Zynergy

Retirement Planning

How to Save Money on Holiday Gifts in Retirement

financial planning

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With the recent spike in inflation, mainly due to higher demand and a shortage of goods coming out of the pandemic, many retirees are concerned about the impact increased prices will have on their monthly budget.  Add in the fact that this is happening around the busiest shopping season of the year, many retirees are wondering if there are ways in which they can save money on holiday gifts.  If you are retired and living on a fixed income, below you will find some ways in which you could save money on gifts this holiday season. 

Shop online/bundle orders

While shoppers showed up enforce at brick-and-mortar stores on Black Friday, over the past few years retailers have pushed a lot of their deals online.  Whether it is meant to reach a larger customer base, accommodate those who may not want to stand in line, or perhaps to pass along the deals to those who are not yet comfortable going into a crowded store, online deals are abundant this year, and you can still find these deals today.  If you are shopping online, be sure to search for promotion codes.  These codes may apply a discount to your order or provide free shipping.  If you are unable to find any codes but would like to save money on shipping costs, then it may make sense to combine your orders.  Many retailers require you to spend a certain amount before they provide free shipping, so combining orders may get you over the threshold. 

Use old gift cards

Do you have old gift cards sitting around? I know I do! If so, they can be a great way to save money during the holiday season.  There are two approaches that you could take with gift cards.  The first is to regift the gift card; this way the recipient can spend the money on something they want.  However, I understand that some people feel that giving a gift card can seem like an insincere gift.  Therefore, instead of giving the gift card, you could use the gift card to purchase a gift that you know they would like.  I can ensure you that they will never know that you used the gift card to purchase the gift. 

Group gift

A group gift can be a great way to save money, especially if you have multiple children or grandchildren.  Instead of purchasing multiple less-expensive gifts, you could ask other family members to go in on a big gift together.  Not only will the recipient be happier with a bigger gift, but the group can all share in the joy on the face of the individual who received the gift – which is a gift in and of itself. 

Share experiences instead of money

Not all gifts have to be purchased.  In fact, one of the best gifts you can give is you.  This can come in the form of spending time with your loved ones or simply sharing your experiences.  Perhaps you have a secret family recipe that you never shared with anyone.  Instead of just gifting the recipe, it may be a nice idea to cook the meal together.  This way you can share where you got the recipe from and pass along your passion for cooking.  Do you have a family heirloom that is important to you?  If so, this may be a great opportunity to pass it along to the next generation.  Not only will they receive the heirloom, but they can hear the story behind it and why it is important to you.  I have a strong feeling that the memory of cooking that special meal or hearing the story of the family heirloom will last longer than any gift you could purchase. 

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By Bill Gallagher, CFP®, MPAS®

Will You Pass on What you Have Learned?

“When gone am I, the last of the Jedi will you be.  The Force runs strong in your family.  Pass on what you have learned.” – Yoda

It is tough not to listen to Yoda; I mean, he lived for 900 years.  He has seen a lot during his life and was always willing to pass on the wisdom of his years to others.  Before Yoda’s spirit became “one with the Force,” he shared some of this wisdom with Luke Skywalker.  His message was simple: the galaxy needs the Jedi, and it is up to Luke to teach the “ways of the Force” to the next generation.  Yoda understood that by teaching the Jedi traditions to the younger generation, there will always be someone there to protect the galaxy from the darkness.  As I thought more about Yoda’s advice, I realized how this message can be related to financial planning, especially when we think about estate planning.

Non-Financial Aspects of Financial Planning

Over the years as a financial planner, I have learned that the numbers only tell half of the story.  Some may say that the numbers tell the whole story, but there are many non-financial aspects of financial planning that I believe is just as important as the financial aspects.  While we can apply this message to many financial planning topics, let’s take a minute and think about this within the context of estate planning.  I am sure that when someone mentions estate planning the first few things that come to mind for many people, including myself, are the financial aspects.  Will my estate be subject to estate or gift taxes? What is the cost of probate? What are the costs associated with my final expenses? How much will ultimately be leftover for my spouse or the children?  Don’t get me wrong, these are very important financial aspects which you need to consider.  You want to ensure that the full value of your estate passes effectively and efficiently to your loved ones.  However, this is not where the conversation should end.  There are other important, non-financial considerations everyone should take into account when it comes to estate planning.  For example, have you thought about the family traditions you would like to pass along to the next generation?  

Family Traditions & Values

Family traditions help provide family members with a sense of togetherness and can create positive memories that can be shared not only today but also in the future.  They are a way of passing the family’s values, heritage, and culture from generation to generation.  It is important to remember that it was these traditions that shaped your childhood and made you into the person you are today.  Therefore, they should not be overlooked.  I know that life can be hectic at times, and it is easy to take family traditions for granted.  That is why it is crucial to take some time to reflect on these traditions, because if you neglect to, then they will go away with you.  When you are reflecting on these traditions it may be helpful to think about the positive memories you have from your childhood.  Perhaps you shared special moments or activities with your parents, grandparents, or siblings.  Maybe it was cooking Sunday dinner with your grandmother, or working in the garage with your grandfather, or gathering around the fireplace and telling the stories of the older family generation.  Passing down these traditions will create a strong bond between family members and provide the following generations with the same fond memories.

As you can see, the financial planning process is not all about numbers.  There are non-financial aspects of your life that you need to incorporate into your financial plan in order to get the full story.  Aligning your financial goals with your non-financial will provide you with the opportunity for success.  And when it comes to estate planning, do as Yoda suggested and “pass on what you have learned.” 

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Do You Know Where to Go from Here?

By Bill Gallagher, CFP®, MPAS®

“Would you tell me, please, which way I ought to go from here?”

“That depends a good deal on where you want to get to”, said the Cat.  

“I don’t much care where”, said Alice.

“Then it doesn’t matter which way you go”, said the Cat. 

“-so as long as I get somewhere”, Alice added as an explanation. 

“Oh, you’re sure to do that”, said the Cat, “if you only walk long enough.”

I was watching Alice in Wonderland with my daughter recently, and as a financial planner, I couldn’t help but relate the above dialog between Alice and the Cheshire Cat to financial planning and investment management.  To me, this dialog represents why it is so important for individuals to take time to define their life goals and objectives within the context of a comprehensive financial plan and an investment policy statement.  

While the underlying message in the dialog above is true, if you don’t know where you’re going, any road will get you there – it does not get to the heart of the issue as it relates to someone who is trying to plan for their future.  Yes, any road will get you there, but “there” may not be where you want or need to be. 

Those who have gone through the process of designing a roadmap for their goals will most likely achieve those goals more effectively and efficiently than those who do not have a plan.  The road may not always be smooth, and there will be many detours along the way, but with a personal guide in your hands you will be able to navigate around and through those detours to get back on track more quickly than if you did not have a course of action. 

Whether you are in the accumulation stage of saving for a goal (e.g. retirement, education, new home, vacation home, etc.) or are in retirement, and drawing income from your portfolio, it is extremely important that you establish your goals and objectives within the context of a comprehensive financial plan, thereby creating your personal roadmap.  It is also important to ensure that your assets are invested appropriately given your goals, objectives, and risk tolerance.  Investments are tools we use to get from where we are to where we want to be, and to get there efficiently, your investment portfolio should be governed by an investment policy statement (IPS).  

What Is An IPS?

While the financial plan serves as a strategic guide for your life goals, an IPS is a process of implementing your investment program.  Properly aligning your risk tolerance with your goals and objectives will help you deal with any surprises down the road.  I like to think of an IPS as a framework for a well-diversified portfolio through which you can expect to generate acceptable long-term returns, at the level of risk you are willing to accept.  It is within this framework that you consider and define your risk tolerance as an investor.  The importance of fully exploring and understanding your risk tolerance cannot be overstated, as your risk tolerance will specify your overall target asset allocation and will help in establishing the investment guidelines relating to the selection of your portfolio assets.  

What is Included in the Investment Policy Statement?

The principal reason for developing an IPS is to establish a course of action that will be followed through different market cycles.  This includes periods of market volatility when emotional or instinctive responses might otherwise prompt less than prudent actions.  Without such guidelines, research has shown that investors often make investment decisions that may be inconsistent with prudent investment management principles, their financial objectives, and their risk tolerance.  All too often, during extended bull market rallies and severe bear markets, investors take a short-term view of a long-term investment strategy and end up making decisions that can cause irreparable harm to their financial situation.  Having a financial plan and IPS to reference in times of market volatility may help bring your goals and objectives back into focus and remind you of the long-term nature of your investment portfolio. 

Risk & Return

By now many people understand the relationship between risk and return.  In general, for an investor to achieve above-average investment returns, he or she must be willing to accept a higher degree of risk.  While this relationship between risk and return exists, for most investors, “risk” has more to do with the potential for the loss rather than for the potential of investment gains.  Too much loss triggers a fear response that often causes the investor to abandon their investment strategy, in some cases doing irreparable harm to their financial situation.  One measure of risk tolerance, then, is the investor’s emotional capacity to accept market volatility and their subsequent response to it. 

An equally important, but often less considered measure of risk tolerance is an investor’s financial capacity for a loss of capital.  Financial risk capacity is determined to be the amount of loss a person can sustain before compromising his or her ability to achieve their financial goals and objectives.  Financial capacity can often only be determined through the completion of a comprehensive financial plan or analysis.  

In some cases, one’s emotional capacity may exceed their financial capacity for loss.  Even though the investor may truly be able to hold through a significant market decline, their individual circumstances, and the timing of the decline – and any recovery from it – may put financial goals in jeopardy.  Like a scale, risk needs to be balanced between the fear response and the need for returns to achieve the investment goals.  Understanding the relationship between emotional and financial risk influences how aggressively or conservatively a portfolio might be invested.  

The use of a financial plan and IPS is considered best practice.  Developing a solid financial plan and IPS is not a typical exercise for most investors.  It requires a significant understanding of one’s goals and tolerance for risk, and provides support for following a well-conceived, long-term investment plan – especially during turbulent or exuberant times; a plan which, as the Cat said, “depends a good deal on where you want to get to.”

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Q: Why do a lot of experts and CNBC commentators say the stock market is overvalued?  How is the stock market valued?

A: Valuation is discussed a lot in today’s market environment.  Whether it be the value of your home, a share of Apple stock, an ounce of gold, or a Bitcoin, many are wondering how you put an appropriate value on investment or use assets in an environment where prices are soaring in many asset classes.

There are only three ways to value an asset:

  1. Discounted future cash flows
  2. Use Value
  3. Speculating that something I purchase today, someone will be willing to pay more for tomorrow

Discounted Future Cash Flows

I understand this sounds technical and complex, but it simply means what am I willing to pay today for future income.

In a simple analogy, let’s assume that you could purchase a money machine.  This money machine produces one dollar every day until the end of time.  Each year, this money machine provides you with $365 with no effort or maintenance costs.  How much would you be willing to pay for that money machine today?  $1, $10, $3,000?  I think we can agree that $1 would be significantly undervaluing such a machine as your investment would be recouped in a day and profitability would start on day two. I think we can also agree that you would not be willing to spend $5 million dollars on such a machine as you would need more than 13,600 years just to break even.  

The fair value certainly falls somewhere between these two price points.  For some, they may be willing to spend $1,000 and find they can recover their initial investment in 3 years.  Others may be only willing to spend $700, while still others might go as high as $1,500.  

The point is the exact fair price of the discounted daily dollar is up to the bidder of the device, but this is what makes markets.  As the seller of such a machine, I want to find the buyer willing to pay me the highest price.  As the buyer, I want to find the seller willing to sell at the lowest price.

Use Value

Use value is simply purchasing an asset and using this asset to provide me or my family with a service.  We purchase a house to provide us with a place to live and shelter us from the elements.  Houses do tend to increase in value, but it is the use of that home that people value most.  Besides, if we did not own our home, we would need to find shelter elsewhere and pay rent to provide that shelter.

Speculation

Speculation is not nearly as complex.  In this case, I purchase a Mickey Mantle rookie card, hold it for a while, and hope that someone is willing to offer me more (hopefully significantly more) than I paid.  This very famous baseball card does not shoot off income.  It simply sits….and waits.  It has no use-value (I cannot use the card for any functional purchase such as heating my home or feeding my children).  

These types of valuation methods are certainly oversimplistic but are a relatively simple way to help you understand how to value an asset.  

Stocks, bonds, annuities, businesses, or any asset class that either now, or at some point in the future shoots off cash, is usually valued as a discounted future cash flow asset.  Real estate and commodities (such as oil, coffee, or lumber) are often used assets.  Speculations can come in any form, but in today’s world, we see much speculation in cryptocurrencies, collectibles, and precious metals.  More traditional asset classes such as stocks and real estate can become speculations when prices of these assets become disconnected from their cash flow or use reality (i.e., eToys stock in 1999, real estate in 2006, and GameStop stock in 2021).

Even if a company, such as a technology company, that is losing money today or expects no free cash flow in the near future, it is still valued as an asset that is working to scale (grow) at such a quick rate it needs to burn a lot of cash now to stay ahead of the competition in a quickly changing and growing industry so someday it will be so large it will have significant cash to shoot off to its owners (shareholders).  Excellent examples of these types of companies are Amazon (lost money for 20 years before their profitability exploded), Facebook, Microsoft, Google, etc.  

Other companies such as Coca-Cola have little room for growth (the bushmen in Africa drink Coke) but they charge a very high price for sugared water thanks to the tremendous brand recognition they’ve built.  This means free cash flow is paid to the shareholders in the form of dividends in large quantities.

Historically, the valuation of a company or group of companies is measured by the price to earnings ratio (P/E) which tells investors how many years it will take you to make back your investment through earnings at the current rate (please note this metric does not account for growth over time of these earnings).  Historically, the S&P 500 has run at an average P/E ratio of 15-18 (It will take 15-18 years to make my money back at today’s earnings rate).  During times when markets have fallen and are low, P/E ratios can fall into the single digits.  During times like today and periods of strong economic growth and high speculation, P/E ratios can be in the mid-high ’20s.  For individual stocks like Tesla, the P/E ratio may be 1,500.

Experts tend to say an asset class like stocks are overvalued in markets like today’s environment when P/E ratios and metrics like them tell us that historically, this is the highest price in relation to earnings people have paid.  Investors are stretching to pay high prices for their money machine.  This does not mean necessarily that the markets will crash (although they can), however, it does mean that people will accept far lower returns over time when purchasing an asset today.  Unless they are bailed out by another buyer who is willing to accept even fewer returns in the future to pay a higher price today.  This, however, now becomes speculation and can be very profitable in environments like markets today…until it’s not.  When the music stops there will not be enough chairs for everyone.

There are far more metrics to consider than just P/E when trying to value an asset (such as current interest rates, the growth rate of earnings, future economic prospects, etc.). However, if you are simply purchasing an asset because it has gone up lately and hope someone else will purchase it from you in the future, understand you are a speculator, not an investor.  Many have become wealthy speculating just as many have won large sums of money at the roulette wheel.  However, luck plays a significant role in speculation and is not a solid long-term investment strategy.  The great investors throughout history have been successful in purchasing undervalued assets.

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By Bill Gallagher, CFP®, MPAS®

If you are considering working with a financial advisor, or if you have been working with one for many years, it is important to know how your financial planner is compensated.  In addition, it is important to know if the financial advisor acts as a fiduciary, as that may have an impact on the services provided, and the way in which you pay for those services.  There has been a lot of talk over the past few years regarding the term fiduciary.  While many people understand the definition of a fiduciary, they may not fully understand how the term impacts the financial advice they receive.  If your financial advisor is a fiduciary, then she is both legally and ethically required to provide financial advice and guidance that is in your best interest.  In addition, as a fiduciary, she is required to disclose any, and all, conflicts of interest that may come up over the course of the relationship. If you are in the market for a financial advisor, please be sure to add these questions to your list while you are going through the interview process: 

  • Are you a fiduciary?
  • Do you act as a fiduciary 100% of the time? 
  • How are you compensated? 
  • Do you earn a commission on the sale of any financial product?
  • What is the total cost to work with you?

While the responses you receive will vary among advisors, financial advisors typically operate within three compensation models:   

Fee-only

A fee-only financial planning firm will be registered with the Securities and Exchange Commission (SEC) as a Registered Investment Advisor (RIA).  RIAs are held to a higher standard as they must act in a fiduciary manner.  In a fee-only setting, 100% of the advisor’s compensation will come directly from the people she works with.  A fee-only financial advisor will not earn or accept any commissions or third-party kickbacks from any investment providers.  Typically, the fees are calculated as a percentage of assets under management (AUM) and are deducted directly from your account(s), on a quarterly basis.  This compensation model ensures that the advisor is acting in a fiduciary manner, where she and the client are on the same side of the table – the advisor will do better when the client does better.  In addition, since the advisor is earning a fee, she is not enticed to make any recommendations that would result in her selling an investment product to generate a commission.  Therefore, the financial advice in this setting is objective, and not contingent on any specific product(s).  

For those that are comfortable managing their own investment accounts but would like to engage a financial advisor for financial planning services, a fee-only advisor may be able to accommodate.  For example, a fee-only financial advisor may offer to complete a comprehensive financial plan for a flat fee or provide an hourly service where she can work on a specific financial project for her client.   

Commission-based 

A commission-based financial advisor, or registered representative, is often affiliated with a broker-dealer.  A broker-dealer is a firm that sells its own products or another financial company’s products to its customers.  A broker-dealer, and its registered representatives, are not held to the same fiduciary standard as an RIA. Therefore, a financial advisor who earns a commission is not necessarily required to act in your best interest.  Yes, she has to make sure the investment product she recommends is suitable for your situation, but she is not required to put your financial interests first.  Therefore, the relationship between you and the commission-based advisor tends to be more transactional, as opposed to an ongoing, financial advice-driven relationship.  When the advisor sells you a certain product, she will receive a commission directly from the investment provider.  The amount of the commission tends to be a certain percentage of the investment amount and can range from high to low.  For example, if you invest $250,000 into an annuity that pays the advisor 6% commission, the advisor will receive a payment of $15,000 directly from the insurance company.  

Fee-based

A fee-based advisor is registered as an RIA as well as a broker-dealer, and therefore earns both a fee and a commission.  Since a fee-based advisor is dually registered, she is not required to act as a fiduciary 100% of the time, or when outside the financial planning arena.  Similar to a fee-only advisor, a fee-based advisor will charge an AUM fee. In addition, she may charge a separate fee for financial planning services.  However, unlike a fee-only advisor, the fee-based advisor may also receive a commission on certain investment products that she sells to her clients.

As we can see from the financial advisor compensation models above, it is important to understand how you pay for financial advice, the type of financial planning service you receive, and if your advisor is required to act in a fiduciary capacity.  If you require a comprehensive financial plan and ongoing advice, perhaps a fee-only or fee-based model would be appropriate for your needs.  However, if you are comfortable managing your own investment accounts but need some advice on which products to purchase, a commission-based advisor may be the right fit.  By understanding the different compensation models and how the advisor is registered (RIA or broker-dealer) you can make an informed decision on what is the best fit for your needs.  

 

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“Beware of little expenses. A small leak will sink a great ship.” – Benjamin Franklin

Most retirees concern themselves with large market fluctuations, major economic calamity, or fraud. With good reason, the large, sudden, dramatic loss always seems to be the greatest concern for investors. However, often-overlooked are the consistent, grinding expenses and fees that can gradually eat away at your returns and pin your portfolio down, preventing it from achieving its maximum potential.

Ann & Betty

Ann and Betty were both 65 and met each other at a widows’ support group. They both wanted to retire and had no intention of remarrying. Despite the $1,000,000 they each had sitting in a savings account, neither had a clue about money and certainly did not know how to generate the income they needed to live. Ann went to a financial seminar and listened to a slick salesman sell her on a financial product he had that would guarantee her $74,549 for 25 years. She was so excited, she told Betty with the intention of convincing her to invest as well.

Betty was skeptical. She shopped around and found the same investment vehicle with 1.5% less in commissions and fees. Betty’s annual income for the next 25 years was $85,810. She received more than $11,000 per year more than her friend because she was careful to avoid high fees.

We live in a world where cost has a direct relationship to quality. BMWs can be expected to perform better than Chevrolets, Hagen Daz tastes better than Turkey Hill, and The Cheesecake Factory is better than McDonald’s. “You get what you pay for” is a mantra we hear time and again. Although this may be the case on Main Street, the truth on Wall Street is very different.

Studies have shown that the only correlation between fees and returns is an inverse one. Higher fees consistently lead to lower returns. Low fees should not be confused with no fees. Attempting to handle your own finances usually ends up costing far more than the fee. It is never advisable to avoid one problem by creating another.

It is possible to find a fee-only CFP® who is as concerned about your investment fees as you are. If your financial planner is worth his salt, he will understand the relationship of fees to performance and do everything in his power to keep them as low as possible without sacrificing return.

The use of index funds is the surest way to keep your fees to a minimum and not fret about possible market underperformance. An index fund is a group of stocks that are pre-assigned; they are not actively managed by a fund manager. The index fund tracks an underlying index, like the Dow Jones Industrial Average, and rarely makes changes to the makeup of the fund. A common example is an S&P 500 fund that tracks (you guessed it) the S&P 500 index. The index is run by a committee and makes changes infrequently, thus, it is not subject to the emotion or whims of an individual whose career is on the line. This can be very beneficial to the investor.

Index funds traditionally have far lower expenses than actively managed mutual funds because they have far less overhead to operate the fund. Index funds usually do not have loads. This is why index funds are so often shunned by full commissioned brokers; there is no commission to be had, thus no income for them. However, fee-only investment advisors are often very receptive to index funds as a large percentage of a portfolio.

Investment fees are unavoidable. In order to have the proper level of diversification, they must be accepted as part of the process. However, all investments are not created equal. Two funds could be exactly the same and have two very different sets of fees. Keeping your fees to a minimum will ensure that you are able to expel every last ounce of juice from your money tree once it begins to bear fruit.

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FAQ: I inherited a lot of shares of a single stock? I am worried it is too much in one stock, but don’t want to sell it. What should I do?

Answer: This is a very difficult emotional decision for many. When inheriting shares of a company that were held by your parents, grandparents, or other beloved family members, it can often feel like a betrayal to sell any of that stock. In reality, most people that come to us with this problem have way too much of their portfolio tied up in this one stock. Overconcentration in the shares of one company can lead to the equivalent of gambling your future on the future of one company.

Although this can lead to outsized returns over time if your instinct is right, if wrong, overconcentration can be devastating. In financial planning, we don’t like to gamble your financial future. Good financial planners use diversification and asset allocation to ensure that your money is there when you need it and grows over a long period of time.

It seems unlikely that companies like Apple, Disney, or Home Depot could possibly struggle or go out of business, but it is not as uncommon as you think. Nobody could have imagined in the year 2000 that General Electric, General Motors, or Exxon Mobile would be either out of business or materially irrelevant to our stock market and economy in 2021, but that is where we are. GE, the greatest performer of the 20th century has been the worst performer in the Dow Jones Industrial Average in the last 21 years, hanging on for its life at present. A $100,000 investment in this “blue chip” in 2000 would be worth roughly $26,000 today, while an equivalent investment in the S&P 500 would be worth more than $300,000 in the same amount of time.

This may seem bad, but it is far better than investing that $100,000 in General Motors in 2000. This 100-year old company that was the leader in the automotive industry filed for bankruptcy in 2009, essentially eliminating your investment.

The point is not to scare you into avoiding investing, but to understand no matter how solid a company looks at any time, economics, management, and technology are changing so fast, it will be hard for any one company to dominate. The past is not a strong indicator of the future and it would have been hard to predict, in 2000, that a company like Apple, that was months from bankruptcy or Amazon, that was struggling with all tech stocks when the bubble burst, would be the next great stock picks of the future.

The easy solution: Don’t play the game. If you want to maintain the legacy of your loved one, hang on to the inherited stock, but keep it to no more than 5% of your total net worth. Sell the rest. You can then experience the joy of being connected to your loved one without the risk that they might put you on food stamps in the future.

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FAQ: Why are my bond funds losing value? I thought bonds were supposed to be safe?

Investors generally associate bond investments with price stability and safety. Even though bonds are considered conservative investments (especially when compared to stocks), bond prices fluctuate. However, it is important to note that bond prices historically have not varied as widely as stock prices. If you would like to learn more about bonds, please see my previous article: “Should Bonds Be Included in My Portfolio?”

One of the main things that cause bond prices to change is interest rates. Bond prices and interest rates have an inverse relationship with each other. When interest rates increase bond prices decrease, and vice-versa. Let’s take a look at an example that may help with understanding this relationship:

Let’s say you have $1,000 that you would like to invest in a bond. You have two choices available. The first bond is trading in the secondary market and will pay you 3% interest while the second bond is a newly issued bond that will pay you 5% interest. Let’s also assume that both bonds have identical risk characteristics. As an investor, who is looking to maximize your return, you would not purchase the 3% bond on the secondary market when you could invest the same amount of money in the newly issued bond that will provide more interest. Therefore, the market price of the 3% bond would have to decline in order for you to have a comparable return on the investment.

In addition, the price of a bond with a longer time to maturity is more sensitive to changes in interest rates than the price of a bond with a shorter time to maturity. Therefore, the price of a 30-year U.S. Treasury bond will experience more volatility than a 10-year U.S. Treasury bond given a similar change in interest rates.

So, you may be asking yourself; “with the recent increase in interest rates why would I invest in bonds?” One of the main reasons you would own bonds is to add a level of diversification to your portfolio. This diversification can be extremely helpful during periods of time when stocks are struggling. Bonds can act as a ballast to your portfolio during periods of falling stock prices, because during these times bond prices tend to stay stable or increase. This occurrence is known as the “flight to quality”. As stock prices decline, investors tend to sell their stock holdings and reinvest that money in bonds (especially high-quality bonds like U.S. Treasuries) in an effort to stabilize their portfolio.

When it comes to investing, the goal is to understand that the value of your investments (i.e. stocks, bonds, real estate, etc.) will fluctuate overtime but it is best to hold them for the long-term and try not to pay attention to the day-to-day price swings.

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Bonds: Should they be included in my portfolio?

By Bill Gallagher, CFP®, MPAS®

What is a bond?

A bond is a financial instrument that represents a loan from the investor to a government entity or a corporation. The majority of bonds today are issued by the U.S federal government, its agencies, municipalities, and U.S. corporations. There are two key features of bonds that differentiate them from other financial instruments:

  1. Regular coupon payments
  2. Maturity

When an investor purchases a bond, they are, in essence, lending their capital to the issuing entity. In return, the entity will pay the bondholder interest (either quarterly, semi-annually, or annually) for a stated period of time. At the end of that period the bond will mature, and the entity will return the bondholder’s original investment. The maturity of a bond can range anywhere between five to thirty years. While bonds have historically carried lower volatility than stocks, there are risks involved. Bondholders will find that they are exposed to default risk, interest rate risk, inflation risk, and reinvestment rate risk.

How can I purchase bonds?

There are two main ways in which an investor can purchase bonds:

  1. Purchase individual bonds
  2. Purchase a bond mutual fund or exchange-traded fund

Investors can purchase an individual bond through a broker or directly from the U.S. Government (in the case of a U.S. government bond). An investor may decide to purchase an individual bond if they were targeting a certain maturity date or stated level of interest. While an investor has the ability to purchase a variety of bonds it typically requires a large sum of money to build a well-diversified portfolio of individual bonds. Therefore, many investors choose to invest in a bond mutual fund or exchange-traded fund. A bond fund provides the investor with access to a diversified portfolio of bonds, with a lower initial investment. Before investing in a bond fund, it is important to be aware of the fees associated with the fund. In addition, it’s important to understand what type of bonds the fund is investing in. There’s a difference, in terms of risk, between investing in a short-term government bond fund (low risk) and a high-yield corporate bond fund (high risk).

Why should I include bonds in my portfolio?

Most people purchase bonds for interest payments. A retiree may want to invest a portion of her money in bonds so that she can use the interest payments to supplement her retirement income. However, bonds can also act as a ballast to the portfolio when you hit stormy seas. During periods of uncertainty and weak economic fundamentals, stock prices tend to decline. However, during these difficult periods bond prices tend to rise. The opposite is also true – when stock prices rise, bond prices tend to decline. Therefore, bonds can be used in combination with stocks, not only to create a diversified portfolio but to help reduce overall volatility (risk) and maximize the portfolio’s risk-adjusted return. This approach may also provide the investor with a more comfortable ride and not cause her to panic during periods of stock market declines.

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Traditional IRA or Roth IRA: Which is the Right IRA for You?

By Bill Gallagher, CFP®, MBA

More and more, Americans are taking charge of retirement and establishing savings plans to help build their retirement nest eggs. The type of individual retirement account (IRA) you choose can significantly affect you and your family’s long-term savings. So, it’s important to understand the similarities – and the differences – between Traditional IRAs and Roth IRAs in order to select the option which is best for you.

When comparing IRAs, questions often arise around the considerations relating to both contributions and distributions. In addition, many clients ask if they should consider converting their Traditional IRA to a Roth IRA. The answers to these questions can have a significant impact on one’s tax situation over the balance of their lifetime. The following can help provide a basic overview of both Traditional IRAs and Roth IRAs. In addition, we provide a brief discussion on Roth IRA conversions to help clients navigate through the nuances of the conversion process.

TRADITIONAL IRA

Contributions

By now, many people are aware they can make an annual tax-deductible contribution to a Traditional IRA. (1) In 2021, an individual (regardless of age) who have earnings from employment may contribute up to $6,000 to a Traditional IRA. In addition, those who are age 50 and over are allowed to make a catch-up contribution in the amount of $1,000.(2) However, many people are surprised when their accountant tells them that they may not receive the full deduction for their contribution.

This deduction limitation is based on two factors: your modified adjusted gross income (“AGI”), and your active participation in an employer-sponsored retirement plan. (3) For example, in the case of a married couple who are both active participants in an employer-sponsored retirement plan, and whose 2021 modified AGI is greater than $125,000 ($76,000,000 for a single filer), no deduction will be allowed.

While the tax deduction may be phased out, or even eliminated for certain high-income taxpayers, it should not dissuade them from making a non-deductible, after-tax contribution to a Traditional IRA. Even though a tax deduction will not be allowed, contributions to the Traditional IRA will grow tax-deferred over the course of the individual’s life. Individuals who choose to make an after-tax contribution to a Traditional IRA will need to keep track of these non-deductible contributions (IRS Form 8606) to ensure that these contributions are not taxed again upon distribution from the Traditional IRA during retirement.

Distributions

To the extent an individual has made tax-deductible contributions to a Traditional IRA, any distributions from the IRA are considered ordinary income and will be taxed accordingly in the year of the distribution. In addition to ordinary income tax, distributions prior to age 59 1⁄2 are subject to a 10% penalty.(4) However, there are certain situations in which the IRS will waive this 10% penalty. According to “IRS Publication 590-B – Distributions from Individual Retirement Accounts”, these exceptions include:

  • You have unreimbursed medical expenses that are more than 7.5% of your adjusted gross income,
  • The distributions aren’t more than the cost of your medical insurance due to a period of unemployment,
  • You are totally and permanently disabled,
  • You are the beneficiary of a deceased IRA owner,
  • You are receiving distributions in the form of an annuity,
  • The distributions aren’t more than your qualified higher education expenses,
  • You use the distributions to buy, build, or rebuild a first home (up to $10,000),
  • The distribution is due to an IRS levy of the qualified plan,
  • The distribution is a qualified reservist distribution.

Because non-deductible contributions made to a Traditional IRA are treated as an investment in the contract (cost basis), when withdrawn these contributions are not considered taxable income. However, the earnings portion of the non-deductible Traditional IRA is considered ordinary income and will be taxed accordingly. In addition, if the distribution is made prior to age 59 1⁄2, a 10% penalty may apply to the portion attributable to the earnings. The calculation that determines the tax-free and taxable portions of distributions is complex when both deductible and non-deductible contributions are commingled in a Traditional IRA. Please refer to IRS Publication 590-B for more details on the tax treatment of such distributions.

Another important feature of Traditional IRAs is the Required Minimum Distribution (“RMD”). The RMD is the mandatory amount that must be distributed from a Traditional IRA on an annual basis, starting on April 1st of the year following the year in which an IRA owner attains the age of 72.(5) The amount of the RMD is based on the year-end balance of the Traditional IRA and the IRA owner’s life expectancy.

The Required Minimum Distribution will have a direct impact on the IRA account owner’s tax bracket during retirement. If the IRA owner fails to consider how the RMD will impact his or her tax bracket during retirement, they may find themselves in a higher tax bracket once distributions commence, especially if the Required Minimum Distributions are sizable. At that point, there would be little the individual could do to help alleviate the tax burden. In such cases, it may be prudent to begin withdrawing smaller amounts from the IRA before 72 with the expectation of being in a lower tax bracket.

Another strategy the IRA owner may implement today that may save some tax dollars over the course of his lifetime is referred to as a Roth conversion. Roth conversions are discussed below.

ROTH IRA

Contributions

Unlike a Traditional IRA, contributions to a Roth IRA are made with after-tax dollars and are not tax-deductible.(6) For 2021, an individual (regardless of age) who have earnings from employment may contribute up to $6,000 to a Roth IRA. As we saw with Traditional IRAs, those who are 50 years of age and older may make a catch-up contribution of $1,000.

Another difference between Traditional IRAs and Roth IRAs is the fact that contributions to a Roth IRA are phased out, and eventually eliminated, based on an individual’s modified adjusted gross income. For example, in 2021 a married couple must have a modified adjusted gross income of under $198,000 ($125,000 for single filers) to make the maximum contribution to a Roth IRA.(8)

Distributions

Unlike distributions from a Traditional IRA, qualified distributions from a Roth IRA are tax-free.(9) Qualified distributions are defined in the Internal Revenue Code as:

  • Distributions that are made after the five-year period for which a contribution was made to a Roth IRA.
  • Distribution under the following circumstances:
    • Made after the date you reach age 59 1⁄2,
    • Made because you are disabled,
    • Made to a beneficiary of your estate after your death, or
    • One that is made to a first-time homebuyer ($ 10,000-lifetime limit). (10)

However, should an individual take a non-qualified distribution, the amount allocable to earnings will be subject to ordinary income tax (and a 10% penalty if the distribution was made prior to age 59 1⁄2). It is important to note that an individual can always distribute the number of his contributions at any time on a tax-free and penalty-free basis. In fact, any distributions from a Roth IRA shall be treated as coming from annual contributions first, from conversion contributions second, and finally from earnings.(11)

Another important feature of the Roth IRA is the fact that a Roth IRA owner is not forced to take Required Minimum Distributions from his Roth IRA.(12) This feature can be extremely beneficial to the taxpayer who doesn’t need to draw on his Roth IRA assets to support his or her lifestyle expenses in retirement. In this situation, the funds within the Roth IRA continue to grow unencumbered on a tax-deferred basis over the balance of their lifetime.

Roth Conversions

Now that we understand the similarities and differences between Traditional IRAs and Roth IRAs, we can take a closer look at a strategy that could potentially lead to a more tax-efficient environment during an individual’s retirement. This strategy is referred to as a Roth conversion. A Roth conversion is the process of withdrawing funds from a Traditional IRA and depositing the proceeds into a Roth IRA. When a conversion is completed, the amount converted will need to be reported as ordinary income, in the year of conversion.(13) In a Roth conversion, the 10% penalty is waived for individuals who convert prior to age 59 1⁄2. However, if an individual who is not 59 1⁄2 uses the funds from his Traditional IRA to pay the tax liability resulting from the Roth conversion, the 10% penalty will be imposed on the amount used to pay the tax. Therefore, in most situations, a Roth conversion works well when the individual has enough money set aside in non-IRA accounts to pay the tax liability.

The first step in the Roth conversion process is to determine if the conversion makes sense for an individual given his or her unique financial situation. As mentioned earlier, it is extremely important for an individual to have a clear understanding of their current tax bracket and expected tax bracket in retirement to determine if the conversion is right for them. Once this is determined, they must then decide on the timing of the conversion. Given one’s tax situation, does it make sense to convert all the assets in his Traditional IRA in a single year, or would it be more beneficial to perform a series of annual conversions over the course of several years? The latter would allow the individual to spread out the tax liability over the course of multiple years.

One situation where a Roth conversion may have its place is during the early stages of retirement, especially in the years leading up to an individual’s age 72. It is during this time when an individual may find themselves in a lower tax bracket because they are no longer working, and are not yet required to take mandatory distributions from a Traditional IRA. This could be a great time for an individual to perform a series of partial conversions each year leading up to age 72. By implementing these conversions, and theoretically reducing the number of assets remaining in the Traditional IRA, the amount of the required minimum distributions at 72 should be lower, thus reducing the overall tax liability.

Another situation where a Roth conversion may make sense is seen in the fortunate case of an individual that does not need the assets in his Traditional IRA to support his or her lifestyle needs during retirement. In this situation, a Roth conversion may be implemented for generational planning purposes by essentially prepaying the future income tax for his heirs. While this prepayment may be thought of as a “gift”, it does not count toward one’s annual gift tax exclusion or against the taxpayer’s lifetime exemption amount. (14)

As we can see, while implementing a Roth IRA conversion may increase tax efficiency, the decision should not be taken lightly. One must have a clear understanding of their current tax bracket and expected tax bracket in retirement to make an informed decision. The decision should not be made in a vacuum, but rather, through collaboration with your tax advisor and financial planner. In this way, you can determine if a Roth conversion is right for you.

Sources

  • (1) I.R.C. §219(a)
  • (2) I.R.C. §219(b)(5)(B)
  • (3) I.R.C. §219(g)
  • (4) I.R.C. §72
  • (5) I.R.C. §401(a)(9)(C)
  • (6) I.R.C. §408A(c)(1)
  • (7) I.R.C. §408A(c)(4)
  • (8) I.R.C. §408A(c)(3)
  • (9) I.R.C. §408A(d)(1)
  • (10) I.R.C. §408A(d)(2)
  • (11) I.R.C. 408A(d)(4)
  • (12) I.R.C. §408A(c)(5)
  • (13) I.R.C. §408A(d)(3)(A)
  • (14) Cymbal, Kenneth & Barrett, Tom. (2016). Increasing the Odds of Making a Successful Roth IRA Conversion. Journal of Financial Service Professionals. Vol. 70(3). May 2016. Pg. 49- 63.

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In June 2013, the National Institute on Retirement Security published the results of a study entitled “The Retirement Savings Crisis”, Is it Worse Than We Think?” The main purpose of the study was to determine if American households are financially prepared for retirement. The results of the study were rather sobering, as it suggests the majority of households are not as well prepared as they may have thought. Some of the highlights from the study were:

  • More than 38 million working-age households (45%) do not own any retirement account assets, whether in an employer-sponsored 401(k) plan or in IRAs.
  • The average working household has virtually no retirement savings. When all households are included – not just those with retirement accounts – the median retirement account balance is just $3,000 for all working-age households and $12,000 for those households near retirement.
  • 92% of working households are not on target to meet their retirement goals.

If this trend continues, Americans will likely need to find other ways by which to support their lifestyle during retirement rather than rely on retirement savings. Typically, the fallback position centers on either the decision to defer retirement by working to an older age or to make sacrifices to lifestyle and spend less. Neither of these is necessarily attractive to someone who has reached the point where retirement is a serious consideration.

HOME EQUITY TO THE RESCUE?

Those who own a home are in a unique position whereby they may have the opportunity to utilize the equity in their home to help fill the income or asset gap should they have a retirement income shortfall.

There are four primary ways by which an individual can access the equity in their home:

  • Home Equity Loan (or second mortgage)
  • Home Equity Line of Credit (“HELOC”)
  • Home sale and downsize
  • Home Equity Conversion Mortgage (Reverse Mortgage)

Following is a brief overview of each of these strategies. Each has its own advantages and disadvantages. Before deciding to implement any of these strategies it is important to speak with your financial advisor to determine the best course of action given your unique financial position.

Home Equity Loan

A Home Equity Loan allows a homeowner to access their home equity by taking a lump sum of money that will need to be paid back over a certain specified period of time (i.e. 10 years, 15 years or 30 years).

The advantages of a Home Equity Loan include:

  • A home equity loan carries a fixed interest rate. A retiree can plan on the loan payment being fixed for the entire term of the loan. This can be helpful for those that are on a fixed budget.
  • The interest the borrower pays on the loan may be claimed as a mortgage interest deduction. According to IRS Publication 936, the Federal Government allows the borrower to deduct the interest from the loan as long as the proceeds were used to buy, build, or substantially improve the borrower’s home. Further, a borrower can deduct home mortgage interest on the first $750,000 ($375,000 if married filing separately) of indebtedness. However, higher limitations ($1,000,000 ($500,000 if married filing separately)) apply if the borrower is deducting mortgage interest from indebtedness incurred before December 31st, 2017.

The disadvantages of a Home Equity Loan include:

  • The full balance of the loan begins to accrue interest as soon as the funds are disbursed. This may cause the borrower to pay more interest over time.
  • The borrower must start repaying the loan soon after it is disbursed. These payments may place a constraint on the borrower’s cash flow which could lead them to deplete their investment assets to help fill the income gap.
  • Because the home equity loan is an amortizing loan, each installment includes repayment of principal as well as interest. As such, the earliest payments on the loan largely interest, with very little reduction in the outstanding loan balance.
  • To qualify, the borrower must undergo a credit check and prove their financial assets and sources of income to the lender. Proving sources of income for retirees may prove difficult, as many have no employment income.
  • If the retiree is unable to meet the loan’s obligations, he or she may find themselves in a position of defaulting on the loan, resulting in foreclosure on the home.
  • Given the disadvantages associated with these loans, according to Allen (2015), a Home Equity Loan is typically an appropriate strategy for those retirees with a high-risk tolerance and sufficient sources of income.

Home Equity Line of Credit (HELOC)

A home equity line of credit is another way for a homeowner to access their home equity. When a borrower is approved for a HELOC, he or she does not receive a lump sum payment. Instead, the funds can be drawn upon when and as needed up to the amount of the credit line.

The advantages to a Home Equity Line of Credit include:

  • They are typically easier to establish than a traditional home equity loan, and closing costs are typically below that of a home equity loan.
  • The initial interest rate charged on a HELOC is typically lower than interest rates on home equity loans.
  • Interest is assessed on the amount the homeowner borrows against the home’s equity, not on the full amount of the line of credit.
  • The interest the borrower pays on the loan may be claimed as a mortgage interest deduction. According to IRS Publication 936, the Federal Government allows the borrower to deduct the interest from the loan as long as the proceeds were used to buy, build, or substantially improve the borrower’s home. Further, a borrower can deduct home mortgage interest on the first $750,000 ($375,000 if married filing separately) of indebtedness. However, higher limitations ($1,000,000 ($500,000 if married filing separately)) apply if the borrower is deducting mortgage interest from indebtedness incurred before December 31st, 2017.

Disadvantages include:

  • Interest rates are not fixed and are typically tied to a published interest rate such as the Prime Rate. The rate of interest calculated on the outstanding loan balance will therefore vary over time. In a rising interest rate environment, the borrower can find that the amount of the monthly payment may rise to a level that further squeezes their budget.
  • If the retiree is unable to meet the loan’s obligations, they may find themselves in a position of defaulting on the loan, resulting in foreclosure.
  • While the underwriting process may not be as stringent as for a home equity loan, to qualify, the borrower must undergo a credit check and prove their financial assets and sources of income. Proving sources of income for retirees may prove to be difficult as they typically have no employment income.

Home Sale and Downsize

Another way for a retiree to access home equity is by selling their existing home and downsizing.

Advantages include:

  • The liquidity gained from the sale may be used to purchase a new home that is perhaps better suited to the homeowner’s needs.
  • When “downsizing”, the homeowner can reduce or eliminate mortgage payments if the new home is purchased for cash or with a smaller mortgage.
  • To the extent the cost of the new home is less than the proceeds from the sale, excess proceeds can be invested to help provide additional income to help support the homeowner’s lifestyle.
  • Downsizing to a less expensive home may also reduce carrying costs like the amount being paid for taxes, homeowner’s insurance, utilities, etc.

Disadvantages include:

  • The decision to sell requires that the homeowner overcome the emotional hurdle of selling the home where many family memories were made.
  • To the extent the home is sold for more than its cost basis, the homeowner may have to pay tax on the capital gains from the sale. However, homeowners filing a joint return may be eligible to exclude the first $500,000 of capital gain from taxation. ($250,000 for those filing a single return). IRS Publication 523 states that the exclusion is available if you owned the home and used it as your primary residence during at least 2 of the last 5 years before the date of sale, you didn’t acquire the home through a like-kind exchange during the past 5 years, and you didn’t claim any exclusion for the sale of the home that occurred during a 2-year period ending on the date of sale of the home.

Home Equity Conversion Mortgage (Reverse Mortgage)

Lastly, a homeowner that is at least 62 years old may access the equity in their home through what is often referred to as a reverse mortgage. To be eligible for a reverse mortgage the home must be a single-family home or a 2 to 4-unit home with one unit occupied by the borrower. Certain condominiums and manufactured homes (trailers, etc.) will also qualify if they meet the requirements.

The amount a borrower may receive through a reverse mortgage depends on the following factors: (1) the age of the youngest borrower or eligible non-borrowing spouse, (2) the current interest rate, and (3) the lesser of the appraised value of the home or the mortgage limit of $822,325 (as of January 1, 2021) imposed by the FHA on reverse mortgages.

A reverse mortgage is referred to as a non-recourse, asset-based loan that does not require repayment until the borrower leaves the home (Allen, 2015, p. 75). Reverse mortgages are appropriate for those who would like to age in place (i.e. remain in their home), have enough financial resources to maintain the home (i.e. paying property taxes, homeowner’s insurance, etc.), and for those who may be looking to supplement their retirement income or to provide an emergency fund.

The clear majority of reverse mortgages in the United States are Home Equity Conversion Mortgages, which are regulated and insured by the Federal Government by the Department of Housing and Urban Development (HUD) and the Federal Housing Authority (Pfau, 2016, p. 45). For many years, reverse mortgages were sold inappropriately by lenders which often included high-pressure sales techniques and carried sizable loan origination fees. As a result, the Federal Government made changes to the reverse mortgage facility, increasing the regulations associated with them to protect the borrower by ensuring they have the financial wherewithal to continue to maintain the property.

As mentioned above, one of the major benefits of a reverse mortgage is to allow the homeowner to age in place. However, just because the home may be subject to a reverse mortgage does not mean that the borrower must remain in the home. The borrower can sell the home, but just like a conventional mortgage, they must repay the reverse mortgage loan balance when the home is sold. In addition, the homeowner can leave the home to his heirs. The heirs will inherit the home upon the death of the borrower. However, before the heirs receive title to the property, they must repay the reverse mortgage loan balance. If the heirs are not interested in keeping the home, they have the option of selling it. Again, they would be responsible for repaying the reverse mortgage balance upon the sale of the home.

Advantages of reverse mortgages include:

  • The ability to access the equity in one’s home, within limits, via a lump sum, an open line of credit, or through regular monthly disbursements without having to make loan repayments, as long as the borrower remains in the home. Please note, if the borrower lives with a spouse who is a co-borrower, then the co-borrowing spouse may continue to live in the home should the borrower move to a nursing home or assisted living facility.
  • Proceeds from a reverse mortgage may be used to pay off an existing first mortgage, home equity loan, or HELOC (within the stated limits), thereby eliminating principal and interest payments on such loans. Since re-payments are not required on the reverse mortgage, the borrower can substantially reduce their monthly out-flows.
  • According to IRS Publication 936, payments received under a reverse mortgage are considered loan advances. Therefore, disbursements received are not taxable.
  • A reverse mortgage is especially beneficial for those that do not have sufficient balances in retirement savings. Implementing a reverse mortgage will provide them access to otherwise “dead equity” that can help them fill any retirement income gaps.

Although reverse mortgages have some benefits, retirees need to be aware of some of their disadvantages.

Disadvantages of reverse mortgages include:

  • Origination fees and closing costs can be high.
  • The principal amount of the loan plus interest must be repaid upon the death of the borrower, or if the home is no longer the borrower’s principal residence (or the borrower moves out due to health reasons for 12 months or longer), or if the borrower defaults on the terms of the loan.

If you are close to retirement, or in retirement, and are looking for ways to utilize your home equity to supplement your income it is important that you speak with your financial advisor to make sure that any of the above strategies are appropriate for your unique financial situation.

  • Allen, James, R. (2015). Using the Personal Residence for Retirement Income. Journal of Financial Service Professionals. 69(4). Pp 71-79.
  • Pfau, Wade. (2016). Reverse Mortgages: How to use Reverse Mortgages to Secure Your Retirement. McLean, VA. Retirement Researcher Media.
  • Rhee, Nari. (2013). The Retirement Savings Crisis: Is it Worse Than We Think? Washington, DC. National Institute on Retirement Security.
  • United States Department of the Treasury. Internal Revenue Service. Publication 936 (2019): Home Mortgage Interest Deduction. Internal Revenue Service.

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FAQ: At what age should I consider long-term care insurance?

Answer: This is an extremely common question amongst those near retirement. Most people planning for their retirement understand that we have programs such as Medicare to help with acute care. Essentially, if we get sick or hurt and need professional help to get better, all retirees are provided insurance to help cover those costs. However, what about care that is not designed to help us recover from an illness or injury? What about care that simply supports our regular activities of daily living such as bathing, eating, dressing, etc. that we may no longer be able to accomplish on our own as we become elderly. Unfortunately, there is no government program to support these costs (unless we are effectively out of money) and thus, can have a detrimental impact to our wealth and estate.

This is where Long-Term Care insurance can help. LTC is a policy, that when purchased, will provide funds to pay for either in-home or nursing facility care to help you with these activities of daily living.

When should you consider purchasing LTC insurance is a common question. Purchase this policy too early and you could be paying premiums for decades before there is a need. Purchase it too late and the premiums can be prohibitively expensive.

We typically recommend a 14-year window of purchasing LTC insurance. Look to purchase between the ages of 50 and 64 and you should find that happy medium. Most Zynergy members will shop for their policy between 55 and 60 and make a determination at that point whether LTC insurance is right for them.

Long-Term Care Insurance is an important policy to consider for your later years of life. Don’t wait too long to purchase or you could be priced out.

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Resolve to Become Healthier

For many people, healthcare will be one of their largest expenses in retirement. A couple age 65 who retired in 2020 is estimated to need $295,000 to cover medical expenses throughout retirement, according to Fidelity Benefits Consulting. By the way, that estimate does not include any costs associated with nursing-home care. It applies only to retirees with traditional Medicare insurance coverage. It does not include other health-related expenses, such as over-the-counter medications, most dental services and long-term care.

Here’s a key to that estimate: It’s calculated for average retirees, but the cost could be more or less depending on where you live, your longevity and your health.

Fidelity says many people nearing retirement underestimate the amount of savings they may need to cover health-care costs. In one poll, respondents guessed that they would need only $50,000.

So to save money, get healthy or healthier. Eat better. Exercise. Your health can have a big impact on your wealth.

Spend Less

Set a threshold for your big purchases. It’s one thing to spend $20 at Target on a whim, but if you ever want to buy something $50 or $100 or more, give yourself at least a 24-hour waiting period to make sure you’re reflecting on the purchase. Ask yourself what you’re giving up in lieu of this purchase. Is it going to be that you’re not going to go out for the next month? Where are you going to make up the difference? Because it’s money that hasn’t been accounted for.

We recommend setting your threshold at $50 or $100, depending on your budget. During your waiting period, ask yourself why you want this item and what it means for you — whether you really need it or want it to keep up with the Joneses. If it’s more the latter, remind yourself that when you’re comparing yourself to other people, you’re seeing their best self — not the financial issues behind-the-scenes that make you keep up with them.

If there’s a particular category of your budget that needs scaling back, look at your past spending to set a limit. For instance, if you know you’re spending $400 a month on going out, say, ‘I’m going to cut that in half — I won’t go out to dinner but I’ll go out to lunch and brunch with friends.” So, have a conversation about where you’re willing to make adjustments to meet this goal.

Plan for the Holidays

Time goes by quickly; look how fast last year went. This is the perfect time to plan for this year. Determine your holiday budget based on what you spent last year. Examine who you are buying for, food, travel, entertainment, decorations, postage, etc., and start saving. If possible, start shopping now. It will give you time to look for deals as well as purchase that perfect something without all the holiday stress.

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You contemplated Black Friday shopping while snuggled in bed; visions of chaos danced in your head. With all the shopping days left, you took a pass; but boy oh boy, that time went by fast! But alas, all is not lost! Here are three tips to help lower the cost!

1. Gift an Experience! Make up gift certificates for services like free babysitting for your grandchildren. Put together a movie night gift (popcorn, candy and you can download an iTunes gift card for a movie). Purchase a local experience, like a gift card to a local restaurant, spa or theater. Check out 8 Coupons, as they aggregate all the deals for your area from sites like Groupon, Living Social, Amazon Deals and Restaurants.com.

2. Shop Online… but watch your shipping costs! Some of the best deals on large ticket items come available online December 21-24th. But shipping costs can be astronomical for expedited delivery so be aware. Look for options to pick up or reserve in store. Consider a 30-day Amazon Prime trial to qualify for free 2 day shipping for most purchases at amazon.com. Most stores offer free gift wrap, so if you are planning to ship the gift to someone, do so directly from the retailer to avoid paying double shipping costs!

3. Wait Just a Little Longer! I know you are starting to panic but the deals on Christmas Eve may just be worth the wait at this point! Most retailers begin the markdowns for the “after-Christmas” sale on December 24th, so while you may not be guaranteed to find everything you want in stock, you are very likely to get great gifts at heavily discounted prices.

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FAQ: How much cash is enough for my emergency reserve?

When it comes to your emergency reserve, rules of thumb abound.

“You need 6 months of living expenses in cash!”

“Always keep enough cash to cover your basic expenses for one year!”

“You must have at least $10,000!”

“Subtract your age from your IQ and multiply by $500!”

The truth is, rules of thumb may be good advice for the population (okay, maybe not the last one), but can be terrible for any individual.

An emergency reserve is the safe, liquid, accessible cash you keep in a checking, savings, or money market account that you can access when unforeseen expenses occur, or you experience a job loss. Most financial advisors will recommend 6 -12 months of living expenses in this account, however, that may not be appropriate for you.

We believe there is a balance between sleeping well and eating well. With a little extra cash tucked under the mattress, you may sleep very well at night, which is very important. However, too much extra cash will sit in savings earning almost nothing while inflation erodes its value over time and prevents you from a better lifestyle….eating well.

As an example, you may feel very comfortable with $100,000 in your savings account in case an emergency arises, allowing you to sleep comfortably at night, but that $100,000 earning less than 1% in today’s environment means you are missing out on investing some of those funds and earning much higher returns over time. This cost is likely to be to the tune of tens of thousands of dollars over five or more years. The loss of this return can certainly hamper your lifestyle and spending.

The point is, like most things in life, it’s important to find balance. Figure out what the right balance of sleeping well and eating well is for you. Start by thinking about 6-12 months of living expenses and decide if that is too much for your personality (my income is safe, and I would rather my money work harder for me) or makes you very uncomfortable (a good night’s sleep is worth several thousand dollars a year to me). Once you figure out what that number is for you, invest the rest with the confidence that you have some cash to help through the rough patches!

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Money-Saving Tips: Save Money on your Energy Bills by Warding off the Vampires

Halloween is over; your decorations have been packed away and your candy supply is rapidly diminishing. But your home is still haunted by vampires, and you pay the price each month in utility charges—Electricity “vampires” account for up to 20% of your energy bill! Here are three simple ways to eliminate vampires (No Stakes Required!):

  1. Identify the devices that drain power while not in use. The most common types are:
    1. “Wall Warts” – Devices with large plugs, like cell phone charges, consume energy even when the device to be charged is not attached.
    2. “Bricks” – Power cords for laptops, televisions, and some TV equipment are often joined in the middle by large black boxes. Even when your equipment is turned off, these “Bricks” continue to use energy so long as they are plugged in.
  2. If possible, replace these items with energy-efficient devices, or unplug them when they are not in use
  3. Consider purchasing a “Smart” power strip that cuts off power to ancillary devices when the master is off. For example, if your tv is the master and it is turned off, power would be cut off to the cable box and DVD player as well.

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FAQ: I’m near retirement and with the election right around the corner, shouldn’t I be very conservative until after the election is over?

We have been fielding this one often lately, and understandably so. The 2020 election seems like none we have experienced in history. The rhetoric is far more partisan than it has ever been, and there doesn’t seem to be any candidate that identifies with the average American’s values. We’ve heard concerns about a potential change in power and fears about no change in power, fears that the results will be catastrophic, and even apocalyptic. And no matter where one falls on the political spectrum, there is an overwhelming fear across the board: “Are we all done for? Surely this time is different!”

Only it’s not.

In fact, we experience contentious, partisan elections of our President every four years. Each time, the fear is the same. The 2016 election, only four short years ago was just as partisan, just as frustrating, and just as venomous in its rhetoric. The line I heard from seven of my members at the time was “No matter who wins, we’re doomed.” We weren’t.

President Donald Trump has been President for almost 4 years and despite what you think of him as a President (we are limiting our discussion to investing), investors have done well during his term. Once he was elected, the market crashed more than 1,000 points overnight before the sun even came up with the headlines of a Trump victory. However, by the time the market opened at 9:30am the next morning, the Dow was down only 200 points. This was just about a 1% decline…hardly a crash. After that, it was straight up (practically) for 18-months. Now, that may be fine if you are a Trump fan, but what if Hillary Clinton had won?

Actually, we don’t know what would have happened if Clinton had won since any guess would be pure speculation, but the last two Democratic Presidents, President Bill Clinton and President Barack Obama presided over some of the best stock markets in our history even as they regulated and raised taxes. While President George W. Bush presided over one of the worst, despite implementing very similar policies to President Trump.

The point is not to favor one party over the other in our investment strategy; in fact, quite the opposite. History shows us that it simply does not matter. Markets perform poorly and well for Presidents who are Democrats and for Presidents who are Republicans. The result has less to do with who is in power and how high taxes are, and more to do with where we fall in the current economic cycle. President Bush inherited an overblown economy with the highest stock valuations since 1929. No amount of tax cuts and deregulation would have saved the stock market during his tenure. President Obama came into power almost at the trough of one of the worst economic crises of our lifetimes; the market had almost nowhere to go but up.

I am not defending any one candidate or party. The lesson of history is that there are plenty of factors that are consistent with market performance over time, the largest being valuation at the time of purchase. One factor that has essentially zero correlation is elections and the political party in power. Focus on what is important for your long-term investing and ignore the “noise” which seems important in the moment. If you had followed this advice in 2016, you were far happier, and wealthier, for it. If you trusted your “gut” and sold before the election, you had almost no opportunity to buy back in at a lower price. The longer you waited to reinvest, the more return you missed.

Stay the course, stay invested for the long-term, and watch your money grow through both Republican and Democrats tenures!

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Saving and planning for your future can be daunting. There are so many aspects to our personal finances and each one of those facets has nuances that make understanding it all overwhelming. The good news is, planning for your retirement doesn’t have to be complicated and, at the risk of oversimplifying things, there is really one thing, that if managed properly, can drive the rest of your planning and behavior. This strategy is understanding and managing your expenses.

That’s right, simply knowing what you are spending on an annual basis and properly managing that spending is the most important step in putting a good long-term financial and retirement plan in place. As a Certified Financial Planner™ I know that all of the data we collect to build a plan is important, however, most data is not subjective or unknown. It’s easy to find out the balance of your mortgage, 401k, or savings accounts at any given point of time. These numbers are clear and obvious. However, accurately modeling expenses is usually a guesstimate by our members who tell us what their monthly bills are. Obviously, your expenses are far more than your monthly bills since gifts, auto repairs, holidays, travel, and many other expenses do not come in bill form but can be a large portion of one’s annual budget. Understanding every dime that comes out of your pocket throughout the year, not just your monthly bills, is the catalyst for financial success.

The good news is that in today’s world of data aggregation and smartphone apps, you no longer need to tediously enter receipts into an excel spreadsheet or complex accounting software. Much of the heavy lifting of tracking day-to-day expenses has been relieved with technology. Aggregator apps like Mint.com offer a free service that can tie your bank accounts and credit cards together and track your transactions in real-time. Most of those transactions are even categorized automatically (although the service probably requires 15 minutes a week to ensure categories are properly accounted for). No longer is knowing what you spend a complex and time-consuming task.

If designing your financial future proactively is a priority of yours, start with your expenses. Track them, understand them, and manage them. Your future self will thank you!

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FAQ: I’m just starting my first job and my employer offers a 401k with a match. How much do you think I should contribute each paycheck?

Answer: We are so glad to see that as a young person you are thinking about your future. The most important factor to successful retirement savings is time. Allowing your assets decades to compound can create an almost magical account balance when the time comes that you need your funds. Essentially, the sooner you start, the better.

We will break our recommendations into two parts so you can decide based on your current situation.

Minimum: At the very least, contribute enough to take advantage of your employer’s match. This is free money that you do not want to miss.

Ideal: Typically, we recommend saving 10%-15% of one’s salary in their 401k. This will provide you with a significant nest egg if you have 30+ years of growth compounding building the account. If you are saddled with debt or have not yet built your emergency reserve, 10% is sufficient to allow you to have some cash for other important financial priorities. However, if you have little or no high-interest debt and you have at least a decent emergency reserve (3-6 months’ worth of living expenses), then 15% or even more can really supercharge your retirement savings at this young age.

If you decide to start with a lower saving percentage, do yourself a favor and make it a priority that each January you will increase your savings 1% per year until you reach a higher percentage in the ideal range. The slow increases will be almost completely unnoticed in your paycheck and will most likely be offset by raises or cost of living adjustments to your salary. After only a few years you will be a savings superstar!

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FAQ: Now that I’m retired, what do you think if I invest in only high dividend stocks for the income they provide?

Answer: This is a question we get from time to time that can be very concerning. Anytime investors put most or all of their investments in one asset class, they are setting themselves up for problems, however, more than that, the nature of this question typically means that the person asking is unaware of the risks associated with this strategy.

Anytime you put your hard-earned money to work for you to go out into the world and multiply, you are taking risk. Risks that are easy for investors to understand are market risk, the risk that my investment fluctuates in value, and default risk, the risk of whatever I invest in going belly up and losing my entire investment.

However, there are several unseen risks that are not always so apparent to investors. A good example of this is inflation risk. This is the risk that costs to purchase goods are going up quicker than the value of my investment. Thus, even though my investment appears safe and I will get what I invest plus some interest, the money returned to me will be less valuable than when I lent it out (i.e. it can buy fewer goods), even though the absolute value is more. This is a risk that is far less perceptible to investors than market fluctuations, but it can have just as terrible consequences if not properly managed.

In the case of high dividend-paying stocks, there are several less than transparent risks. The one any investor needs to be on the lookout for is a common investing error called a “dividend trap”. A “dividend trap” can occur when a company that pays a sizable dividend begins to see its stock price fall due to a systematic problem in its industry or poor management. As the stock price falls, the dividend yield (which is calculated by dividing the dividend paid in the past year by the stock price) can increase dramatically, making it look like a compelling investment. However, the fundamental problems with the underlying business mean the company will almost certainly cut the dividend in the future and possibly even go out of business.

(For example, General Motors is a $100 stock that pays a $6 (6%) annual dividend. However, the car business is in trouble and the company stock falls from $100 to $20 in three months. That 6% yield is now a whopping 30%. It may look like a fantastic dividend-paying stock, but the company is a shaky investment and will most likely cut this dividend in the near future. In the case of General Motors, they actually filed for bankruptcy in 2009. You would have lost 99% of your invested funds stretching for high dividends).

The most important lesson in investing is understanding the seen and unseen risks of your investments. Reaching for yield through dividend stocks can be a good part of a diversified portfolio, but as with almost all investment strategies, should be diversified. Diversification is the best way to manage all the risks you will face in your investing life.

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Budgeting is arguably the most important aspect of financial planning. Saving, investing, insurance, retirement planning, and projections are useless if you have no idea how much money you are spending today and how much you would like to spend (or have the ability to spend) in the future. We all have a limited amount of resources to spend. Determining the amount that is right for your particular situation, allocating those funds into buckets based on your priorities, and then tracking to make sure your spending stays on track may seem time-consuming, but utilizing technology, the process may not be as difficult as you think.

The reason that developing and tracking a budget is important is it allows your long-term thinking to have an impact on your day to day spending. Making smart decisions about how you want to utilize your resources over a month or year will allow you to ensure that the important things, such as saving for your future, are handled and emotional, short-term overspending stays in check.

Start with your Annual Income

When developing your budget or spending plan, think of things on an annual basis. Determine what your net income is (net income is the actual money that is deposited into your bank account after taxes and withholdings are accounted for) and use this annual number as your starting point.

Determine your Annual Expenses

A common mistake in budgeting is analyzing only your monthly expenses to find that you have left out important irregular expenses that are inevitable such as vacations, holiday gifts, and auto repairs. It is important that every single thing you spend money on over the course of the year is included in your budget. If you are not sure how much you will spend on any one category (i.e. I know I will have to buy gifts this year for birthdays, weddings, etc., but I have no idea how much it will cost) do your best to estimate. Budgeting is a projection into the future and like all projections, it is impossible to be perfect. As time goes on and you get better at budgeting your expenses, your numbers should be very close, but for the first year, do your best to estimate.

Ensure Your Budgeted Expenses are Less than Income

Regardless of how the numbers look, you will need to reduce your expenses if they are higher than your annual income. Essentially, you will fall into debt if your expenses exceed your income each year. Think about your priorities and find one or more places to cut that are low on your priority list.

Track Your Spending

At Zynergy, we highly recommend an aggregator and spending tracker such as Mint.com to track all of your spendings. You can start by setting your budget into the Mint.com system and then link your spending accounts to Mint, such as credit cards, bank accounts, and anywhere else you may spend money from. This secure system will then automatically pull your spending data from these accounts and even categorize your transactions for you. It will be important for you to log in from time to time to update your spending categories and make sure the numbers are right and the categories are properly assigned, but otherwise, the platform does most of the work for you.

Review Your Spending Every Month

Take a look at what you spent against what you earned. You will never perfectly follow your budget, but if one category is slightly over budget one month, make sure another is under budget. The important thing is that over time you are spending less than you are earning, so you have the ability to save for your future.

Budgeting is often seen as a chore by most of the people we work with. However, if you follow the steps described above and utilize technology, it doesn’t have to be. Proper budgeting and planning are sure to lead to a comfortable retirement!

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FAQ: Now that the market has corrected and is down, should I be doing anything different with my retirement investments?

Answer: This is an excellent question that we have been getting often since mid-March.

As the COVID-19 crisis continues to engulf our world in uncertainty, that lack of clarity has translated through to the manic-depressive stock market. The market selloff in mid-March was historic, with the S&P 500 bottoming out about 37% below its all-time high just a few weeks prior.

In addition to a panicky stock market, the traditional safe investments, like treasury bonds were hitting historic highs with the 10-year treasury offering record low yields (in the bond world, yield and price are negatively correlated, so when one goes up, the other falls) of .5% or less. Essentially, valuations of equities, especially when compared with bonds, seemed compelling.

However, the disparity was short-lived as the market remained at or near its lows for only a few days and immediately turned upwards, recovering more than half its losses.

Now, with exceedingly low yields on bonds (do I really want to lend the government money for 10 years and get less than 1% interest each year?) and a recovering stock market, should you change your allocation?

The answer depends on the traditional metrics of financial planning such as age, risk tolerance, time frame, and goals. If you are retired and drawing from your portfolio to provide your retirement income, you may not have the ability to take risks with that money. Volatility can be deadly to money you need to live off of for the next 3-5 years.

However, for those of you who are younger, have more than 5 years to retirement, and have a relatively high-risk tolerance, this may be an excellent time to move your portfolio to a more aggressive posture to take advantage of cheap valuations in equities and sell bonds at historically high prices.

Be smart, make your allocation decision based on your circumstances, and if you have the ability to weather the COVID-19 storm, take advantage of the opportunity presented. However, the stock market is not a casino. Do not gamble money you need in the near future on a hunch.

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We have just passed the one-month mark since the stock market bottom and since that time, stocks initially had a compelling rally off the lows followed by a period of malaise as volatility collapsed and the market now churns sideways.

On behalf of the team at Zynergy Retirement Planning, we hope you, your family, and your loved ones are staying safe and healthy. I don’t think it needs to be said (but I’ll say it anyway) that we are living through extraordinary and unprecedented times. Our thoughts and prayers are with the sick and dying and the health care workers tending to them.

This post, although a brief market recap, is more of a greeting to let you know we are still here if you need us and to give you a few updates on the state of things.

As for the portfolios, we have done nothing since the lows of mid-March. Although unable to predict the future, I am growing more confident that the lows we saw during that time will be the market lows of this crises. It does not mean that volatility is behind us, we should all prepare for more market swings, but I don’t expect we will plunge below the mid-March levels.

We are also no longer making an aggressive call for cash. Unfortunately, the window of panic selling that led to extremely low valuations was relatively short-lived, not much more than a week or so. Many of you were able to take advantage of this opportunity which has proven very profitable. The rest will need to wait for the next opportunity, however, valuations at this level do not justify and aggressive push for additional cash.

Essentially, it is time to do what all great investors do most of the time….nothing. The portfolios have been rebalanced and are all exactly as they should be given the current environment and valuations. There is not much to do in the way of longer-term financial planning until we have more clarity on the fight against the Coronavirus. Essentially, we wait.

Our office remains closed while Lauren, Michela, and I continue to work remotely. Like most businesses, we have no idea when our office will open again but will certainly let you know when we do. Please know that the office number is being forwarded to Michela’s cell phone, so we are still receiving business calls to the office. However, the easiest way to contact us is via our cell phones.

We hope to see all of you again very soon. Until that time, stay safe and take the necessary precautions to ensure your health and the health of your family members. We will all get through this crisis together!

Please call Lauren or me if you would like to talk about your particular situation. We are here if you want to discuss your account, the market, or your financial plan. I am available on my cell at 732-822-9719 or at the office at 732-784-2380 as is Lauren (cell: 732-272-3348). As always, thank you for the faith you have placed in Zynergy.

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Last week, stock markets around the world corrected in a violent selloff. Most of the major indexes were down more than 15% at their lowest levels due to fears of a Coronavirus pandemic and the economic impact that would have. This, just a little more than a week from the S&P 500 making record highs on an almost daily basis. In essence, a correction was due, and it came with a searing intensity.

Now what? What should retirees and long-term investors do? It is an interesting question as I am hopeful, if you are invested, your portfolio is properly diversified. A properly diversified means two things:

  1. You have eliminated single stock risk by not investing so much of your investments in any one stock (or any single investments) that its collapse would financially devastate you. This problem was solved decades ago with the advent of the mutual fund and more recently, the ETF.
  2. Your portfolio is composed of various types of investments with low or negative correlations to smooth out the bumps in volatile markets. Most portfolios should include large-cap U.S. stocks, small-cap U.S. stocks, international stocks, emerging market stocks, bonds, real estate, and cash. Understanding what allocation is right for your age, goals, and risk tolerance is perhaps the single most important thing you can do in investing. Far more important over the long-term than market timing or stock picking.

If we assume that you have at least some level of diversification for both of the above, let’s then discuss how to manage the current volatility:

Young investor: If you are under 50 years old and have a minimum of 10 years before you will need to tap these assets, there are a few things you can do to enhance your long-term return using this volatility to your advantage:

  1. Rebalance: Rebalancing your portfolio is simply bringing your portfolio back into alignment with the original allocation percentages. Essentially, you will sell what has done well and buy what has done poorly. This is a fantastic way to take advantage of market volatility and add to your investment performance over time.
  2. Invest more: Although we tend to encourage people to always invest when they have money for the long run as it will perform well over a long period of time, market selloffs are particularly good times to add new cash. It allows you to accumulate more shares for the same dollars and accumulation of shares should be young investors focus. However, be careful not to put all your free cash to work at the first sign of a dip. We had several people call us after the first 3% selloff wanting to put cash in and buy the dip. We advised patience and began encouraging new money when the market was down more than 10%. Any 3% move is not a pullback, it’s a fluctuation. Invest new money in stages as the market falls. Remember, you don’t have to invest new money so keep some on the sidelines for real panics.

Older Investor: Periods of extreme market volatility are especially difficult on older investors. If you plan to draw on your portfolio in less than 5 years or are currently drawing from it, it can be downright scary. However, the key is being properly diversified before the volatility occurs, not being reactive to it. By the time the market has fallen 15%-20%, if you were not diversified properly, it is too late. However, for those who were diversified coming into last week’s selloff, here are some steps you can take to take advantage of the market opportunity and ease the pain:

  1. Rebalance: As with younger investors, rebalancing during a time of extreme fluctuations is always a good idea.
  2. Use Conservative Investments for Distributions: Ideally, you do not want to sell stocks when prices are down to satisfy your distributions. As prices contract, you are required to sell more shares to receive the same dollar amount which can eat away at your portfolio quicker than anticipated. Ideally, when stocks fall, you will want to use cash, bonds, or any other high performing investment to satisfy your distribution requirements. Liquidate these investments while they are up, performing well, and you have to sell fewer to meet your cash flow needs. This strategy has the added benefit of helping rebalance the portfolio as selling what is performing well will bring the portfolio allocation back into alignment.

Market fluctuations are the price of admission when investing in a diversified portfolio. Although the outsized performance the stock market furnishes over the long-term is necessary to outpace inflation for just about all investors, it can sting in the short-term. Avoid checking balances daily, rebalance where you can, and if possible, invest more. When you look back over your performance in 10+ years, you will be extremely happy with your performance and the Coronavirus will be a buzzword from the past like SARS or Brexit. Happy Investing!

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Deciding when to retire can be one of the biggest decisions of your life. If done right, you will only do it once, so it is important that you take the proper steps to ensure a part-time job as a Wal-Mart greeter is not required to make ends meet when you’re 80. Here are five things you must do give you the best chance at retirement success:

  1. Make a plan: I know, it is not surprising coming from a retirement planner that the most important thing is to put a plan in place. Although this advice may be a conflict of interest, it doesn’t mean it’s wrong. There is no single more important thing that you can do during your retirement than to plan for it. Working with an expert that can lay out your cash flows, optimize your assets, help you navigate government programs such as Social Security and Medicare, and developing a framework for your future is vital. This is the cornerstone from which your retirement will thrive.
  2. Stress Test: I’m an optimist. I believe every endeavor I dive into will work out with tremendous success. It’s how my brain is wired. However, in reality, this is not always the case. The best-laid plans are often derailed by unpredictable or even unprecedented events. That is why trying to anticipate the worst-case scenario in your retirement and understanding the results of your plan if it comes to fruition is important to having confidence as you enter your retirement. Many retirement plans are based on “average” rates of returns. However, only understanding the average is a common mistake. If my feet are in the oven and my head in the freezer, on average I am comfortable. Variability is an important component to a plan and understanding this will make you well prepare as you march headlong into retirement.
  3. Health Insurance: How will you pay for your medical expenses in retirement and how much will it cost you? For those over 65, the answer is relatively simple. Applying for Medicare and purchasing a supplemental policy is almost certainly your best and most cost-effective option. However, what if you or your spouse are younger 65 when you retire? Health insurance costs can be an excessive portion of your budget and may not cover as much as you think. Do your research and understand what your costs will be before making the jump into retirement.
  4. Social Security: Make sure you head into retirement with a well thought out plan of when you will draw on your Social Security retirement benefits. There are a lot of options for drawing your benefits and if you have a spouse, the options grow exponentially. It is often a tremendous mistake to just assume you will collect as soon as you are eligible or as soon as you retire. Take your time, talk with an expert, and make the best decision for you and your circumstances before you retire.
  5. Retire to Something: Your mental health in retirement is just as (if not more) important than your financial or physical health. Most people retire to escape something (the rat race, a difficult boss, a job they never liked), but very few think to retire to something. It is important to find purpose or meaning in your retirement. Retiring and sitting on the couch watching game shows is no strategy for retirement bliss. Spending time with love ones, volunteering, building a business, or seeing the world are all noble objectives that can lead you to happiness. Think about what you will be retiring to so you can be not only financially comfortable but loving every minute of it.

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2019 is quickly coming to an end. The coming months represent not just the last few weeks or the year, but of the decade. Here are a few financial tips to consider as we approach December 31st:

  1. Income Taxes – If you are paid irregularly, on 1099, or own your own business, you are required to pay your own federal and state income taxes throughout the year. Unlike withholdings from a W2, it can be more difficult to calculate exactly what your liability will be. Miscalculations can lead to underpayment and far worse, interest and penalties. If you are not paid on a W2, it may make sense to run your taxes a bit early and if liability is due, make the payment before December 31st to reduce or eliminate any potential interest or penalties.
  2. IRA/401k contributions – As the year comes to a close, so does the opportunity to make retirement plan contributions. Although the window for IRA contributions does not shut until April 15th of next year, 401ks, and other qualified plans run on the calendar year. Take a look at what you have saved and compare that to your retirement plan. If you have fallen a bit short, consider increasing your withholdings percentage between now and the end of the year to stash away more cash.
  3. Roth Conversion – December 31st is the last day to execute a Roth conversion for 2019. With current income tax rates so low, this may be an opportunity that is too good to pass up. However, there is a lot of nuance to Roth conversions. For more information, I recommend reading our blog post from September 2019 titled: “What is a Roth Conversion and is it Right for Me?”.
  4. Financial Plan – If you do not have a financial plan in place, there is no time like the end of the year to get one. Consider your long-term retirement goals, savings objectives, and plans for 2020 to develop a budget and savings plan that works for you.

2020 is right around the corner. Spend a little time on your personal finances and I can promise you that you will set yourself up for a financially successful 2020 and beyond!

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FAQ: When do people normally retire?

Answer: We always approach this question with a bit of skepticism. Not because we don’t think the individual asking is serious, but because we believe the question they mean to ask is “When is it best for me to retire?”

The truth is that retirement should be a personal decision based upon your unique desires, beliefs, and financial resources. Learning about when the average person retires is effectively useless in determining when will be the right time for you.

Although most of the people we work with retire between the ages of 62 and 70, each situation is different. The answer to when you will retire should be based on your responses to the following questions:

  1. When can I afford to leave work and either semi-retire or completely retire?
  2. Am I physically able to continue in my work?
  3. Do I still enjoy the challenge of work?
  4. What will I retire to? How will I spend my days?
  5. Would I prefer to work longer and enjoy a more comfortable lifestyle in retirement or retire younger and live a simpler lifestyle?

Once you have the answers to these questions, then you can begin to build a timeline for your retirement. Remember, it’s not about when the Jones’ next door will retire (and whether you will be able to keep up with them), it’s about when you can or will retire based on factors ranging from physical, emotional, and financial.

As always, if you need help answering these questions, give Zynergy Retirement Planning a call so we can help you achieve, maintain, and enjoy your financial freedom.

Contact Zynergy Retirement Planning

Schedule a free consultation with a retirement specialist today.

732-784-2380