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6 Tips for Getting Your Personal Finances in Shape for 2019

Scott Weiss, CFP® · October 16, 2018 · Personal Finance · No Comments

Photo by rawpixel.com on Pexels.com

Fall is a good time to assess where you stand and where you could be.

You need not wait for 2019 to plan improvements to your finances.

You can begin now. The last few months of 2018 give you a prime time to examine critical areas of your budget, your credit, and your investments.

You could work on your emergency fund (or your rainy day fund).

To clarify, an emergency fund is the money you store in reserve for unforeseen financial disruptions; a rainy day fund is money saved for costs you anticipate will occur. A strong emergency fund contains the equivalent of a few months of salary, maybe even more; a rainy day fund could contain as little as a few hundred dollars.

Optionally, you could hold this money in a high-yield savings account. A little searching may lead to a variety of choices; here in September, it is not hard to find accounts offering 1.5% or more annual interest, as opposed to the common 0.1% or less. Remember that a high-yield savings account is intended as a place to park money; if you make regular deposits and withdrawals to and from it and treat it like a checking account, you may incur fees that diminish the savings progress you make. (1)

Review your credit score.

Federal law entitles you to a free copy of your credit report at each of the three nationwide credit reporting firms (Equifax, TransUnion, and Experian) every 12 months. Now is as good a time as any to request these reports; visit annualcreditreport.com or call 1-877-322-8228 to order them. At the very least, you will learn your credit score. You may also detect errors and mistakes that might be harming your credit rating. (2)

Think about the way you are saving for major financial goals.

Has your financial situation improved in 2018, to the extent that you could contribute a little more money to an IRA or a workplace retirement plan now or next year? If you are not contributing enough at work to receive a matching contribution from your employer, maybe now you can.

Also, consider the way your invested assets are held.

What are your current and future allocations? Some people have heavy concentrations of equities in their workplace retirement plan, IRA, or brokerage account due to Wall Street’s long bull market. If this is true for you, there may be some pain when the next bear market begins. Check in on your portfolio while things are still bullish.

Can you spend less in 2019?

That might be a key to saving more and putting more money into your rainy day or emergency funds. If your pay has increased, your discretionary spending does not necessarily have to increase with it. See if you can find room in your budget to possibly cut an expense and redirect the money into savings or investments.

You may also want to set some near-term financial goals for yourself.

Whether you want to accomplish in 2019 what you did not quite do in 2018, or further the positive financial trends underway in your life, now is the time to look forward and plan.

The Financial Planning Pyramid (3)

PlanningPyramid

Sources

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 You’ll Need to Tolerate Some Risk When Investing

Scott Weiss, CFP® · October 15, 2018 · Investing · No Comments

When financial markets have a bad day, week, or month, discomforting headlines and data can swiftly communicate a message to retirees and retirement savers alike: equity investments are risky things, and Wall Street is a risky place.

Use this tool to determine your Risk Number: http://bit.ly/WFGYourRiskNumber

All true. If you want to accumulate significant retirement savings or try and grow your wealth through the opportunities in the markets, this is a reality you cannot avoid.

Regularly, your investments contend with assorted market risks. They never go away. At times, they may seem dangerous to your net worth or your retirement savings, so much so that you think about getting out of equities entirely.

If you are having such thoughts, think about this: in the big picture, the real danger to your retirement could be being too risk averse.

Is it possible to hold too much in cash?

Yes. Some pre-retirees do. (Even some retirees, in fact.) They have six-figure savings accounts, built up since the Great Recession and the last bear market. It is a prudent move. A dollar will always be worth a dollar in America, and that money is out of the market and backed by deposit insurance.

This is all well and good, but the problem is what that money is earning. Even with interest rates rising, many high-balance savings accounts are currently yielding less than 0.5% a year. The latest inflation data shows consumer prices advancing 2.3% a year. That money in the bank is not outrunning inflation, not even close. It will lose purchasing power over time. (1,2)

Consider some of the recent yearly advances of the S&P 500.

In 2016, it gained 9.54%; in 2017, it gained 19.42%. Those were the price returns; the 2016 and 2017 total returns (with dividends reinvested) were a respective 11.96% and 21.83%. (3,4)

Yes, the broad benchmark for U.S. equities has bad years as well.

Historically, it has had about one negative year for every three positive years. Looking through relatively recent historical windows, the positives have mostly outweighed the negatives for investors. From 1973-2016, for example, the S&P gained an average of 11.69% per year. (The last 3-year losing streak the S&P had was in 2000-02.) (5)

Your portfolio may not return as well as the S&P does in a given year, but when equities rally, your household may see its invested assets grow noticeably.

When you bring in equity investment account factors like compounding and tax deferral, the growth of those invested assets over decades may dwarf the growth that could result from mere checking or savings account interest.

At some point, putting too little into investments and too much in the bank may become a risk – a risk to your retirement savings potential.

At today’s interest rates, the money you are saving may end up growing faster if it is invested in some vehicle offering potentially greater reward and comparatively greater degrees of risk to tolerate.

Having a big emergency fund is good.

You can dip into that liquid pool of cash to address sudden financial issues that pose risks to your financial equilibrium in the present.

Having a big retirement fund is even better.

When you have one of those, you may confidently address the biggest financial risk you will ever face: the risk of outliving your money in the future.

Annual returns and intra-year declines

This chart shows intra-year stock market declines (red dot and number), as well as the market’s return for the full year (gray bar). What is clear is that the market is capable of recovering from intra-year drops and finishing the year in positive territory, which should encourage investors to stay the course when markets get choppy.

Sources

Will You Be Prepared When the Market Cools Off?

Scott Weiss, CFP® · July 23, 2017 · Investing · 2 Comments

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.

money.cnn.com/data/markets/nasdaq/ [6/15/17]
money.cnn.com/data/markets/sandp/ [6/15/17]
fortune.com/2017/03/09/stock-market-bull-market-longest/ [3/9/17]
investopedia.com/terms/c/correction.asp [6/15/17]
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 Big Should Your Emergency Fund Be?

Scott Weiss, CFP® · February 2, 2016 · Financial Planning, Spending & Saving · 2 Comments

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Having an emergency fund is essential to a successful financial plan. You won’t truly understand how important it is to your financial health until the day comes when you absolutely need it. So, how much do you actually need in your emergency fund?

Rule of Thumb

The basic rule of thumb has been 6 months of take home pay or 6 months basic living expenses. However, the problem with rules of thumb is that they don’t take into account the nuances of people’s lives. The size of your fund will depend on your personal situation and financial needs. Figuring this out is more art than science.

When I work with a client I actually do use a general rule of thumb as a starting point to determine how much they should have. I try to figure out if they should save 3, 6, 9, or 12 months basic living expenses or 3, 6, 9 or 12 months take home pay. What’s the difference? Well, for one thing saving for basic expenses may be a lot easier than saving for take home pay. However, saving only for basic expenses could mean a lifestyle change when you need to start tapping that fund. Whether you can make those changes is an important question you’ll need to ask yourself when building your fund.

Questions to Ask Yourself

Take some time to think about the list of questions below. The answers to these questions will help you figure out what your emergency fund goal should be:

How much do you take home in your paycheck every month?
What are your basic monthly expenses (i.e. groceries, mortgage, car payment, insurance, utilities, etc.)?
What are your extras every month (i.e. shopping, entertainment, dining, vacations, children’s activities, etc.)?
How much are your insurance deductibles?
Are you married or single?
Do you have anyone you are financially responsible for?
How secure is your job?
If you lost your job how difficult would it be to replace your income?
How long would it take for you to get another job?
Are you retired?

Now let’s take a look at my more broad rules of thumb and who they might be good for. Keep in mind, the examples I use below to illustrate a hypothetical emergency fund assume saving for basic living expenses. You will need to increase that amount if you want to save for take home pay.

The 3 Month Fund

In my opinion, this is the bare bones amount anyone should have in their emergency fund. When you are just starting to build a fund your goal should be to set aside 3 months of basic monthly expenses.

Who is this good for?

Anyone just starting to build an emergency fund (Having a small fund is better than having no fund at all!)
Someone in the early stages of their career
Someone who does not have any dependants or still lives at home

Example:

Monthly take home pay = $3,000
Monthly living expenses = $2,500
Emergency fund = $7,500

The 6 Month Fund

Once you’ve started to make some money and have responsibilities like auto payments, rent, student loans, etc. this should be your goal.

Who is this good for?

Anyone with financial responsibilities
A married couple with no children
Someone who many not have a mortgage

Example:

Monthly take home pay = $5,000
Monthly living expenses = $4,000
Emergency fund = $24,000

The 9 Month Fund

At this point in your financial life, you may be married, have children and have a mortgage. You have accumulated a good deal of financial responsibilities and a disruption in income will cause a significant lifestyle change.

Who is this good for?

Someone with a mortgage
A couple who have similar salaries
A married couple with children
Someone who feels they can land another job within 6 months of losing their current job

Example:

Monthly take home pay = $7,500
Monthly living expenses = $5,000
Emergency fund = $45,000

The 12 Month Fund

When your financial situation gets more complicated and your financial responsibilities have grown, you may need to consider this larger emergency fund.

Who is this good for?

A married couple with unequal incomes
Someone with a mortgage
Someone who is concerned it will take awhile to replace their income if they lost their job
A married couple with children
Someone who is fairly risk averse and knows they will sleep better at night if they have a large emergency fund

Example:

Monthly take home pay = $10,000
Monthly living expenses = $8,000
Emergency fund = $96,000

Bonus: The 24 Month Fund

This fund is reserved specifically for retirees. It covers a much longer time frame because the emergency fund serves a different function during retirement than it does during your working years. If you are taking systematic withdrawals from your investment accounts to fund your retirement, you should have at least 24 months of basic living expenses set aside to use during market downturns. This money should be in safe and highly liquid investments like traditional savings accounts, CD’s, money market accounts or money market mutual funds.

Who is this good for?

Retirees taking systematic withdrawals from investment accounts
Retirees not wanting to make lifestyle changes during market downturns
Retirees not wanting to reduce their withdrawals during market downturns

Example

Monthly withdrawal from investments = $2,000
Emergency fund = $48,000

5 Important Things to Remember

Never invest your emergency fund in equities
Always keep the money for your emergency fund in safe, highly liquid investments like traditional savings accounts, CD’s, money market accounts or money market mutual funds.
If you deplete your fund, make it a priority to build it back up
To assist in building your emergency fund, set up a separate, designated savings account and have automatic transfers deposited into that account
Avoid using a line of credit as your emergency fund

As you have seen, there is no one right way to build an emergency fund. I’ve illustrated what I believe to be a prudent approach and provided a sample of possible solutions. As such, I tend to be fairly conservative and risk averse in my recommendations as far as emergency funds are concerned. To determine your ideal emergency fund, I encourage you to honestly answer the questions above and closely examine your personal financial situation. What is good for you may not be the same as what is good for someone else.

To learn what I can do for you visit www.weiss-financial.com.

The Golden Rule for Financial Success

Scott Weiss, CFP® · March 23, 2016 · Credit & Debt, Spending & Saving, Video · Emergency Fund, First Step Cash Management, The Golden Rule · No Comments

This seemingly simple task is nearly impossible for many of us to do consistently and successfully. But, if you learn the rule early and stick to it, you will be well on your way toward financial freedom. So, what is the Golden Rule? Spend less than you earn.

Spend < Earn

Many of you working with us already know the rule. However, be sure to share this essential advice with your kids and grandkids to help set them up for financial success.

If this is the first time you are hearing this advice, pay attention. Spending less than you earn is the first step toward creating a REAL financial strategy. If you spend more than you make the only place you can go is into debt. When your debt becomes unmanageable you lose your financial independence. This means you may have trouble affording to do the things in life you want to.

The Benefits

When you spend less than you earn you can have money to:

Pay off debts
Add to a retirement account
Save for an emergency or rainy day
Take vacations
Buy a house
Buy a new car
Start a business

My Advice

Regularly set aside money the same way you would pay any other bill. By doing this, you carve out savings from what you earn as if it were an expense.

“Never Spend Your Money Before You Have It” -Thomas Jefferson

Think of it as the cost of purchasing your financial freedom! As a rule of thumb, aim to save at least 10% of what you make.

What to Do if You are in Debt?

If you are deep in debt, get educated about your money and create a plan to dig out. You will need to find ways to:

Decrease your expenses
Maximize your savings

Online tools like First Step Cash Management, YouNeedaBudget.com, and Mint.com can help you monitor and control your cash flow. In addition, clients of Weiss Financial Group can track their spending in their Secure Client Website. I’ve found that these online tools really help you understand where your money is going so you can make informed decisions about your spending habits.

Video:

If you know anyone that could benefit from this advice, feel free to share this video with them. Good luck on your journey toward financial independence.

For more financial planning tips, download my free report: “8 Steps to Organize and Optimize Your Financial Life”. Thanks for reading!

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

Scott Weiss, CFP® · September 18, 2019 · Investing, Retirement · No Comments

Photo by rawpixel.com on Pexels.com

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.

▲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

3 Things You MUST Think About When Changing Jobs

Scott Weiss, CFP® · October 20, 2016 · Financial Planning, Video · No Comments

Fall seems to be the time of year many people either willingly decide to change jobs or are forced to due to downsizings or restructuring. If you are changing jobs, here are the top financial considerations:

SWITCHING FROM ONE JOB TO ANOTHER CAN LITERALLY PAY OFF

Data from payroll processing giant ADP confirms that statement. In the first quarter of 2016, the average job hopper realized a 6% pay boost!

That’s a pretty significant jump in pay, so it’s definitely something to consider. We all get comfortable in our jobs, but as you can see it may pay to look elsewhere. You never know what opportunity may be out there for you if you are not looking.

Nevertheless, before you make that leap, be sure you address these matters:

CONSIDERATION #1

HEALTH CARE

How quickly can you arrange health coverage?

If you already pay for your own health insurance, this will not be an issue. If you had coverage at your old job you will need to figure out how to replace it.

If you were enrolled in an employer-sponsored health plan, you need to find out when the coverage from your previous job ends – and, if applicable, when coverage under your new employer’s health plan begins.

If the interval between jobs is prolonged, and COBRA will not cover you for the entirety of it, you may want to check whether you can obtain coverage from your alumni association, your guild or union, or AARP.

If you are leaving a career to start a business, confer with an insurance professional to search for a good group health plan.

CONSIDERATION #2

YOUR RETIREMENT SAVINGS

What Happens With Your Retirement Savings?

You will likely have four options regarding the money you have saved up in your workplace retirement plan: you can leave the money in the plan, roll it over into an IRA (this is the option we help with at Weiss Financial Group), transfer the assets into the retirement plan at your new job, or cash it out.

Keep in mind that the last option will be taxable and may incur a 10% early withdrawal penalty if you are not yet 59 1/2.

Here is a link to another blog post that goes into greater detail about what to do with your retirement account when you leave your job: 4 Options for Your 401(k) When You Leave Your Job

CONSIDERATION #3

YOUR CASH FLOW

Can you manage your cash flow effectively between one job & the next?

First, you’ll need to truly understand if you can make this work. I suggest taking pencil to paper and filling out a cash flow worksheet to figure out what your needs are.

Here is a link to our cash flow worksheet to make things easier for you: http://bit.ly/CashFlowWorksheet

Use can also online tools to help with this. We use first step cash management with our clients. In my opinion this is the best cashflow planning strategy available. If you are interested, as a thank you for watching the video and reading this post I will give you free access. Simply send a private message request to the Weiss Financial Group Facebook page and I’ll get you set up.

This all makes the case for having an emergency fund in place. Do you have one? Take a look at this blog post I wrote: How Big Should Your Emergency Fund Be?.

Finally, I recommend postponing big purchases, and avoid running up large credit card debts you will regret later.

BOTTOM LINE

Make sure you keep your household money needs top of mind
Make sure you address your insurance needs
Strive to keep saving for your future at your new workplace

Sources

qz.com/666915/when-to-switch-jobs-to-get-the-biggest-salary-increase/
money.cnn.com/2016/04/12/news/economy/millennials-change-jobs-frequently/
healthcare.gov/quick-guide/dates-and-deadlines/
lifereimagined.aarp.org/stories/14481-Financial-Checklist-for-Job-Changers
This material was prepared, in part, by MarketingPro, Inc.

How Annuities Can Help Provide a Retirement Income Floor

Scott Weiss, CFP® · January 21, 2019 · Insurance Planning, Retirement · No Comments

binoculars-2194228_1920

Here’s why many people choose annuities for for retirement income, and what prospective annuity holders should consider.

Imagine an income stream you cannot outlive.

That sums up the appeal of an annuity. If you are interested in steady retirement income (and the potential to defer taxes), you might want to look at the potential offered by annuities. Before making the leap, however, you must understand how they work.

Just what is an annuity?

It is an income contract you arrange with an insurance company. You provide a lump sum or continuing contributions to fund the contract; in return, the insurer agrees to pay you a specific amount of money in the future, usually per month. If you are skittish about stocks and searching for a low-risk alternative, annuities may appear very attractive. While there are different kinds of annuities available with myriad riders and options that can be attached, the basic annuity choices are easily explained. (2)

Annuities can be either immediate or deferred.

With an immediate annuity, payments to you begin shortly after the inception of the income contract. With a deferred annuity, you make regular contributions to the annuity, which accumulate on a tax-deferred basis for a set number of years (called the accumulation phase) before the payments to you begin. (1,2)

Annuities can be fixed or variable.

Fixed annuities pay out a fixed amount on a recurring basis. With variable annuities, the payment can vary: these investments do essentially have a toe in the stock market. The insurer places some of the money that you direct into the annuity into Wall Street investments, attempting to capture some of the upside of the market, while promising to preserve your capital. Some variable annuities come with a guaranteed income benefit option: a pledge from the insurer to provide at least a certain level of income to you. (1,3)

In addition, some annuities are indexed.

These annuities can be either fixed or variable; they track the performance of a stock index (often, the S&P 500), and receive a credit linked to its performance. For example, if the linked index gains 8% in a year, the indexed annuity may return 4%. Why is the return less than the actual index return? It is because the insurer usually makes you a trade-off: it promises contractually that you will get at least a minimum guaranteed return during the early years of the annuity contract. (3)

Annuities require a long-term commitment.

Insurance companies expect annuity contracts to last for decades; they have built their business models with this presumption in mind. So, if you change your mind and decide to cancel an annuity contract a few years after it begins, you may have to pay a surrender charge – in effect, a penalty. (Most insurance companies will let you withdraw 10-15% of the money in your annuity without penalty in an emergency.) Federal tax law also discourages you from withdrawing money from an annuity – if the withdrawal happens before you are 59½, you are looking at a 10% early withdrawal penalty just like the ones for traditional IRAs and workplace retirement accounts. (1,3)

Annuities can have all kinds of “bells and whistles.”

Some offer options to help you pay for long-term care. Some set the length of the annuity contract, with a provision that if you die before the contract ends, the balance remaining in your annuity will go to your estate. In fact, some annuities work like joint-and-survivor pensions: when an annuity owner dies, payments continue to his or her spouse. (Generally, the more guarantees, riders, and options you attach to an annuity, the lower your income payments may be.) (1)

Deferred annuities offer you the potential for great tax savings.

The younger you are when you arrange a deferred annuity contract, the greater the possible tax savings. A deferred annuity has the quality of a tax shelter: its earnings grow without being taxed, they are only taxable once you draw an income stream from the annuity. If you start directing money into a deferred annuity when you are relatively young, that money can potentially enjoy many years of tax-free compounding. Also, your contributions to an annuity may lower your taxable income for the year(s) in which you make them. While annuity income is regular taxable income, you may find yourself in a lower tax bracket in retirement than when you worked. (1)

Please note that annuities come with minimums and fees.

The fee to create an annuity contract is often high when compared to the fees for establishing investment accounts – sometimes as high as 5-6%. Annuities typically call for a minimum investment of at least $5,000; realistically, an immediate annuity demands a five- or six-figure initial investment. (3)

No investment is risk free, but an annuity does offer an intriguing investment choice for the risk averse. If you are seeking an income-producing investment that attempts to either limit or minimize risk, annuities may be worth considering.

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▲Understanding annuities: Which annuity may be right for you?

Annuities come in all shapes and sizes, which can often confuse investors. This chart helps to identify the type of annuity that aligns to specific income needs and tolerance for investment risk, and provides information about how the annuity growth and payout amounts are determined, as well as other key characteristics to know.

Sources

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.

4 Options for Your 401(k) When You Leave Your Job

Scott Weiss, CFP® · January 23, 2016 · Investing, Retirement · 401(k), IRA, Personal Finance, RMD, Rollover · One Comment

The days of staying at the same job your entire working life are pretty much over. Also gone are the days when your company would finance your retirement with a comfortable pension. That responsibility now falls squarely on you. Subsequently, your 401(k) is a great way to build your retirement war chest.

So, what is the smartest thing to do with the money in that 401(k) when you leave for the next big thing, get laid off, or retire? You basically have four options. The best one for you will depend on your situation and your objectives.

OPTION 1: Take a Lump Sum Distribution

With this option the company closes your account and sends you a check for whatever you’ve accumulated minus taxes. You will be taxed at ordinary income tax rates and could potentially be bumped into the next tax bracket if the distribution is large enough. Also, if you are under age 59 1/2, you may be subject to a 10% early distribution penalty.

Who could this option be good for?

Someone who got laid off and really needs the money. They understand the tax ramifications but there is really no other option to keep the lights on until they find a new job. As a side note, this is a good reason to build an emergency fund.
If you have accumulated very little money (i.e. a few hundred dollars or so) because you just started contributing to your 401(k) and feel the hassle of selecting another option is not worth it, then you could take the distribution. It’s not the best thing to do, but it won’t really hurt you.

OPTION 2: Leave the Money Where it is

This option is self explanatory. You just leave the money within the existing 401(k) plan at your previous employer. There is a comfort factor here; you know the plan, most likely know how to use the online access, are familiar with their customer service and know the investment options inside the plan. The downside is that you can no longer add money to this plan, get the company match, or possibly take loans if needed. You are also limited to the investment options offered by the plan which could be good or bad depending on the quality of the investments offered inside the plan. Also, keep an eye on expenses. They can vary significantly from plan to plan. In some cases you may be getting a better deal on the mutual funds inside the plan, but in other cases you may pay more for those same funds outside the plan. Be sure to review the plan documents. One final note about leaving your 401(k) with your old employer. Over the years, if you don’t stay on top of things, you can easily accumulate several retirement accounts spread among your previous employers. For many people, it can be confusing to keep track of everything which could, ultimately, be detrimental to your wealth.

Who could this option be good for?

If you are age 55 or older and need to begin taking distributions from your 401(k) for retirement, this might be a good option for you. In an IRA, you must wait until age 59 1/2 to take a distribution without incurring the extra 10% early distribution penalty. But, with a 401(k), if you leave your job the year you turn age 55 or later, the IRS will allow you to begin withdrawals without incurring the extra penalty. (Here are the IRS rules)
If you land another job, like your new employer’s 401(k) and want to roll your money into the new plan, then leave your money in your old 401(k) until you can make the transfer. There is no need to roll it over to an IRA for a short period of time and roll it over again several months later.
If you just really like your old employer’s 401(k) plan and are a do-it-yourself-er who will keep track of the money, perform the necessary re-balancing and periodically review the investments, leave it there.

OPTION 3: Roll your old 401(k) into your new 401(k)

If your new employer’s plan allows it, you can roll your old 401(k) over into your new 401(k). Doing this will help keep all your 401(k) assets together and make it simpler to manage your entire retirement portfolio. Keep in mind, your money will now be subject to the rules and regulations of the new plan and can only be invested in the options available inside the new plan. However, there is a lot to be said for keeping things simple. One other potential benefit is that your money will be available for plan loans if needed.

Who could this option be good for?

This is a good option for staying organized. Having all your money in one account is much easier to keep track of.
This is also a good option for the do-it-yourself-er who stays on top of their investments and regularly re-balances their portfolio
If you are in a situation where it maybe necessary to to take a loan from your 401(k), then rolling your money into the new plan is an option. Although I do not recommend 401(k) loans, sometimes they may be the only option. The important thing to be aware of when taking a 401(k) loan is that when you leave the company the loan needs to be paid back in full or the balance of the loan will be treated as a distribution and taxed accordingly.
If you have serious debt concerns, keeping your money in a 401(k) rather than rolling it over into an IRA may be the better option. Some states offer greater creditor protection for a 401(k) then they do for an IRA.
If you will be working into your 70’s and do not yet want to begin withdrawing money, then keeping your money in a 401(k) is better than an IRA rollover. With an IRA you must take Required Minimum Distributions (RMDs) at age 70 1/2. Not so with a 401(k), as long as you are still working at the company maintaining the plan.

OPTION 4: Roll your old 401(k) into an IRA

The final option is to roll your old 401(k) into an IRA. Typically what happens is you open an IRA account and instruct your old employer to transfer the money directly into your IRA. Sometimes, however, your company will send a check directly to you which must be deposited into your IRA within 60 days or be subject to taxes at ordinary rates and possibly the 10% early withdrawal penalty (Here are the IRS Rules). One big benefit of rolling your 401(k) over into an IRA is that you will have more investment options.

Who could this option be good for?

Great for someone who changes jobs a lot. You can have one account that you roll your old 401(k) accounts into as your situation changes.
If you plan to work with a fiduciary advisor to help you manage your investments, this may be the best option.
If you are heading into retirement and want assistance creating a retirement income plan, an IRA rollover could be a good option for you.
If you are a do-it-yourself-er, this might be a good option.
If you need to pay for college, you may be able to withdraw money from your IRA and not incur the 10% penalty. You don’t have the ability to do this with a 401(k). You will, however, need to pay ordinary income tax on the withdrawal. In most cases, I do not recommend using IRA money to pay for college, however, it is a potential benefit of an IRA.
If you are a first time home-buyer you can take $10,000 out of an IRA for a down payment without incurring the 10% early withdrawal penalty. Taxes at ordinary income tax rates will still apply.

So, those are your four options. What’s best for you will depend on your situation and the type of assistance you want managing your money. For me, I always rolled over my old 401(k) accounts into an IRA. I prefer keeping my retirement assets together, manage my own money, and do not like being restricted by the investment options inside a 401(k).

For more financial planning tips download my free report: 8 Steps to Organize & Optimize Your Financial Life. It’s packed with helpful advice, useful tips and valuable resources.

To learn what I can do for you visit www.weiss-financial.com.