you can exercise a little caution and seek out investments with the potential for consistent returns.

The gut-driven investor.

Some investors tend to pull out of investments the moment they lose money, then invest again once they feel “driven” to do so. While they may do some research, they are ultimately acting on impulse. This method of investing may result in huge losses.

Eliminating emotion.

Many investors “stir up” their investments when major events happen, including births, marriages, or deaths. They seem to get a renewed interest in their stocks and/or begin to second-guess the effectiveness of their long-term plans. It’s a case of action-reaction: they invest in response to short-term needs instead of their long-term financial goals. The more often this happens, the more incoherent their so-called “financial strategy” becomes. If the financial changes they make are really dramatic, it can lead to catastrophe. Many times, there is no need to fix what isn’t broken or turn away from what they’ve done right. By enlisting the assistance of a qualified financial professional (and relying on their skill and expertise), you can be sure that investment decisions are based on facts and made to suit your long-term objectives rather than your personal, changing emotions or short-term needs.

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 Take Your Pension as a Lump Sum or Monthly Lifetime Payments?

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Corporations are transferring pension liabilities to third parties. Where does this leave retirees?

A new term has made its way into today’s financial jargon: de-risking.

Anyone with assets in an old-school pension plan should know what it signifies.

De-risking is when a large employer hands over its established pension liabilities to a third party (typically, a major insurer). By doing this, the employer takes a sizable financial obligation off its hands. Companies that opt for de-risking usually ask pension plan participants if they want their pension money all at once rather than incrementally in an ongoing income stream.

The de-risking trend began in 2012.

In that year, Ford Motor Co. and General Motors gave their retirees and ex-employees a new option: they could take their pensions as lump sums rather than periodic payments. Other corporations took notice of this and began offering their pension plan participants the same choice. (1)

Three years later, the Department of the Treasury released guidance effectively prohibiting lump-sum offers to retirees already getting their pensions; lump-sum offers were still allowed for employees about to retire. In March 2019, though, the Department of the Treasury reversed course and issued a notice that permitted these offers to retirees again. (1)

So, whether you formerly worked or currently work for a company offering a pension plan, a lump-sum-versus-periodic-payments choice might be ahead for you.

This will not be an easy decision.

You will need to look at many variables first. Whatever choice you make will likely be irrevocable. (2)

What is the case for rejecting a lump-sum offer?

It can be expressed in three words: lifetime income stream. Do you really want to turn down scheduled pension payments that could go on for decades? You could certainly plan to create an income stream from the lump sum you receive, but if you are already in line for one, you may not want to make the extra effort.

You could spend 20, 30, or even 40 years in retirement. An income stream intended to last as long as you do sounds pretty nice, right? If you are risk averse and healthy, turning down decades of consistent income may have little appeal – especially, if you are single or your spouse or partner has little in the way of assets.

Also, maybe you just like the way things are going. You may not want the responsibility that goes with reinvesting a huge sum of money.

What is the case for taking a lump sum?

One line of reasoning has to do with time. If you are retiring with serious health issues, for example, you may want to claim more of your pension dollars now rather than later.

Or, it may be a matter of timing. If you need to boost your retirement savings, a lump sum may give you an immediate opportunity to do so.

Maybe you would like to invest your pension money now, so it can potentially grow and compound for more years before being distributed. (As a reminder, pension payments are seldom adjusted for inflation.) Maybe your spouse gets significant pension income, or you are so affluent that pension income would be nice, but not necessary; if so, perhaps you want a lump-sum payout to help you pursue a financial goal. Maybe you think a pension income stream would put you in a higher tax bracket. (2)

If you take a lump sum, ideally, you take it in a way that minimizes your tax exposure. Suppose your employer just writes you a check for the amount of the lump sum (minus any amount withheld), and you direct that money into a taxable account. If you do that, you will owe income tax on the entire amount. Alternately, you could have the lump sum transferred into a tax-advantaged investment account, such as an IRA. That would give those invested assets the potential to grow, with income taxes deferred until withdrawals are made. (2)

Consult a financial professional about your options.

If you sense you should take the lump sum, a professional may be able to help you manage the money in recognition of your financial objectives, your risk tolerance, and your estate and income taxes.

Sources

  1. cnn.com/2019/03/20/economy/lump-sum-pensions-retirement/index.html
  2. fool.com/retirement/2018/06/18/lump-sum-or-annuity-how-to-make-the-right-pension.aspx

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.

Could Social Security Really Go Away?

Social security card and American money dollar bills

That may be unlikely, but the program does face financial challenges.

Will Social Security run out of money in the 2030s?

You may have heard warnings about this dire scenario coming true. These warnings, however, assume that no action will be taken to address Social Security’s financial challenges between now and then.

It is true that Social Security is being strained by a gradual demographic shift.

The Census Bureau says that in 2035, America will have more senior citizens than children for the first time. In that year, 21% of us will be age 65 or older. (1)

As this shift occurs, the ratio of workers to retirees is also changing.

There were three working adults for every Social Security recipient in 1995. The ratio is projected to be 2.2 to 1 in 2035. (2)

Since Social Security is largely funded with payroll taxes, this presents a major dilemma.

Social Security may soon pay out more money than it takes in.

That has not happened since 1982. This could become a “new normal” given the above-mentioned population and labor force changes. (3)

When you read a sentence stating, “Social Security could run out of money by 2035,” it is really referring to the potential depletion of the Social Security Administration’s Old Age, Survivors, and Disability Insurance (OASDI) trust funds – the twin trust funds from which monthly retiree and disability payments are disbursed. Should Social Security’s net cash outflow continue unchecked, these trust funds may actually be exhausted around that time. (4)

Social Security is currently authorized to pay full benefits to retirees through the mid-2030s. If its shortfall continues, it will have to ask Congress for greater spending authority in order to sustain benefit payments to meet retiree expectations. (4)

What if Congress fails to address Social Security’s cash flow problem?

If no action is taken, Social Security could elect to reduce retirement benefits at some point in the future. Its board of trustees notes one option in its latest annual report: benefits could be cut by 21%. That could help payouts continue steadily through 2092. (2)

No one wants to see benefits cut, so what might Congress do to address the crisis?

A few ideas have emerged.

  1. Expose all wages to the Social Security tax or increase it at certain levels. Right now, the Social Security tax only applies to income below $132,900. Lifting this wage cap on the tax or boosting the tax above a particular income threshold would bring Social Security more revenue, specifically from higher-earning Americans. (5)
  2. Raise Social Security’s full retirement age (FRA). This is the age when people become eligible to receive unreduced retirement benefits. The Social Security reforms passed in 1983 have gradually increased the FRA from 65 to 67.5
  3. Calculate COLAs differently. Social Security could figure its cost-of-living adjustments (COLAs) using the “chained” version of the Consumer Price Index, which some economists believe more accurately measures inflation than the standard CPI. Its COLAs could be smaller as a result. (5)

Social Security could be restructured in the coming decades.

Significant reforms may or may not fix its revenue problem. In the future, Social Security might not be able to offer retirees exactly what it does now, and with that in mind, you might want to reevaluate your potential sources of retirement income today.

Sources

  1. denverpost.com/2019/03/01/ageism-colorado-tight-labor-market/
  2. fool.com/retirement/2018/09/29/social-securitys-fast-facts-and-figures-report-hig.aspx
  3. fool.com/retirement/2019/03/03/why-2019-is-the-social-security-year-weve-all-fear.aspx
  4. taxfoundation.org/social-security-deficit/
  5. morningstar.com/articles/918591/will-the-big-social-security-fix-include-expansion.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 Power of Consistent Saving and Compound Interest

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Photo by Public Domain Pictures on Pexels.com

Everyone is told to save for retirement early. Everyone is told to save consistently. You may wonder: just what kind of difference might an early start and ongoing account contributions make?

Let’s take a look some eye-opening numbers

(You can verify these numbers simply by using the compound interest calculator at investor.gov, the Securities and Exchange Commission’s website).

Scenario #1

If you are 30 years old and contribute $200 a month to a tax-deferred retirement account (initial investment of $200, then $200 per month thereafter), you will have $333,903.82 by age 65, if that account consistently returns 7% a year. (This is with annual compounding.)

Scenario #2

If you change one variable in the above scenario – you start saving and investing at 25 years old instead of 30 – you will have $482,119.16 by age 65.

Scenario #3

Start at 20 years old and you will have $689,998.84 by age 65.

An early start really matters.

It gives you a few more years of compounding – and the larger the account balance, the greater difference compounding makes.

These are simple scenarios, but the impact of consistent saving and investing is undeniable. Over time, it may help you build a retirement account that could become a significant part of your retirement savings.

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▲Benefit of saving and investing early

Investors should make saving for retirement a priority by investing early and often. This graph illustrates the savings and investing behavior of four people who start saving the same annual amount at different times in their lives, for different durations and with different investment choices. Consistent Chloe saves and invests consistently over time and reaches 65 with more than double the amount of the other investors. Quitter Quincy starts early but stops after 10 years, just as Late Lyla starts saving. Despite saving one-third as much as Lyla, the power of long-term compounding on money invested early helps Quincy end up with almost the same wealth at retirement. Nervous Noah saves as much and as often as Chloe, but chooses not to invest his money so he accumulates less than half of Chloe’s final amount.

Are you saving enough?

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▲ Annual savings needed if starting today

What is the rule of thumb for the percentage of your income you need to save for retirement? Some say 10%, some say higher or lower. The real answer is that it depends—on what you earn, the “lifestyle you become accustomed to” and when you start saving. This chart shows the percentage of gross income someone would need to start saving at the ages in the left column to be able to afford the typical lifestyle associated with the household income amounts in the top row. Starting at age 25, the annual savings required ranges from 7% to 10%: achievable, but well above what most Americans save. By contrast, someone thinking about waiting until age 50 to focus on retirement should see how unrealistic that may be, with required savings of between 31% and 47% of their gross income. The sooner investors start, the better chance they may have of steadily winning the retirement savings race.

Sources

  1. https://www.investor.gov/additional-resources/free-financial-planning-tools/compound-interest-calculator
  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. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. 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.

What’s the Difference Between a Mutual Fund and an ETF?

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An investment company creates a new company, into which it moves a block of shares to pursue a specific investment objective. For example, an investment company may move a block of shares to track performance of the Standard & Poor’s 500. The investment company then sells shares in this new company. ETFs trade like stocks and are listed on stock exchanges and sold by broker-dealers.

Mutual Funds

Mutual funds, on the other hand, are not listed on stock exchanges and can be bought and sold through a variety of other channels — including financial advisors, brokerage firms, and directly from fund companies.

The price of an ETF is determined continuously throughout the day.

It fluctuates based on investor interest in the security, and may trade at a “premium” or a “discount” to the underlying assets that comprise the ETF. Most mutual funds are priced at the end of the trading day. So, no matter when you buy a share during the trading day, its price will be determined when most U.S. stock exchanges typically close.

Tax Differences.

There are tax differences as well. Since most mutual funds are allowed to trade securities, the fund may incur a capital gain or loss and generate dividend or interest income for its shareholders. With an ETF, you may only owe taxes on any capital gains when you sell the security. (An ETF also may distribute a capital gain if the makeup of the underlying assets is adjusted.)

Determining whether an ETF or a mutual fund is appropriate for your portfolio may require an in-depth knowledge of how both investments operate. In fact, you may benefit from including both investment tools in your portfolio.

Amounts in mutual funds and ETFs are subject to fluctuation in value and market risk. Shares, when redeemed, may be worth more or less than their original cost.

At a glance.

Mutual funds and exchange-traded funds have similarities — and many differences. The lists below give a quick rundown.

Mutual funds:

  • Bought and sold through many channels
  • Not listed on stock exchanges.
  • Priced to the end of the trading day.
  • Capital gains within the funds distributed to shareholders.
  • Dividends may be automatically reinvested.

Exchange-traded funds:

  • Bought and sold through broker-dealers.
  • Listed on stock exchanges.
  • Price continuously determined during the trading day.
  • Capital gains within the ETF reinvested, and the ETF may distribute a capital gain if the make-up of the underlying assets is adjusted.
  • Dividends generally distributed to brokerage account.

Source

  1. ici.org/pdf/2018_factbook.pdf

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.

Mutual funds and exchange-traded funds are sold only 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.

The Standard & Poor’s 500 Composite Index is an unmanaged index that is generally considered representative of the U.S. stock market. Index performance is not indicative of the past performance of a particular investment. Past performance does not guarantee future results. Individuals cannot invest directly in an index.