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IMO - In My Opinion: A take on mortgages, Roths, pensions & more
My wife, Jen, and I have been speed watching The Good Wife thanks to Netflix. In The Good Wife, one of the judges (apparently the legal system makes for good TV) constantly requires the lawyers in her courtroom to end their arguments with, “In my opinion.” The attorneys look bewildered each time as if to say…well of course it’s only my opinion, just like every other statement I make, and everyone knows that except for you, apparently. A recent consultation reminded me of the “in my opinion” skit (“IMO” for short).
Professionals Offer Differing Opinions
In our field of professional financial planning (not to be confused with the majority of firms and advisors in the financial SALES industry) there are many rules of thumb, but very few technical standards of care that you might find in the medical or legal field.
As a Certified Financial Planner® practitioner, there are some guiding principles and general statements that CFP® practitioners are expected to display in their professional activities, but they are hardly a technical standard of care. The CFP Board states that “Allowance can be made for innocent error and legitimate differences of opinion, but integrity cannot co-exist with deceit or subordination of one’s principles.” Those legitimate differences of opinion are what I’m talking about.
Differenceofopinion-adisagreementorargumentaboutsomethingimportant
Reasonable minds can and will differ just as in everyday life it is not uncommon to hear reasonable folks say, “Let’s agree to disagree.” Professional differences of opinion do not render the other professional a crook or even wrong if they are acting from a place of integrity – IMO. Moreover, it is perfectly appropriate to express a difference of opinion with another financial professional when done in a professional and non disparaging manner – IMO.
Back to my recent consultation – as I listened to the recommendations of another professional, I realized I had several different opinions on what was best for this particular situation and needed to share:
ROTH Conversions: As my colleagues here at The Center can attest, I hold a pretty strong opinion that most people have gotten the Roth Conversion issue “incorrect”. I believe that many folks have accelerated income taxes at a higher rate than they will pay in the future. Most workers have a higher income, which usually translates into a higher marginal tax bracket, during their working years than they do in retirement. But wait; there is no Required Minimum Distribution from a ROTH. True, but this is still only relevant as to what bracket the money comes out. Don’t get me wrong, this is not an absolutist opinion, there are plenty of correct situations where ROTH’s makes sense (IMO) – look for an upcoming post about converting after tax 401k contributions to a ROTH as an example. There are other limited situations where a ROTH makes sense, IMO. For example, if you are a high net worth person and reasonably expect that you will always be in the highest marginal bracket, then converting and paying at 35% vs the new 39.6% marginal rate seems to make sense.
Mortgage vs no mortgage: A firm attempting to become a national financial planning firm recently counseled a young retiree looking to relocate to another state to, “Get the biggest mortgage possible.” Call us old school – but we think that most retirees are best served entering their retirement years debt free. And this client has substantial taxable funds to complete the purchase. Our suggestion was to actually RENT initially. Once they are comfortable and they have found a location that suits them for at least the next 5 years, we think they should consider a cash purchase. Rates are low, which does make obtaining a mortgage more attractive, however in retirement (at age 50) the rate is going to be much higher than any suggested distribution rate (1-3%?).
Pension Lump Sum: Our recommendation is for the client to take a monthly pension at age 55 in the form of a 100% survivor benefit even though her husband is older. The other advisor suggested that even assuming a low return, investing the lump sum will produce more money. The client suggests that age 94 mortality was very reasonable given her family history. Under these assumptions, the “low return” needed from the investment portfolio turned out to be 6%; hardly a “low” return IMO. Assuming only a 1% annual difference in return (5%) the lump sum lasts only to age 86. One of the advantages to taking the lump sum is flexibility or access to a lump sum if needed. Fortunately, the client’s other assets are substantial. Other more confident professionals might find the hurdle rate low; not me.
401k Rollover: We both recommended a 401k rollover to an IRA managed by our respective firms. The client left the employ of a major corporation with what I would categorize as containing a competitive 401k, in terms of investment options and expenses. My sense is that the client will be better served by rolling the account to either professional. Successful investment management is more about behavior than selecting the best allocation or underlying securities to complete the allocation – IMO.
Asset Allocation: The other professional recommended a 70% equity and 30% fixed income allocation versus our 60/40 allocation. My thinking is at this time of their life, less risk is a bit more important. I do, however, appreciate that because they are so young (hedging against inflation), and their expected withdrawal rate is under 3%, that a higher equity allocation may be reasonable. The other adviser apparently pointed out that their allocation was “optimized” (directly on the efficient frontier) because their mid cap exposure was higher than our recommendation in addition to our international equity allocation being 12% vs their 10% recommendation. Due to current valuations, we have reduced our allocation to mid and small cap equities from a neutral weighting of 10% down to 8.5% and our international (large developed) is at our target weighting of 12%. The other professional suggests 14% and 10% respectively. Only time will tell which portfolio was more successful. I do feel pretty strongly that in the end our client’s behavior will be more determinative of their investment success versus the subtle differences in portfolio recommendation – IMO.
Annuities: Do you remember when some advisors called anyone recommending an annuity a crook? Fast forward a few years and some of the profession’s highly regarded practitioners recommend annuities in many situations. I still believe that they are way oversold, but that doesn’t mean there are not appropriate situations - IMO.
Everyone has an opinion and I give my clients mine. So, what’s your opinion?
Everything we hear is an opinion, not a fact. Everything we see is a perspective, not the truth. ~Marcus Aurelius
Timothy Wyman, CFP®, JD is the Managing Partner and Financial Planner at Center for Financial Planning, Inc. and is a frequent contributor to national media including appearances on Good Morning America Weekend Edition and WDIV Channel 4 News and published articles including Forbes and The Wall Street Journal. A leader in his profession, Tim served on the National Board of Directors for the 28,000 member Financial Planning Association™ (FPA®), trained and mentored hundreds of CFP® practitioners and is a frequent speaker to organizations and businesses on various financial planning topics.
Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The forgoing is not a recommendation to buy or sell any individual security or any combination of securities. Be sure to contact a qualified professional regarding your particular situation before making any investment or withdrawal decision.
C14-033719
Putting your Priorities First: A big rocks lesson
When I was an undergrad at EMU, I heard a time management expert speak to a group of business students and, to drive home a point, she used an illustration we students would never forget. As she stood in front of the group of high-powered overachievers, she said, "Okay, time for a quiz."
Focus on the Big Rocks First
She pulled out a ½ gallon, wide-mouthed Mason jar and set it on the table for the class to see. Then she produced about 5 fist-sized rocks and carefully placed them, one at a time, into the jar. When the jar was filled to the top and no more rocks would fit inside, she asked, "Is this jar full?"
Everyone in the class said, "Yes."
Then she said, "Really?" She reached under the table and pulled out a bucket of gravel. Then she dumped some gravel in and shook the jar causing pieces of gravel to work themselves down into the space between the big rocks. Then she asked the group once more, "Is the jar full?"
By this time the class was on to her. "Probably not," one of them answered.
"Good!" she replied. She reached under the table and brought out a bucket of sand. She started dumping the sand in the jar and it went into all of the spaces left between the rocks and the gravel. Once more she asked the question, "Is this jar full?"
"No!" the class shouted.
Once again she said, "Good." Then she grabbed a pitcher of water and began to pour it in until the jar was filled to the brim. Then she looked at the class and asked, "What is the point of this illustration?"
One eager beaver raised his hand and said, "The point is, no matter how full your schedule is, if you try really hard you can always fit some more things in it!"
"No," the speaker explained, that wasn’t the point. The truth this illustration teaches us is:
If you don't put the big rocks in first, you'll never get them in at all."
What are the “big rocks” in your life? Your children? Your loved ones? Your education? Your dreams? A worthy cause? Teaching or mentoring others? Doing things that you love? Time for yourself? Your health? Your significant other? Remember to put these “big rocks” in first or you'll never get them in at all.
If you sweat the little stuff (the gravel, the sand) then you'll fill your life with little things you worry about that don't really matter, and you'll never have the real quality time you need to spend on the big, important stuff (the big rocks). So, ask yourself this question, “What are the 'big rocks' in my life?” Then, consider whether you’re putting them in your jar first. Because, like that time management expert showed me, if you don’t put them first, you’ll never find room.
Matthew E. Chope, CFP ® is a Partner and Financial Planner at Center for Financial Planning, Inc. Matt has been quoted in various investment professional newspapers and magazines. He is active in the community and his profession and helps local corporations and nonprofits in the areas of strategic planning and money and business management decisions. In 2012 and 2013, Matt was named to the Five Star Wealth Managers list in Detroit Hour magazine.
Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.
A14-033720
Sandy Adams Attends Leadership Oakland – 25th Anniversary Class
Sandy Adams, CFP® recently began participating in the 25th class of Leadership Oakland following in the footsteps of fellow partners Laurie Renchik, CFP®, and Timothy Wyman, The program is intended to help participants (about 50 each year) learn about Oakland County, our region and our state in order to be informed contributors and leaders within our communities.
Sandy recently attended a 2 ½ day retreat with 47 other professionals – all now her newest friends. The retreat, held in Roscommon at the R.A. MacMullan Conference Center, was the perfect place to set the stage for this unique learning experience. The group spent time getting to know more about Oakland County, each other and themselves and their leadership potential. For an insider’s look, here’s Leadership Oakland’s video of the retreat.
In future sessions, Sandy and the other participants will engage in experiential learning and hear from local leaders on topics including Economy & Government, Human Services & Non-Profits, Health & Environment, Diversity & Inclusion, the Justice System, Education, Arts & Culture, Shaping the Future, and last but not least, a class project that the 25th class hopes will have a significant and lasting impact on the community.
Leadership Oakland is not affiliated with Raymond James. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members.
A ROTH IRA Strategy for High Income Earners
Do you have a 401k Plan from your current employer? Does it allow you to make after tax contributions (these are different than pretax contributions and Roth 401k contributions)? If the answer to both is “yes”, a recent IRS notice may present a welcome opportunity. IRS Notice 2014-54 has provided guidance (positive guidance) allowing the splitting of after tax 401k contributions to a ROTH IRA. Although I believe that ROTH IRAs are used in many less than ideal situations, this is one strategy that can make sense for higher income earners; tax diversification and getting money into a ROTH without a big upfront tax cost.
After answering “yes” to the first two questions, the next question is, “Are you making maximum contributions on a pretax basis?” That is, if you are under 50 years old, are you contributing $17,500 and if you are over 50 (the new 30) $23,000? If you are making the maximum contribution, then a second look at after tax contributions should be considered. Whew – that’s three hoops to jump through – but the benefits might just be worth it.
Putting Notice 2014-54 to Work
For example, Teddy, age 50 has a 401k plan and contributes $23,000 (includes the catch up contribution) and his employer matches $5,000 for a total of $28,000. Teddy’s plan also allows for after tax contributions and he may contribute $29,000 more up to an IRS limit of $57,000.
The new IRS Notice makes it clear and simplifies the process allowing this after tax amount at retirement to be rolled into a ROTH IRA.
The bottom line: It is more attractive to make after tax contributions to your 401k with the flexibility of converting the basis to a ROTH at retirement or separation of employment without the tax hit of an ordinary Roth conversion.
As usual, the nuances are plentiful and your specific circumstances will determine whether this strategy is best for you. To that end, we are here to help evaluate the opportunity with you.
Timothy Wyman, CFP®, JD is the Managing Partner and Financial Planner at Center for Financial Planning, Inc. and is a frequent contributor to national media including appearances on Good Morning America Weekend Edition and WDIV Channel 4 News and published articles including Forbes and The Wall Street Journal. A leader in his profession, Tim served on the National Board of Directors for the 28,000 member Financial Planning Association™ (FPA®), trained and mentored hundreds of CFP® practitioners and is a frequent speaker to organizations and businesses on various financial planning topics.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James.
The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. C14-033701
Elder Care Planning: Continuing Care Retirement Communities (CCRCs)
In last month's post, we talked about Assisted Living as a housing option for older adults. But do you know about CCRCs or Continuing Care Retirement Communities? CCRCs are an option for those older adults who have the financial means to support this type of housing.
What is a CCRC?
In general terms, a CCRC is the most comprehensive of all housing options that can satisfy the needs/wants of those older adults who are healthy and active, as well as those who need assistance and those who need skilled nursing care. The structure of these communities provides individual residences (usually in the form of an apartment or condo) for independent living, but provide options within the community for assisted living or nursing care. Once you move to the CCRC, you never have to move again! CCRCs are not for the financially faint of heart – they generally require a buy-in/entrance fee and a monthly service fee. However, most communities guarantee that once your are approved and have moved in, you will never have to leave, regardless of your future financial position,.
How, might you ask, do CCRCs look when we view them in the context of our 4 “C’s”(Comfort, Convenience, Companionship and Care)?
Peace of Mind and Comfort Knowing You Never Need to Move
As an older adult, making the decision to move from your home is a big one – one that you likely don’t want to make more than once. Moving to a CCRC allows you to make that decision only once. No matter what needs you have as you age, they will be provided for in the CCRC. You should make sure that you are aware of how possible transitions will work within the specific communities that you look at and the financial impact of each. Especially for married couples, there may be significant additional financial costs if one needs assisted or nursing care and the other remains independent.
Convenience of…everything!
CCRCs provide most conveniences of everyday living:
- Transportation if you can’t or don’t want to drive on your own.
- Activities – usually a full gym, clubs, social activities, classes and entertainment on community grounds, as well as organized trips off campus.
- Restaurants, banks and visits from dentist, eye doctors, etc. are generally available on campus.
- Services of all kinds are usually available (maintenance and cleaning for your residence; food plans so you don’t have to cook, etc.)
Companionship of All Kinds
In working with clients who live in CCRCs, I have found that they can always be around people and be busy…if they want to be. The options available to interact with others that have similar interests are many…usually more than you have time for. I have found that moving to these communities, for many, has resulted in an improvement in quality of life.
Care at Every Level
Ideally, you consider moving to a CCRC when you are completely independent and have no need for assistance, so that you can engage in all that these communities have to offer. However, if and when assistance is needed, you can be certain that it will be available. Assistance can be provided within the independent living units or within the community at a different location – every level of care can be provided for without another move being required.
If you or someone you know thinks they may need to look at the possibility of moving to a CCRC, I recommend (as always) to plan ahead AND to consult your financial planner to make sure that your finances are sufficient. Please contact me if you need additional resources or have additional questions about this or other housing options.
Sandra Adams, CFP® is a Partner and Financial Planner at Center for Financial Planning, Inc. Sandy specializes in Elder Care Financial Planning and is a frequent speaker on related topics. In 2012-2014 Sandy has been named to the Five Star Wealth Managers list in Detroit Hour magazine. In addition to her frequent contributions to Money Centered, she is regularly quoted in national media publications such as The Wall Street Journal, Research Magazine and Journal of Financial Planning.
Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.
Any opinions are those of Sandra Adams and not necessarily those of Raymond James. C14-028648
Dan’s Desk: The Legacy Revealed
When I saw Center founder Dan Boyce’s email offering up his desk and credenza, I knew what I had to do. This was in the summer, as The Center was preparing to move offices, and Dan was getting new furniture. I couldn’t stand to see such an iconic piece of Center history vanish into the night, so, without much hesitation, I went to Dan’s office to inspect the desk and see if I could make use of it.
A Desk with a History
As I expected, there was normal wear and tear from years of use. Dan had leaned over that desk in countless meetings with clients. He had signed off on too many documents to count. He may have even spilled a little coffee on it here and there. But that wasn’t the whole story. Dan told me he bought the furniture in the late ‘80s from his father-in-law, an attorney who’d used it for years as he worked as an attorney in Benton Harbor/St. Joseph. But he didn’t get it new. Dan’s father-in-law purchased it from his mentor, Charles Gore. Gore was also an attorney and had purchased it new in the ‘20s or ‘30s. This was a desk where business had been conducted for close to a century!
From Before to After
I felt confident with a little TLC I could restore the desk to its former glory. The project took me about three weeks. I sanded the desk down to the original wood and put a clear coat on it. I purposely didn’t stain it because I thought the underlying natural wood was beautiful. I’m really happy with the results and hope it will bring me the same mental acuteness it brought Dan throughout his career. I see myself pulling up a chair and sitting down behind the desk, making a difference in people’s financial lives just like Dan.
Where are we in the full market cycle?
Cycles exist everywhere. One of the first cycles we learn about as a child is the water cycle or the journey of a raindrop. There’s something about the circularity of cycles that I just love.
The economy and financial markets also cycle. An economic cycle is the periodic ebb and flow of economic growth like Gross Domestic Product or employment. According to the National Bureau of Economic Research the average economic cycle lasts a little less than six years. This span is measured both from one peak to the next peak or one trough to the next trough. While six years is an average, the cycle can be much quicker or much longer than six years.
The Cyle of Economic “Seasons”
The various stages of the economic cycle can be thought of like seasons of the year as shown in the chart below. From winter, or recession, where jobs are lost and the economy is shrinking to summer, where growth is accelerating and jobs have been recovered.
Every quarter we take a poll at The Center to see where team members think we fall in this spectrum. Our consensus is that we believe we are in the midst of summer meaning that this bull still has some room to go as we are still lacking some keys signs of a maturing economy like inflation and volatility.
Stock Market Cycles
The stock market also goes through cycles and, along with it, investor emotions ebb and flow. Usually the stock market cycle is slightly ahead of the economic cycle meaning that market indexes often peak before the economic cycle peaks. Our latest survey of our employees placed the stock market cycle near excitement in the picture below. At this point (excitement/thrill/euphoria) investors start to question why they don’t have more aggressive positions because they have clearly performed very well and many even start to shift their portfolios in this direction. As Warren Buffett said”
“Be fearful when others are greedy and greedy when others are fearful.”
Refocusing on the Long Term
This is the point when it is most important to stay in a diversified portfolio, not abandon your long-term investment objectives while reaching for more returns. Rebalancing at these market extremes may go against what investors want to do, for example, selling your stock positions to buy more bonds right now or selling your bonds in 2009 to buy more stocks. However, going against these basic emotions have potential to be the best decisions you can make for your portfolio. Navigating these emotions is the single most difficult road block to the success of an investment strategy. While markets and economies will cycle as long as water continues to cycle, having sound financial advice during these market extremes can make big difference in the success of your long-term financial plans.
Angela Palacios, CFP®is the Portfolio Manager at Center for Financial Planning, Inc. Angela specializes in Investment and Macro economic research. She is a frequent contributor to Money Centered as well asinvestment updates at The Center.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Angela Palacios and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Investing involves risk and investors may incur a profit or loss regardless of strategy selected. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Angela Palacios and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Investing involves risk and investors may incur a profit or loss regardless ofstrategy selected. C14-031971
How Singles Can Use File and Suspend
There are certain advanced social security income strategies available for married couples that can help to maximize income in retirement. It’s a different story for single people who have fewer opportunities to use some of these more advanced strategies. But there’s a strategy called “filing and suspending” that may work for you, no matter your marital status.
File & Suspend: Not just for married couples
This strategy is sometimes used by married couples because it allows for one partner to defer taking benefits and gain credits on their benefit for doing so. In the meantime, the other partner receives a spousal benefit. But if you’re single, there is no “spousal benefit” so the rationale for utilizing such a strategy is different. A single person might use this strategy by filing for benefits retroactively.
Retroactive Benefit Payment Limits
Under the “normal” social security rules, those who are full retirement age can only file to receive back payment benefits retroactively for up to 6 months. For example, let’s say George plans to wait until age 70 to collect benefits so he doesn’t go through the process of filing and suspending those benefits. Then, at age 67, George changes his mind and wants to file and suspend. He is only entitled to receive a lump sum payment for the last 6 months of benefits that he could have received. If George had filed and suspended benefits at his full retirement age and later changed his mind, he would be entitled to receive all of the benefits he would have been entitled to receive going back all the way to the date that he originally filed and suspended.
When File & Suspend Can Pay Off
Now you might be asking, “Why does any of this matter if my game plan is to wait until age 70 to collect benefits?” Your skepticism is justified because in most cases it will make no difference. However, in some cases, your health might change from the time you are 66 to 70. Then, it would make a lot of sense to go back to social security and ask for a lump sum payment for benefits you would have received from 66 to 70. If you filed and suspended, you are entitled to get all of those benefits. If you didn’t file and suspend than you are only entitled to receive 6 months’ worth of back payments.
The rules surrounding social security are vast and very complex. As with any complicated financial decision, it’s often best to seek the help of a qualified financial professional to help navigate the waters.
Matthew Trujillo, CFP®, is a Certified Financial Planner™ at Center for Financial Planning, Inc. Matt currently assists Center planners and clients, and is a contributor to Money Centered.
The information contained in this report has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making a n investment decision and does not constitute a recommendation. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of RJFS or Raymond James. Examples are for illustrative purposes only. C14-028511
Our Workplace Wellness is Award-Worthy
Did you know we hold meetings while walking and when we’re working at our desks, we might be standing instead of sitting? It’s all part of our commitment to keeping The Center team healthy. That commitment has led to a 3rd healthy workplace award in less than a year. This time, we’re being recognized in Corp! Magazine’s online publication as one of Michigan’s Best and Brightest in Wellness. For Partner and Financial Advisor Sandy Adams, keeping our constant focus on health is one thing that makes The Center a great place to work.
For me, staying healthy and active gives me the energy and positive attitude to best serve my team and our clients. The Center is committed to helping our team stay healthy by providing us with education on health and wellness, providing equipment like standing desks and balance balls for alternative seating, and by encouraging standing or walking meetings.”
The Best and Brightest in Wellness awards will be handed out at a gala on October 2nd. The selection was based on an assessment by the wellness systems firm Wellco. We won this award based on criteria like wellness policies, healthy work environment, senior leadership support of health initiatives, and motivation.
Earlier this year we won a Healthy Workplace Award from the Governor’s Council on Physical Fitness, Health and Sports. And last December The Center was recognized as one of Michigan’s Healthiest Employers by Priority Health, Crain’s Detroit Business and MiBiz. In 2007, we launched an initiative to shape up our office. Looks like we’re on the right track.