2018 Fourth Quarter Investment Commentary

Contributed by: Angela Palacios, CFP®, AIF®

The 2018 wild ride!

We’d love to see you at our investment outlook event on Wednesday, February 27th from 11:30am-1pm for lunch and a full update on 2018 and the year ahead.  You can register here. 

How times have changed! As I write this, I often like to look back and see what I was thinking about last year at the same time.  In the fourth quarter of 2017, we were talking about how low volatility had been for an extended period and that it was unlikely to continue.  Unfortunately, we were right.  In 2017, we had only eight sessions where the S&P 500 moved up or down more than 1% (versus the average which is 53 days in a given year since 1958)!  In 2018 the number of days up or down more than 1% numbered closer to 60.  While more than average, this is closer to average volatility than we had grown accustomed to.  December is usually the least volatile month on record but this time registered more than it’s share of wild swing days for the year. 

Volatility

While we tend to love unlimited volatility on the upside, we greatly dislike downside volatility. According to behavioral finance experts Daniel Kahneman and Amos Tversky we hate the downside about twice as much as we love the upside or loss aversion.This is a concept that is embedded deeply within our investment strategy. We work to design portfolios that prevent you from making short-term decisions that contradict your long-term goals. Diversification is a key part of this process. Up until the last quarter of 2018, this was a strategy that had long been out of favor in this bull market for US Large companies. However, we started to see the benefits return. Below is a chart showing returns for 2018 broken down a few different ways and for several different benchmarks. The first section is Year-to-date (2018 full year) returns. For the year, the Barclays Aggregate was the clear winner as it was up slightly (blue bar). However, for the first three quarters of the year, it was the clear loser except for emerging markets (EM had been 2017’s, clear winner). It wasn’t until the last quarter, when volatility struck, that bonds were able to shine. The S&P 500 (US large companies) and Russell 2000 (US small companies) indexes were the exact opposite story. For the first three quarters of the year, the rally continued in a strong way with these markets up well over 10%. Once volatility struck, this meant these markets also had the farthest to fall and experienced the most downside in the last quarter of the year giving back all of their prior returns and then some for the year. It is an excellent reminder of the importance of diversification.

Source: Morningstar Direct

So what has this market so spooked?

Interest rates

The Federal Reserve raised rates for the fourth and final time of the year in December but also lowered its expectations for rates moving forward. Economic data is little changed, but The Fed’s reaction to the data shifted more dovish. The Fed is concerned that by raising too far, too fast they will invert the yield curve.  They recognize it may be necessary to slow down.   The yield curve hasn’t inverted quite yet (this is defined by the two-year being higher than the ten-year yield) but it has gotten much closer to this scenario.  This is generally a good indicator that a recession is on the horizon but has not given this signal yet.

Shutdown Showdown

Democrats took control of the House on January 3rd as the government shutdown continued.  President Trump and the Senate don’t seem to be willing to bend on their request for money for the border wall while Democrats just as strongly oppose.  Ultimately, one side will have to bend to get the government fully back up and running and neither seem to have any incentive to make this happen yet.  Markets generally aren’t rattled by government shutdowns unless they are prolonged. However, right now, everything seems to be rattling the markets.  I don’t think you can specifically point to the government shut down as being a leading market concern but it is definitely on the scorecard.  The longer it extends, the more it will erode consumer and investor confidence too.

China Trade Negotiations

Trade negotiations seem to be moving along, but this is a slow process.  U.S. based companies are starting to report reduced sales into China, so we are beginning to see a direct effect to stock prices of domestic companies.  There is talk of a hard deadline in these discussions of March 1st because if some negotiations have not come to a close by then, the U.S. will impose another round of tariffs on Chinese imports. 

Global concerns

Brexit negotiations continue to stir up markets as it is not going as well as planned.Article 50 of the Lisbon Treaty was invoked on March 29, 2017.The UK has two years from this point to leave the European Union.So the deadline is fast approaching on March 29, 2019.Here is a helpful timeline of what is to come. Brexit is sure to cause some waves in the next few months.

To top off the global concerns, the Italians are making headlines again with debt concerns.  And just as interest rates are rising here at home, they are starting to rise overseas.  Finally yet importantly, the result of the Mueller investigations will come out soon.  This could cause a temporary shakeup in markets depending on what their findings are.

It is interesting to note that these headlines have existed for much of the year.  Up until early October, the US stock market seemed to brush them off in the wake of lower taxes.  However, lower taxes could only distract for so long until these headlines started to spill over into investor sentiment, which became clear in October.  It is important to remember to stay invested even through volatile events.  Missing the biggest up days can be devastating on your long-term returns and, true-to-form, we experienced many of those for 2018 when the markets appeared at their bleakest moments in the fourth quarter.  It is quite common that the largest up days occur during periods of downside volatility. 

We are happy to discuss your portfolio with you at any time you may feel uncomfortable with market swings.  We are monitoring your investments, making periodic changes when warranted and pro-actively rebalancing to take advantage of swings in the markets, both up and down.

We thank you for your continued trust.  Have a wonderful 2019!

Angela Palacios, CFP®, AIF®

Director of Investments

Financial Advisor, RJFS

Angela Palacios, CFP®, AIF® is the Director of Investments at Center for Financial Planning, Inc.® Angela specializes in Investment and Macro economic research. She is a frequent contributor The Center blog.

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https://www.zerohedge.com/news/2018-12-04/neutoric-market-sp-has-risen-or-fallen-1-or-more-20-days-quarter https://www.bbc.com/news/uk-politics-32810887 Freedom Presentation by Nick Lacy, CFA, Chief Portfolio strategist.
The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represent approximately 8% of the total market capitalization of the Russell 3000 Index. The MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 22 developed nations.
The MSCI Emerging Markets is designed to measure equity market performance in 25 emerging market indices. The index's three largest industries are materials, energy, and banks. The Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market.
Any opinions are those of Angela Palacios and not necessarily those of Raymond James. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete. Expressions of opinion are as of this date and are subject to change without notice.
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.

High-deductible medical insurance plan? Try an HSA!

Contributed by: Josh Bitel

With the first year of the new Tax Cuts and Job Act behind us, tax-efficient saving seems to be top of mind for many Americans. In a world of uncertainty, why not utilize a savings vehicle you can control to help with medical costs?

USING AN HSA

A Health Savings Account, or HSA, is available to anyone enrolled in a high-deductible health care plan. Many confuse an HSA with a Flex Spending Account or FSA – don’t make that mistake! A Health Savings Account is typically much more flexible and allows you to roll any unused funds over year to year, while a Flex Spending Account is a “use it or lose it” plan. 

WHAT AN HSA CAN COVER

Many employers who offer high-deductible plans will often contribute a certain amount to the employee’s HSA each year as an added benefit, somewhat like a 401k match. Dollars contributed to the account are pre-tax, and tax-deferred earnings accumulate. Funds withdrawn, if used for qualified medical expenses (including earnings), are tax-free.

The list of qualified medical expenses can be found at irs.gov; however, just to give you an idea, they include expenses to cover your deductible (not premiums), co-payments, prescription drugs, and various dental and vision care expenses.

As always, consult with your financial advisor, tax advisor, and health savings account institution to verify what expenses qualify. If you make a“non-qualified” withdrawal, you will pay taxes and a 20% penalty on the withdrawal amount. 

HERE ARE THE DETAILS FOR 2019:

Individuals

• Must have a plan with a minimum deductible of $1,350

• $3,500 contribution limit ($1,000 catch-up contribution for those 55 or older)

• Maximum out-of-pocket expenses cannot exceed $6,750

Family

• Must have a plan with a minimum deductible of $2,700

• $7,000 contribution limit ($1,000 catch-up contribution for those 55 or older)

• Maximum out-of-pocket expenses cannot exceed $13,500

WITHDRAWING FROM AN HSA

Once you reach age 65 and enroll in Medicare, you can no longer contribute to an HSA. However, funds can be withdrawn for any purpose, medical or not, and you will no longer be subject to the 20% penalty. The withdrawal will be included in taxable income, as with an IRA or 401k distribution. This can present a great planning opportunity for clients who may want to defer additional money, but have already maximized their 401k plans or IRAs for the year.

Although you have to wait longer to avoid the penalty than with a traditional retirement plan (age 59 ½), this investment vehicle could reduce taxable income in the year contributions were made, while earnings have the opportunity to grow tax-deferred and tax-free.  

As you can see, a Health Savings Account can be a great addition to an overall financial plan and should be considered if you are covered under a high-deductible health plan. No one likes medical expenses, but this vehicle can potentially soften their impact.

Josh Bitel is a Client Service Associate at Center for Financial Planning, Inc.®

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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.

New Year Financial To-Dos Help Keep You on Track

Contributed by: Kali Hassinger, CFP®

As we settle into 2019, the fresh calendar year provides an ideal opportunity to make plans and adjustments for your future. Instead of setting lofty resolutions without a game plan in mind, might I suggest that you consider our New Year Financial Checklist? Completing this list of actionable, attainable goals will help you avoid the disappointment of forgotten resolutions in February, and you’ll feel the satisfaction of actually accomplishing something really important!

New Year Financial Checklist

• Measure your progress by reviewing your net worth as compared to one year ago. Even when markets are down, it's important to evaluate your net worth annually. Did your savings still move you forward? If you're slightly down from last year, was spending a factor? There is no better way to evaluate than by taking a look at the numbers!

• Speaking of spending and numbers, review your cash flow! How much came in last year and how much went out? Ideally, we want more income than spending.

• Now, let's focus on the dreaded budget. Sure, budgeting can be a grind, so call it a “spending plan”. Do you have any significant expenses coming up this year? Make sure you're prepared and have enough saved.

• Be sure you review and update beneficiaries on IRAs, 401(k)s, 403(b)s, life insurance, etc. You'd be surprised at how many people don't have beneficiaries listed on retirement accounts (or have forgotten to remove their ex-spouse)!

• Revisit your portfolio's asset allocation. Make sure your investments and risk are still aligned with your stage in life, your goals, and your comfort level. I'm not at all suggesting that you make changes based on market headlines. Just be sure that the retirement or investment account you opened 20 years ago is still working for you.

• Review your Social Security Statement. If you're not yet retired, you will need to go online to review your estimated benefit. Social Security is one of the most critical pieces of your retirement, so make sure your income record is accurate.

Of course, this list isn't exhaustive. The final step to ensure your financial wellbeing is a review with your advisor. Even if you don't work with a financial planner, at a minimum set aside time on your own, with your spouse or a trusted friend, to plan on improving your financial health. Do it even if you only get to the gym the first few weeks of January!

Kali Hassinger, CFP® is an Associate Financial Planner at Center for Financial Planning, Inc.®

New Year’s Resolutions Center Style

Contributed by: Center for Financial Planning, Inc.®

On New Year's Day, about 45 percent of Americans will resolve to make 2019 their best year ever.  

Not surprisingly, the most common New Year’s resolution is to lose weight. People also vow to get more organized, exercise more, better manage their finances, and do more good in the world.

While many of our team’s resolutions fall into those categories, The Center has one rebel.

Angie simply doesn’t believe in making New Year’s resolutions. “I feel like, if it is a good idea, why wait until January to start? For example, losing weight. I’m reducing my carb intake to lose a few pounds before the new year!”

The rest of our team members have taken the tradition to heart. Here are their 2019 resolutions:

• Jaclyn >> Balance my checkbook more frequently.

• Matt T >> Give away 10% of my income to charity in 2019.

• Nick D >> Run another half marathon! Did it back in 2009, but have been a bum ever since.

• Tim :: In addition to the common resolutions of losing weight and saving more money (not in that order), I have some financial resolutions for 2019.  First, due to last year’s tax law changes, I will review my tax withholding before January 15 to make sure enough has been withheld. Unfortunately, this is a tax trap for many. Next, I plan to review some old life insurance policies. And lastly, my wife Jen and I will finalize a major gift to our alma mater, Albion College – using a donor advised fund, of course!

• Matt C >> To feed 100 hungry children, plant 100 trees, pick up 100 pieces of trash, mentor 100 kids, and give more than I take.

• Jacki >> Block weekly time for activities that bring me joy.

• Josh B >> My New Year’s resolution is to read more books.

• Lauren >> Use a 529 to save for my son’s future college expenses. We hope he’ll be a college grad in the Class of 2039!

• Sandy >> To be more intentional with my attention, my time, and my money, in order to make a more meaningful impact on my family and my community.

• Kali >> Increase my overall savings rate by 5%.

• Laurie >> Add one extra month to my emergency fund reserves. Being prepared ahead of time for unexpected but necessary expenses gives me a sense of accomplishment. I know that, if needed, I have a Plan B in place!

• Nancy >> Thanks to Tim’s “Financial Wellness; Estate Planning Lunch and Learn,” I’m motivated to get all my financial documents, such as a will, beneficiary forms, etc., completed, updated, and organized.

• Gerri >> This year, I am committing to travel more with friends. Many of my friends travel, and since I have made a commitment to do more myself, I think it would be a blast to make some memories together.

• Andrew >> Spend a minute each morning in appreciation of the things for which I’m grateful.

• Bob >> Update my estate plan and track my monthly spending budget at least once per quarter.

We hope these New Year’s resolutions inspire you to make a few of your own. And if any of them involve your finances, reach out to one of our team members for support and guidance.

Here’s wishing you a happy and successful 2019!

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Donor Advised Fund: Contributions to a DAF are irrevocable. Raymond James does not provide legal or tax advice. Taxpayers should seek advice based from an independent legal or tax professional prior to opening account. 529: As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. Investors should consider, before investing, whether the investor's or the designated beneficiary's home state offers any tax or other benefits that are only available for investment in such state's 529 savings plan. Such benefits include financial aid, scholarship funds, and protection from creditors. The tax implications can vary significantly from state to state.

Tax Deductible “Alimony” Workaround for 2019 and Beyond

Contributed by: Jacki Roessler, CDFA®

After January 1, 2019, negotiating alimony in divorce cases will become significantly more difficult.  Pursuant to the Tax Cuts and Jobs Act and the repeal of tax law in place since 1942, alimony will no longer be treated as tax deductible for the payer in cases finalized on January 1, 2019 or later.

Great news for the alimony recipient? Not necessarily.

Consider the following example: When Jane and John got divorced in 2017, John's income was $250,000 per year, and Jane was a stay-at-home mom with no earned income. John agreed to pay Jane $3,000 per month in alimony.  Since he was able to deduct that amount from his income, his monthly out-of-pocket cost for the support was $2,130. Jane, of course, had to pay income taxes on the alimony. After paying taxes, however, her net ($2,400 per month) was greater than the out-of-pocket cost to John. This was an effective way to shift income from a high bracket to a low bracket and give John an incentive to pay Jane more in support.

By comparison, eliminating this tax benefit takes more money out of the hands of the divorcing couple and puts it in the hands of the IRS. The payer doesn’t have an incentive to pay a penny more than his/her out-of-pocket cost.

Is there a workaround that could still provide couples with the advantage of shifting the tax burden from the high wage earner to the low earner in the context of alimony payments?

In some cases, the answer may be a surprising yes.

Let's look at the case of Brian and Julie, who are in the same financial position as John and Jane. Julie is requesting $3,000/month in alimony for 6 years. Her attorney suggests that the parties negotiate a lump sum buy-out on alimony from a pre-tax account. This would provide the same tax benefit (shifting income from a high tax bracket to a low bracket) that the alimony deduction would have provided. With the help of a financial advisor, they determine that $3,000 per month in tax-deductible alimony is equal to $200,869 in pretax, lump-sum dollars (this assumes a 3% discount rate). To satisfy his alimony obligation, Brian can therefore transfer to Julie $200,869 from his IRA or Qualified 401k plan via a Qualified Domestic Relations Order (QDRO).

By transferring the retirement assets, Brian avoids the income tax liability that is embedded in those assets. When Julie takes money out of the account, she’ll pay ordinary income taxes on any distribution, at her marginal tax bracket, just as she would have with taxable alimony payments. As long as she is at least 59 1/2 years old, she can immediately begin taking distributions without incurring a 10% penalty.

This strategy comes with some significant drawbacks. First, a lump-sum buyout means the award becomes permanent and non-modifiable. With traditional alimony, if Julie were to die before the end of six years, Brian’s alimony obligation would cease, so Brian might have unnecessarily pre-paid alimony. The same could be true if Julie remarried during the payment period, Brian became disabled, or future alimony was modifiable in any way.

Of course, another shortcoming to this strategy is that many couples don’t have access to a large lump sum in retirement assets.

The best candidates for this workaround are likely older couples who can defer their income needs to retirement, are at least 59 ½ years old and ready to begin taking annual distributions from retirement assets, and understand all the risks involved with pre-paying support.

As always, qualified and personal legal, tax, and financial advice is necessary before making any financial decisions in divorce.

**Local attorneys…to learn more about this strategy and other hot tips for 2019, mark your calendars for my educational seminar on January 30, 2019, at the Bloomfield Township library.

Jacki Roessler, CDFA® , RJFS Branch Associate, is a Divorce Financial Planner at Center for Financial Planning, Inc.®

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Expressions of opinion are as of this date and are subject to change without notice. This materi-al is being provided for information purposes only. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. Illustrations provided are hypothetical examples.

Bond woes: “Why do we own bonds if we think they aren’t going to do well in a rising rate environment?”

Contributed by: Center Investment Department

Hoping for capital gains is not a good reason why you should own bonds. Actually, owning or  buying bonds in this low and rising interest rate environment with the hope that you'll be able to sell them later at a higher price may not work out. BUT…just because you can’t sell this investment at a profit later does not make the investment a bad idea.

A great real life comparison is a car. We own a car to get our family and us from one place to another, hopefully safely. Many components go into the makeup of a safe driving automobile. The engine is key in making the car go. Stocks act much like the engine of a car.  They make our portfolios go/grow. But, would you ever drive a car that wasn’t equipped with brakes or an airbag? Brakes and airbags are similar to the bonds in our portfolio. Bonds help you control some of the risk of owning stock. For most people, the reason to own bonds is to slow down our bottom-line losses experienced in our portfolio during major market declines. Without this moderation (and sometimes even with it), investors tend to panic when stock prices fall.

So in a nutshell, “Why own bonds?”

They make the scary times less so. When the stock market experiences an extended decline, investors look around for where to turn. Cash and Bonds are usually the place they turn to.A volatile stock market can happen suddenly and unexpectedly. Waiting to add bonds until something happens means you are going to suffer much of the downside before you actually add them to the portfolio. You have to have already had them in the portfolio for them to help. Talk with your financial planner to make sure you have the proper amount of your portfolio invested in bonds so you can hang on to your investments through those difficult times. A portfolio makeup that allows you to stay the course over the long term is much more likely to get you to your destination!

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https://www.marketwatch.com/story/why-bonds-are-the-most-important-asset-class-2015-06-10 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.

IRS Announces Increases to Retirement Plan Contributions for 2019

Contributed by: Josh Bitel

Several weeks ago, the IRS released updated figures for 2019 retirement account contribution and income limits. 

Employer Retirement Plans (401k, 403b, 457, and Thrift Savings Plans)

• $19,000 annual contribution limit, up from $18,500 in 2018.

• $6,000 “catch-up” contribution for those over age 50 remains the same for 2019.

• An increase in the total amount that can be contributed to a defined contribution plan, including all contribution types (employee deferrals, employer matching and profit sharing), from $55,000 to $56,000, or $62,000 for those over age 50 with the $6,000 “catch-up” contribution.

In addition to increased contribution limits for employer-sponsored retirement plans, the IRS adjustments provide some other increases that can help savers in 2019. A couple of highlights include:

Traditional IRA and ROTH IRA Limits

• $6,000 annual contribution limit, up from $5,500 in 2018 – the first raise since 2013!

• $1,000 “catch-up” contribution for those over age 50 remains the same for 2019.

Social Security Increase Announced

• As my colleague Kali Hassinger, CFP® touched on, the Social Security Administration announced a cost of living adjustment, to the tune of 2.8%, starting January 2019.

• Kali also mentioned some slight increases to Medicare Part B premiums to keep in mind as we inch closer to 2019. 

As we enter 2019, keep these updated figures on the forefront when updating your financial game plan. As always, if you have any questions surrounding these changes, don’t hesitate to reach out to our team!

Josh Bitel is a Client Service Associate at Center for Financial Planning, Inc.®

No Longer Taboo: Talking to Your Kids About the Finances of Divorce

Contributed by: Jacki Roessler, CDFA®

Recently I sat down with my client, “Jane” for a “moment of truth” meeting. The culmination of several client meetings and extensive number crunching, it was apparent that Jane’s primary financial goal wasn’t realistic. Above all else, Jane wanted her three children to experience little to no change in their current lifestyle.

Based on my projections, that wasn’t likely to happen without significant financial sacrifice on Jane’s part.

The kids’ lifestyle included private school tuition, overnight summer camp and a plethora of expensive extra-curricular activities. As a parent of young children, I empathize with the desire to keep things as stable as possible in the midst of a tumultuous time. As a divorce financial planner, however, my job is to inject a dose of reality into the emotional roller coaster of divorce.

I want my client to understand the short term and long term financial impact of their settlement before they sign on the dotted line.

In this case, Jane was stunned to hear that child support wouldn’t cover all her minor children’s expenses. Like most states, Michigan’s child support formula factors the income of both parents, the parenting schedule, family size and the tax status of the parties into the equation. The actual expenses of the children are not automatically considered. Jane assumed that since her husband had agreed in the past to prioritize private school tuition, he would be required to continue. That wasn’t necessarily the case. Savings for future college costs? Not part of the formula. The same goes for horseback riding camps, travel soccer, music lessons, etc… 

After several tough meetings and in-depth conversations, Jane made some difficult decisions.

The truth was that her kids’ expenses had contributed in some way to the divorce; she and her husband had been living beyond their means.

On the advice of her therapist, Jane sat down with her kids to discuss developing a family financial game plan. That might mean downsizing their house or cutting back on some of the extras. It might even mean a change of schools. However, it was empowering for them all (yes, even the kids) to know that they would be ok if they made smart financial decisions now to protect themselves for the future. For example, they all agreed that it was more important for Jane to be home after school than it was for the kids to continue at any particular school. The kids understood that they couldn’t attend every camp they had in the past, but would be able to choose one special experience. Jane didn’t burden her children with specific numbers or financial worries, rather, she initiated a dialogue about prioritizing to keep the family stress-free.

It may feel uncomfortable to discuss finances with children, especially as it relates to divorce, however, it is an important part of the process.

While Jane’s situation was unique, and her results not necessarily representative of all divorce circumstances, frank money talks and responsible role modeling on the part of their parents help children set and achieve their own financial goals as they venture into adulthood.

Jacki Roessler, CDFA® is a Divorce Financial Planner at Center for Financial Planning, Inc.®

Are You Retirement Ready?

Contributed by: Sandra Adams, CFP®

In our work with clients, one of the most common questions we get is, “How will we know when we are ready (and able) to retire?”  That can be a tricky question, because there are two sides to being ready for the next phase of your life – the technical side and the personal side.  While certainly you need to be financially secure for the next decades of your life, you also need to be comfortable with the transition from your life as a career individual to what you now wish to become in your next phase – and that is not as easy as it sounds.

From a financial-readiness perspective, many clients target age, monetary or benefit milestones to help them determine when they will be ready to retire:

• “When I have $1 million in assets saved, I will be ready to retire.”

• “When I am eligible to collect Social Security, I will be ready to retire.”

• “When I am eligible to collect my company pension OR I have reached my XX anniversary with my company, I will be ready to retire.”

• “When I am eligible to receive Medicare, I will be ready to retire.”

The real answer is, some or all of these may be true for you, and some or all of these may be false.Every client situation is different and no general guideline can determine whether or not you are financially ready to retire. Unfortunately, it is far more complicated than that. There are numerous financial factors that go into determining financial readiness.Let’s take a deeper look into the issues.

Financial Readiness Issues:

Retirement Savings:

Do you have enough saved?

• What might your other retirement income sources be (Social Security, Pensions, etc.)

• How much income will you need (what are your fixed costs versus lifestyle wants in retirement), and

• What are your longevity expectations (how long might you expect to live based on health, family history, etc.—expect it will be longer than you think!).

Where are your savings?

• Do you have retirement savings outside of retirement plans?

• Do you have some after-tax and reserve cash/emergency reserve savings?

• Do you have different types of accounts to provide tax diversification going into retirement (i.e. IRAs/401(k)s, ROTH IRAs, after tax investment accounts)?

Debt:

Have you paid down your debt or do you have a plan to be as debt free as possible by the time you retire?  This will allow you to control your retirement income for other fixed expenses and wants; it is desirable to have as little debt/fixed expenses as possible going into retirement as possible.

Retirement Income:

A large part to being retirement ready is understanding your retirement income sources, options and strategies and using them to your best advantage.  Take the time to consult with your planner to choose the option that works best for you and your family circumstance.

• Pensions: Do you understand all your options, including the income options available to your spouse as a survivor upon your death.  We find that in many cases it makes sense to choose an option that includes a lifetime income option for you with at least a 65% survivor income benefit for your spouse if you were to die first.

• Social Security: While many are under the false impression that because you are allowed to take Social Security benefits as early as age 62, they should, we might recommend otherwise.  For most individuals now approaching Social Security claiming age, Full Retirement Age for claiming Social Security is now age 66 and delaying benefits until age 70 results in an 8% per year increase in benefits.  Knowing and understanding the Social Security benefits, rules and strategies that can be employed, especially for married couples, to ensure the largest lifetime benefit can be an added supplement to long-term retirement income. We find that our most successful married couples in retirement employ a strategy where the lower Social Security earner draws at Full Retirement age while the higher Social Security earner waits to draw at age 70, insuring the highest possible Social Security benefit for the spouse that lives the longest.

Investments:

Preparing for retirement involves making appropriate adjustments to your investment strategy.  You should work with your financial planner to adjust your asset allocation to one that is appropriate for your new goals and time horizon. We find that our most successful retirees tend to have asset allocations ranging from 40% Bond/60% Stock to 50% Bond/50% Stock.

Insurance:

• For those retiring before age 65 (Medicare eligibility) and without retiree healthcare, finding health insurance to bridge them to Medicare is a must. 

• Retirement readiness does require addressing the issue of Long Term Care funding Having a plan, no matter what your choice, is something that must be done before retirement.

Estate Planning:

While not exactly monetary, having your estate planning documents (Durable Powers of Attorney, Wills and possibly Trust or Trusts in place) updated prior to retirement is a good idea.Part of this is making sure accounts are titled properly, beneficiaries are updated, and account holdings/locations and management are as simplified as possible going into your last phase of life.

Once you have determined your financial retirement readiness, you need to determine your personal retirement readiness, which may be even more difficult for many folks.  Why?  Many have spent the majority of their lifetimes to this point building careers that established them with titles, credentials and stature. They built reputations, networks, social and business circles and were well respected because of the work that they have done.  And now they are moving from that phase of their lives to another and that means starting over.  What will they be now?  What will their lives mean?  And to whom?

Until you are ready to start the next phase of your life knowing your purpose – what you want to wake up for every day – you are likely not ready for retirement.  Those that have not given the thought to their mission, values, and their “why” for their next phase will be left feeling lost and will likely fail at retirement and find themselves wanting to go back to their former lives.

How can you find your purpose?

• Ask yourself what is most important to you? (family, friends, spirituality, charity,etc)

• Ask yourself what are your life priorities? (family, health, knowledge, etc.)

• Ask yourself what you want to let go of and what you want to give yourself to.

• Realize that the rest of your life can be the best of your life if you embrace it with an open mind and enthusiasm.

• Consider reading the book “Purposeful Retirement” by Hyrum Smith if you need more help!

“Am I ready to retire?”  It is not a simple question and there is no simple answer.  It may take months or years to answer all of the questions and make all of the preparations.  If you think that retirement is in your not too distant future, the time is NOW to start planning.  Don’t let retirement sneak up on you…work with your financial planner and be Retirement Ready!

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 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.

Webinar in Review: Year-End Tax and Planning Strategies

Contributed by: Josh Bitel

In November of 2017, the Tax Cuts and Job Act of 2018 passed with numerous changes to our tax code. This year we provided a refresher on some of those changes as well as some planning opportunities to think about as 2018 wraps up.

If you weren’t able to attend the webinar live, we encourage you to check out the recording below. 

Check out the time stamps below to listen to the topics you’re most interested in:

• (04:20): New 2018 Marginal Tax Brackets

• (06:30): Highlights of the 2018 Tax Cuts and Jobs Act (TCJA) – comparing 2017 with 2018

• (14:24): Planning charitable gifts under the new tax law

• (19:15): Healthcare coverage overview – Health Savings Accounts (HSAs) and Medicare

• (25:30): Roth IRA conversions as an attractive planning opportunity

• (33:20): How to utilize your employer retirement plan most effectively

• (36:30): How we help mitigate taxes & tax efficient investing

• (41:30): Updates to gifting and intra-family gifting for 2018