Fixed Annuities in Retirement

Who doesn’t like a level of certainty in life?  In a world full of unknowns, it’s human nature to feel more secure by having some type of guarantee.  For some, this might mean holding a certain amount of cash in the bank or having your home paid off in retirement, but the topic I’m tackling in this blog is fixed income sources in retirement.  Traditionally this meant a pension, social security, and annuity income.  However, with pension plans now being about as common as seeing a walkman CD player and social security having its own issues, I think it makes sense to explore other options to provide a guarantee for a portion of your retirement income need.

The 50% Fixed Income Rule of Thumb

One of the many questions we discuss with clients when working with them on their financial plan (especially when they are approaching retirement) is how much of their spending goal should be comprised of fixed income sources?  Ideally, we would like to see that percentage around 50%, but every client situation is different.  So if the annual spending goal is $100,000 gross, $50,000 of fixed income sources (social security, pension or annuity income) is desirable with the remainder of income being drawn from a well-balanced, diversified portfolio.  However, depending on the client’s risk tolerance and other assets, it could make sense to have that percentage higher or lower. 

The Bygone Pension Era

Since one of the main fixed income sources for a retiree was a company pension – now virtually non-existent – it’s often up to you. The burden has been placed on the employee to fund their own retirement through a 401k, 403b or other defined contribution plan.  While company matches certainly help the employee, they don’t come close to offering the same lifetime income benefit a pension provides.  As such, it could make a lot of sense to explore the option of utilizing a fixed annuity for part of your retirement need. 

Making Room in your Plan for Annuities

Annuities don’t make sense for everyone and they have rightfully received a bad rap. Many of them are expensive and were “sold” in situations where it just didn’t make sense for the client based on their needs and their personal situation.   However, annuities are around for a reason, because they can fit the need for certain clients for a PORTION of their financial plan.  With so many different options for income, annuities typically place the burden of risk on the insurance company offering the annuity for a guaranteed stream of income.  Having a portion of your spending goal met by a fixed income source, such as an annuity, gives many clients an added layer of peace of mind, knowing that the income stream will be there regardless of what the market is doing. 

In summary, annuities can have a place in your financial plan but like anything financial, they don’t make sense for everyone.  This is our job, as your financial team member, to work with you to see if they have a place in your plan.  Don’t cringe when you hear the word “annuity” like many do. Please have an open mind because they could play a very important role in your retirement!

---

Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc. Nick is a member of The Center’s financial planning department and also works closely with Center clients. In addition, Nick is a frequent contributor to the firm’s Money Centered and Center Connections blogs.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation to buy or sell any investment. 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. There are special risks associated with investing in bonds (fixed income) such as interest rate risk, market risk, call risk, prepayment risk, credit risk, and reinvestment risk. Investing involves risk and investors may incur a profit or loss regardless of strategy selected. 

A fixed annuity is a long-term, tax-deferred insurance contract designed for retirement. It allows you to create a fixed stream of income through a process called annuitization and also provides a fixed rate of return based on the terms of the contract. Fixed annuities have limitations. If you decide to take your money out early, you may face fees called surrender charges. If you're not yet age 59½, you may also have to pay an additional 10% tax penalty on top of ordinary income taxes. A fixed annuity contains guarantees and protections that are subject to the issuing insurance company's ability to pay for them.

We're Sorry, This Page is No Longer Available

Checkout our current blog posts HERE. See you there!

Efficient Tax Planning is a Year-Round Job

While many of us are so focused this time of year on getting our tax returns done and over with until 2016, year-round tax planning is something that excites us number geeks!  Taxes are something we really can’t control, right?  Not exactly.  While we can’t change the tax rates set by our government, we can work collaboratively with you and your tax professional to make sure certain financial decisions throughout the year ensure that you are being as efficient as possible with your tax situation.  Let’s take a look at a few examples:

Example #1: Ford Stock

Say you have a stock position in Ford that you purchased when the “sky was falling” at $3/share.  Now it is worth much more and you have an unrealized gain of $20,000.  You might not want to part ways with the stock because it has done so well and you don’t want to pay tax on that nice $20,000 gain.  This might make your reconsider: If your taxable income falls within the 15% marginal tax bracket, chances are you would pay very little or possibly ZERO tax on the $20,000 gain.  You could lock in some nice profit on the stock and potentially improve the overall allocation of your portfolio. 

Example #2: Roth Conversion

Let’s take a look at another real life example we see very often.  What if your income this year drops significantly?  Whether it be a job loss, retirement, job change, etc. this is something we want you to keep us in the loop on for pro-active tax planning purposes.  In this situation, a Roth IRA conversion could make a lot of sense if your income this year will fall into a lower tax bracket that you will most likely never be in again.  Paying tax at a much lower rate than you normally would and moving Traditional IRA dollars into a Roth IRA for potential future tax-free growth could be a monumental planning opportunity.   

Sharing Your Tax Returns

These are just two examples of the many factors we are looking for in your financial plan to make sure your dollars are being taxed efficiently.  You can help us do this work by providing us with your tax return early in the year.  This gives us a much better chance to fully analyze your tax situation throughout the year to see if any tax planning strategies could make sense for you and your family.  Many of our clients have now signed a disclosure form allowing us to contact their CPA or tax professional directly to obtain copies of returns and to discuss tax-planning ideas.  This saves you, as the client, the hassle of making copies or e-mailing your return to us – we are all about making your life easier! 

Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc. Nick is a member of The Center’s financial planning department and also works closely with Center clients. In addition, Nick is a frequent contributor to the firm’s Money Centered and Center Connections blogs.

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. Raymond James does not provide tax advice. You should consult a tax professional for any tax matters. C15-004265

Slightly Off-Center: Your best beauty secret?

There’s a lot you know about our team at The Center … but we’ve dug up answers to some questions you might have never thought to ask.

Exercise is the Fountain of Youth! –Angela Palacios

Stay Out of the Sun –Amanda Toia

Stay optimistic, stay fit, have fun –Dan Boyce

Don’t stress and be happy –Gerri Harmer

Drink tons of water –Jaclyn Jackson

Clean ears is a must –Jennifer Hackmann

Less is more –Jennie Bauder

Fanny Packs are always in style and can complement any outfit –Kali Hassinger

7 hours of consistent sleep every night –Matt Chope

I have to shower twice a day – once in the morning to help myself wake up and once at night to relax and unwind –Nick Defenthaler

Don’t try too hard! –Sandy Adams

This is all natural – bam! –Tim Wyman

Embrace yourself – you are beautiful no matter what –Melissa Parkins

Where to look for Bond Yield

Finding yield has become a struggle for investors today.  At the beginning of 2014, most experts were expecting the yield on U.S. 10-year Treasuries to end the year well above 3%.  However, they ended up going down from where they started the year and finished at 2.2% (and are even lower today).  Many were left scratching their heads as to why this could have happened.  However, when you look at the high quality government bond options around the would you can start to understand why. It’s all relative. 

Mapping 10-year Government Bond Yields

First of all, not much of the world is considered “high quality”.  The turquoise countries in the graphic below are the only countries that receive the coveted AAA rating.  This includes Canada, Australia, Singapore and much of Europe.  There are a few countries in the AA rating, or bright green color coding camp, which is where the United States falls. 

Second, look at the yields these countries pay.  Of the AA and AAA rated countries, U.S. Treasuries at 2.2% have the most attractive rates for the credit quality and also perceived quality by others.  Would you want to buy 10-year Chinese government bonds for only 1.5% more yeild over the U.S. (3.7% versus 2.2%)?  The answer is generally no with the bulk of your fixed income assets.

Many governements, institutions and pension funds agree.  So U.S. bonds are aggressively bought when their rates go up, even a little, by institutions and governments because they are a safe haven with the best relative yields out there. This buying then drives the rates right back down again.  The blue bars on the chart below show month-by-month how many trillions of U.S. Treasuries are owned by foreign governments.  You can see as tapering occurred (indicated by the green boxes in $’s), the U.S. pulled back on the amount of bonds it was buying, then yields would spike (see the purple line) and foreign governments would buy.

Now, with Europe embarking on its own bond buying program, yield curves and thus rates in Europe are going to come down even further. This is likely to make this phenomena even more pronounced.  For at least the near term, it is likely we will be stuck with lower rates here in the U.S. and around the world as these trends persist.

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 [insert FA name] 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. There are special risks associated with investing in bonds (fixed income) such as interest rate risk, market risk, call risk, prepayment risk, credit risk, and reinvestment risk. There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices generally rise. International investing involves special risks, including currency fluctuations, different financial accounting standards, and possible political and economic volatility. C15-003427

Happy Centerversary!

Bringing a combined 37 years of experience to The Center, we are grateful for the contributions of Tim Wyman, Matthew Chope and Amanda Toia. While we wanted to give them a little recognition as they reach their Centerversaries, we also wanted to know what the anniversaries meant to them.

Fifteen years ago now Managing Partner Tim Wyman joined our team. He not only brings leadership to The Center, but he keeps our team laughing. When we asked him about hitting the 15 year mark, he called it a wonderful milestone:

Joining The Center in 1999 was clearly the best professional decision I have made. I am very grateful and thankful for what we have collectively built here at The Center for the benefit of clients and the great team that serves them. My work is extremely rewarding and important in my life and it is a true pleasure and privileged to be a member of The Center!  

Center partner Matthew Chope joined Center for Financial Planning, Inc. in 1996. Of his 18 years with The Center he says:

“It’s been like a dream career for the most part. The only thing better than these choices, as I look back, was the staff that found a home here over that time and the clients that gave us an opportunity to serve them.  I feel lucky and privileged each and every day.”

And 4 years ago, Client Service Manager Amanda Toia joined our team. Now that we have her, we can’t imagine how we ever managed without her!

“I work at the greatest firm with the greatest co-workers and clients! I have learned somuch in the last four years.”

Important Information for Tax Season 2014

As you prepare for the 2014 tax season, here is some information that you may find beneficial.

Our team is available to assist you with your tax reporting needs. Please don’t hesitate to reach out with questions. We are also happy to coordinate with your CPA or tax preparer on your behalf if you make this request.

2014 Raymond James Form 1099 mailing schedule

• 2/17- Mailing of original Form 1099s
• 3/2 - Begin mailing delayed and amended Form 1099s
• 3/16 - Final mailing of any remaining delayed original Form 1099s

Please note the exceptions immediately below:

Delayed Form 1099s

In an effort to capture delayed data on original Form 1099s, the IRS allows us to extend the mailing date until March 16, 2014 for clients who hold particular investments or who have had specific taxable events occur. Examples of delayed information include:

• Income reallocation related to mutual funds, real estate investment, unit investment, grantor and royalty trusts; as well as holding company depositary receipts
• Processing of Original Issue Discount and Mortgage Backed bonds
• Cost basis adjustments

Amended Form 1099s

Even after delaying your Form 1099, please be aware that adjustments to your Form 1099 are still possible. Raymond James is required by the IRS to produce an amended Form 1099 if notice of such an adjustment is received after the original Form 1099 has been produced. There is no cutoff or deadline for amended Form 1099 statements. The following are some examples of reasons for amended Form 1099s:

• Income reallocation
• Adjustments to cost basis (due to the Economic Stabilization Act of 2008)
• Changes made by mutual fund companies related to foreign withholding
• Tax-exempt payments subject to alternative minimum tax
• Any portion of distributions derived from U.S. Treasury obligations

What can you do?

You should consider talking to your tax advisor about whether it makes sense to file an extension with the IRS to give you additional time to file your tax return, particularly if you held any of the aforementioned securities during 2014.

If you receive an amended Form 1099 after you have already filed your tax return, you should consult with your tax advisor about the requirements to re-file based on your individual tax circumstances.

Additional information can be found at http://www.raymondjames.com/taxreporting.htm.

We hope you find this additional information helpful. Please call us if you have any questions or concerns during tax season.

Please note, changes in tax laws or regulations may occur at any time and could substantially impact your situation. Raymond James financial advisors do not render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional.

Tax Time Fraud Alert from the IRS

Rich or poor, old or young, criminals still want to steal from you.  Financial fraud and identity theft is a huge concern to most of us, particularly cyber fraud.  IRS Commissioner John Koskinen released a statement in late January warning citizens about tax time scammers.  PLEASE PAY ATTENTION TO THIS WARNING.

Over the Internet

The Scam: Internet scammers come out in droves around tax time, trying to trick you as a taxpayer. They may try to get you to send them your address, Social Security number, credit card number, bank account number or any other valuable piece of information that can help them steal your identity or your assets.  These tax scammers sent out so-called "phishing" emails that appear to be from the IRS and claim that the recipient either owes money or is due a refund.  The IRS will never send you an e-mail about a bill or refund and request your private information. 

What to Do: If you get an unsolicited email that seems to be from the IRS or a related agency, such as the Electronic Federal Tax Payment System (EFTPS), don't reply, don't open any attachments and don't click on any links.  Opening the attachments can allow scammers to steal your personal information or infect your computer.  Instead, report the e-mail to the IRS by sending it to phishing@irs.gov.  According to the IRS, they do not contact taxpayers electronically - whether by text, email or other social media - to request personal or financial information.

By Phone

The Scam: One of the all-time top tax scams is done by phone. These scammers call taxpayers and make claims about a refund or tax due and try to get taxpayers to provide private information.

What to Do: Do not provide private information over the phone – to anyone, including those who might claim to be calling from the IRS. If you receive a phone call or electronic communication from any source claiming to be the IRS or an associated agency, do not respond by providing confidential information.

Providing the wrong information to the wrong people can result in identity theft, monetary theft and years of headaches for you. Report any such communication to the IRS or contact your tax preparer or financial advisor for guidance. 

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. A15-003424

Slightly Off-Center: TV show you never miss?

There’s a lot you know about our team at The Center … but we’ve dug up answers to some questions you might have never thought to ask.

The Biggest Loser and Game of Thrones –Angela Palacios

This season of The Voice –Jaclyn Jackson

Criminal Minds –Jennifer Hackmann

Parenthood –Jennie Bauder

Parks & Rec –Kali Hassinger

The Good Wife, Downton Abbey, The Blacklist –Laurie Renchik

Homeland –Matt Trujillo

Outlander, Game of Thrones, Mad Men –Melissa Joy

This surprises me too, but it’s “The Walking Dead” –Nancy Sechrist

I’m a huge fan of Showtime – Homeland, Ray Donovan, old episodes of Dexter, etc. – And as I mentioned earlier, those mind numbing reality shows that I’m a sucker for! –Nick Defenthaler

Detroit Tigers or Michigan State games (football and basketball) Go Spartans! –Sandy Adams

I don’t watch TV programs very much.  My wife Jen and I do periodically get obsessed and watch shows like House of Cards, The Good Wife, and Homeland via Netflix in a very short amount of time. –Tim Wyman

Getting Financially Fit in 2015

My wife and I are very different (don’t worry, it’s a good thing!), especially when it comes to our careers.  She is a Surgical Technologist at a large local hospital and is the surgeon’s “right hand man” in the operating room.  As much as I love financial planning, I must admit that she has way cooler stories than me when she gets home!  Health care amazes me.  The types of procedures that are available now are incredible and, in my opinion, those in the medical field are heroes. 

In the locker room at my wife’s hospital, it’s common for the ladies to have magnets of pictures of their family, friends or quotes that might get them through a long, hard, stressful day.  Recently she came home and told me, “You’ll love this one!” I asked what she was referring to and she proceeded to tell me that one of her co-workers had a magnet on her locker that read:

Take care of your financial health

Me, being the nerd that I am, said, “No way, that’s awesome!”  The more I thought about that quote, the more it resonated with me.  We always think about taking care of our health, especially this time of year after we’ve made our (hopefully do-able and realistic) new year’s resolutions.  The gym is busier and fruits and veggies are scarce at the grocery store as people try to make a change. Physical health could mean literally thousands of different things for each individual -- from quitting smoking to eating better, working out to sleeping more.

The same goes for financial health.  There is no “one size fits all”.  True financial planning is a PROCESS not a product, just like improving your physical health.  So, with a fresh start to a new year, I encourage each of you to evaluate your life to see if you are “taking care of your financial health.” As you do this, remember:

Set realistic goals that are achievable (just like you should be doing for your physical health)

Work toward your goals, but don’t expect perfection

Over time, creating good habits and taking the time to review your finances will hopefully lead to a happier you.  From everyone at The Center, we wish you and your family a very happy and healthy new year!   

Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc. Nick is a member of The Center’s financial planning department and also works closely with Center clients. In addition, Nick is a frequent contributor to the firm’s Money Centered and Center Connections blogs.

Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of RJFS or Raymond James. C15-002022