2 Easy Ways To Determine If Your 401k Is Too Aggressive

Contributed by: Matt Trujillo, CFP®

For the investor who’s unsure of how their retirement plan works…here are two easy ways to measure how aggressive or conservative your 401k is.

1. Determine your stock-to-bond ratio.

Most custodians offer a pie chart with this information. Login to your 401k account to view the percentage of your money that is invested in stocks and how much is in bonds. In general, it’s aggressive to invest 70% or more in stocks. Once you know your level of risk you should understand if you can handle the ups and downs of that risk emotionally, and also how much risk your long-term planning calls for. 

2. Check your balance at the end of each month.

For example, if an investor’s account jumped from $100K to $110K (10% growth in a month) then they probably have invested most of their money in stocks. This will feel great when things are going up, but that investor needs to be prepared to see some significant paper losses when we experience a downturn like what we just saw in March and April.

So, how can an investor strike a good balance? And when should an allocation change from aggressive to conservative?

As you get closer to taking distributions, it’s reasonable to scale back your stock exposure and move money into safe havens like highly rated corporate bonds and treasury bonds. I say “taking distributions” instead of “retirement” because your plan should be based on when distributions begin. Retirement is a type of distribution event, but not necessarily the only one.

However, if a client has most of their income needs satisfied from other sources and has the emotional appetite to handle the swings, I can see them continuing a more aggressive allocation even in retirement (70% or more in stocks). However, if a client is relying heavily on their portfolio then generally a more conservative allocation is recommended (50% or less in stocks).

Matthew Trujillo, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® A frequent blog contributor on topics related to financial planning and investment, he has more than a decade of industry experience.

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401(k) plans are long-term retirement savings vehicles. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

Post-Election Market Update

11/11/2020 - Watch for market commentary from our Director of Investments, Angela Palacios, CFP®, AIF®. Let's take a close look at how the presidential election impacted the stock market.

Tune in for market commentary from our Director of Investments, Angela Palacios, CFP®, AIF®. Let's take a close look at how the presidential election is impa...

Year-End Tax Planning

11/17/2020 - New tax law changes and the impact of Covid-19 may have left you with some questions. Kali Hassinger, CFP®, CDFA® & Bob Ingram, CFP® explain what you need to know!

2021 is an critical tax planning year. New tax law changes and the impact of Covid-19 may have left you with some questions. Kali Hassinger, CFP®, CDFA® & Bo...

7 Ways The Planning Doesn't Stop When You Retire

Contributed by: Sandra Adams, CFP®

Most materials related to retirement planning are focused on “preparing for retirement” to help clients set goals and retire successfully. Does that mean when goals are met, the planning is done? In my work, there is often a feeling that once clients cross the retirement “finish line” it should be smooth sailing from a planning standpoint. Unfortunately, nothing could be further from the truth. For many clients, post-retirement is likely when they’ll need the assistance of a planner the most!

Here are 7 planning post-retirement issues that might require the ongoing assistance of a financial advisor:

1. Retirement Income Planning 

An advisor can help you put together a year-by-year plan including income, resources, pensions, deferred compensation, Social Security, and investments.  The goal is to structure a tax-efficient strategy that is most beneficial to you.

2. Investments 

Once you are retired, a couple of things happen to make it even more important to keep an active eye on your investments: (1) You will probably begin withdrawing from investments and will likely need to manage the ongoing liquidity of at least a portion of your investment accounts and (2) You have an ongoing shorter time horizon and less tolerance for risk.

3. Social Security

It is likely that in pre-retirement planning you may have talked in generalities about what you might do with your Social Security and which strategy you might implement when you reached Social Security benefit age. However, once you reach retirement, the rubber hits the road and you need to navigate all of the available options and determine the best strategy for your situation – not necessarily something you want to do on your own without guidance.  

4. Health Insurance and Medicare

It’s a challenge for clients retiring before age 65 who have employers that don’t offer retiree healthcare. There’s often a significant expense surrounding retirement healthcare pre-Medicare.

For those under their employer healthcare, switching to Medicare is no small task – there are complications involved in “getting it right” by ensuring that clients are fully covered from an insurance standpoint once they get to retirement.  

5. Life Insurance and Long-Term Care Insurance

Life and long-term care insurances are items we hope to have in place pre-retirement. Especially since the cost and the ability to become insured becomes incredibly difficult the older one gets. However, maintaining these policies, understanding them, and having assistance once it comes time to draw on the benefits is quite another story.  

6. Estate and Multigenerational Planning

It makes sense for clients to manage their estate planning even after retirement and until the end of their lives. It’s the best way to ensure that their wealth is passed on to the next generation in the most efficient way possible. This is partly why we manage retirement income so close (account titling, beneficiaries, and estate documents). We also encourage families to document assets and have family conversations about their values and intentions for how they wish their wealth to be passed on. Many planners can help to structure and facilitate these kinds of conversations.

7. Planning for Aging

For many clients just entering retirement, one of their greatest challenges is how to help their now elderly parents manage the aging process. Like how to navigate the health care system? How to get the best care? How to determine the best place to live as they age? How best to pay for their care, especially if parents haven’t saved well enough for their retirement? How to avoid digging into your own retirement pockets to pay for your parents’ care? How to find the best resources in the community? And what questions to ask (since this is likely foreign territory for most)? 

Since humans are living longer lives, there will likely be an increased need and/or desire to plan. In an emergency, it could be difficult to make a decision uninformed. A planner can help you create a contingency plan for potential future health changes.

While it seems like the majority of materials, time, and energy of the financial planning world focuses on planning to reach retirement, there is so much still to do post-retirement. Perhaps as much OR MORE as there is pre-retirement. Having the help of a planner in post-retirement is likely something you might not realize you needed, but something you’ll certainly be glad you had.

Sandra Adams, CFP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® and holds a CeFT™ designation. She specializes in Elder Care Financial Planning and serves as a trusted source for national publications, including The Wall Street Journal, Research Magazine, and Journal of Financial Planning.

How to Finish Financially Strong in 2020

No one could have predicted what 2020 had to offer. The stock market saw wild swings that hadn’t occurred since the 2008 recession. Concerns over Iranian tensions and an oil war quickly took a backseat as Covid 19 spread across the world. Many other notable things happened this year, but let’s discuss how you can end the year financially strong.

Here are the top 8 tips from our financial advisors.

1. Consider rebalancing your portfolio.

The stock market’s major recovery since March may have left your portfolio overweight in some areas or underweight in others. Be sure that you’re taking on the correct amount of risk by rebalancing your long-term asset allocation.

2. Assess your financial goals.

Starting now, assess where you are with the financial goals you’ve set for yourself. Take the necessary steps to help meet your goals before year-end so that you can begin 2021 with a clean slate.

3. Know the estate tax rules.

For those with estates over $5M, be sure to review your potential estate tax exposure under both a Republican and Democrat administration.

4. Review your employer benefits package and retirement plan.

Open enrollment runs from Nov. 1 through Dec. 15. Review your open enrollment benefit package and your employer retirement plan. Don’t gloss over areas such as Group Life and Disability Elections as most Americans are vastly underinsured. Many 401k plans now offer an “auto increase” feature which can increase your contribution 1% each year until the contribution level hits 15%, for example.  

5. Take advantage of tax planning opportunities.

Such as tax-loss harvesting in after-tax investment accounts or Roth IRA conversions. Many folks have a lower income in 2020 which could present an opportunity to move some money from a traditional IRA to a Roth IRA while in a slightly lower tax bracket.

6. Boost your cash reserves.

It’s so important to have cash savings to cover unexpected expenses or income loss. Having a solid emergency fund can prevent you from having to sell investments in a down market or from taking on high-interest debt. Ideally, families with two working spouses should have enough cash to cover at least 3 months of expenses. While single income households should have cash to cover six months. Take the opportunity to review your budget and challenge yourself to find additional savings each week through year-end.

7. Contribute more to your retirement plan.

Increase your retirement account contributions for long-term savings, great tax benefits, and free money (aka an employer match).

Contributions you make to an employer pre-tax 401k or 403b are excluded from your taxable income and can grow tax-deferred. Roth account contributions are made after-tax but can grow tax-free.

If your employer plan and financial situation allow for it, you can accelerate your savings from now until the end of the year by setting your contribution level to a high percentage of your income.  Many employers allow you to contribute up to 100% of your pay.

8. Give to charity.

Is there a charity you would like to support? Make a charitable donation! Salvation Army and Toys for Tots are popular around this time.

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 the author and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Rebalancing a non-retirement account could be a taxable event that may increase your tax liability. Conversions from IRA to Roth may be subject to its own five-year holding period. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals of contributions along with any earnings are permitted. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion. Matching contributions from your employer may be subject to a vesting schedule. Please consult with your financial advisor for more information. 401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty. Contributions to a Roth 401(k) are never tax deductible, but if certain conditions are met, distributions will be completely income tax free. Unlike Roth IRAs, Roth 401(k) participants are subject to required minimum distributions at age 72.

Recently Divorced? Tax Strategies to Save Money in 2020

Contributed by: Jacki Roessler, CDFA®

It’s an opportune time to discuss tax planning for the recently divorced. Let’s turn to a professional, my colleague Matt Trujillo, CFP®, for his year-end tax tips. Many of my clients have the benefit of working with my colleague Matt for their post-divorce financial planning needs. Matt is an enthusiastic advocate for clients when it comes to tax savings.

Right now, newer divorcees may be in a unique position to take advantage of money-saving tax strategies in 2020. 

Although they may be receiving substantial income, much of it might be non-taxable. Like child support for example. Any spousal support that began after January 1, 2019, is also treated as a non-taxable income. As some divorcing clients transition back into the workforce over the next few years, they may find themselves in the lowest tax bracket of their life. Low tax brackets can be used to an investors’ advantage when they have tax-savvy advice. 

1. One of Matt’s key strategies is converting traditional IRA dollars into Roth IRAs. How do Roth Conversions save taxpayers over the long term? Money converted is treated as ordinary income. The long-term benefit of Roth IRA accounts is that the money grows income tax-free versus income tax-deferred growth in regular IRAs. When it’s withdrawn in retirement, there is no tax due. Plus, there are no required minimum distributions (RMDs) on Roth IRAs whereas RMDs are required beginning at age 72 in Regular IRAs. So while taxes are due at the time of conversion, Matt reminded me that clients in transition can take advantage of “locking in” their lower tax rate today by converting IRAs when they are in an extraordinarily low tax bracket. Of course, this doesn’t make sense for every divorced person, and often, it takes some careful planning that incorporates converting a set amount each year for years to be the most tax-efficient.

   Money converted into Roth IRAs must come out of the regular IRA by the end of the year to qualify.

2. Another important strategy Matt employs is tax-efficient investing which involves tax-loss harvesting, tax gain harvesting, and appropriate asset allocation. Many divorced clients don’t realize the amount of money they lose on tax-inefficient investing; what is often referred to as “tax drag”. Loss harvesting involves selling positions that have decreased in value to realize a “capital loss” that offsets any capital gains realized in the same tax year. Losses can even be realized today and “carried over” to future tax years. With the market performance this year, many investors will have to report significant mutual fund capital gains. Offsetting gains with losses can save immediate dollars today. 

   Matt shared with me that tax-efficient asset allocation strategies are a key component of smart investing that novice investors may not be aware of. For example, do clients own municipal bonds and low turnover funds inside of their IRA accounts? These types of assets are best utilized in taxable accounts where their low anticipated return is in correlation with their tax efficiency. Holding them inside of retirement accounts is an unnecessary redundancy that may limit growth opportunities. 

The greatest takeaway for every new divorcee is that they should sit down with their financial advisor and tax professional to determine what they can do right now. If you wait until 2021, you may be leaving money on the table that could be in your pocket.

Any opinions are those of Jacki Roessler and Matt Trujillo and not necessarily those of Raymond James. This material is being provided for informational purposes only and is not a complete description, nor is it a recommendation. While we are familiar with the tax issues presented here, as financial advisors with Raymond James, we do not provide specific tax advice. You should speak to the appropriate tax professional in regards to your particular situation. All investing involves risks, including loss of principal amount invested. No investment or tax strategy can guarantee your objectives will be met. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

Want to “Go Paperless” for Fund Prospectuses?

Contributed by: Nicholas Boguth

If you’d prefer not to receive fund prospectuses by mail, there is a way to enroll in a paperless option.

Check the front of the envelope that you receive from Raymond James. It will have the instructions pictured below. There will be a box in the top right corner with a 20-digit number in it. Go to FundReports.com or call (866) 345-5954 and enter the 20-digit code.

From there, you have the 3 options below to choose from:

1. “Go Paperless” – to receive the prospectuses by email.

2. Receive a “Notice” – rather than the full prospectus, this will be a smaller piece of mail letting you know that a prospectus is available online if you’d like to access it.

3. Receive a “Paper Report” – to continue to receive the full prospectuses by mail.

Having trouble?

If you are a current client or have a Raymond James account, please give us a call. If not, we suggest calling the customer service number on your statement or calling your financial adviser.

If you are interested in hiring a financial adviser, give us a call! The Center is a financial planning firm based in Southfield, MI that serves clients nationwide.

What Are The Hidden Costs Of Buying A Home?

Contributed by: Robert Ingram, CFP®

Today’s historically low-interest rates can mean a more affordable mortgage payment. However, when buying a home within your budget, it’s important to consider the costs beyond the mortgage.

Let’s begin with the costs to purchase a home.

Even while carrying a mortgage, you will need to make a down payment. While there are low down payment loans, try to put down at least 20% of the purchase price. Otherwise, your loan may have a higher interest rate and you could face additional monthly costs such as mortgage insurance.

You will have closing costs, which can include things such as loan origination fees for processing and underwriting the mortgage, appraisal costs, inspection fee, title insurance, pre-paid property taxes, and first year’s homeowner’s insurance. Generally, you should expect to pay between 3-5% of the mortgage amount.

Now, you will have ongoing costs to live in your home.

Annual property taxes average about 1% of the home value nationwide, but the tax rates can vary widely depending on the city or town. Keep property taxes top of mind when you are looking at different communities.

Homeowner’s insurance is another annual cost that not only depends on the value of the home and the contents within it you are covering, but also on the state and local community. This cost generally ranges between $500-1,500 per year, sometimes more.

If your home is a condominium or a single family home, you should expect annual or monthly homeowner’s association fees that cover the care of common areas, the grounds, clubhouses, or pools. Depending on the number of amenities and of course the location, average fees range from $200-400 per month.

While you may be used to paying some utilities as a renter, the size of your new home could significantly increase your utility rates. Going from an 800 square-foot apartment to a 2,500 square-foot house could double or triple the costs to heat it, cool it, and to keep the lights on. Add your local area water and sewer fees and your utilities could easily reach $500 per month or more.

Going from renting to homeownership also means having to maintain the new home (both inside and out). Things can be regular ongoing maintenance like lawn care and landscaping, or larger projects like painting, roof repair, furnace, and appliance replacement. Consider the tools and equipment you would need to buy or the services you would hire to do the work.

Finally, there is another hidden cost that can put a dent in your budget, filling up the house.  A home with more rooms can mean more spaces that “need” furniture and other decorative touches. The costs of furnishings can be several thousands of dollars to tens of thousands of dollars. Without proper planning, it can be all too easy to rack up those credit card bills and have a mountain of debt as you move into your new home.

Robert Ingram, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® With more than 15 years of industry experience, he is a trusted source for local media outlets and frequent contributor to The Center’s “Money Centered” blog.

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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 Bob Ingram, and not necessarily those of Raymond James. Raymond James Financial Services, Inc. does not provide advice on mortgages. Raymond James and its financial advisors do not solicit or offer residential mortgage products and are unable to accept any residential mortgage loan applications or to offer or negotiate terms of any such loan. You will be referred to a qualified professional for your residential mortgage lending needs.

Top 3 Reasons Why You Need A Financial Planner

Contributed by: Josh Bitel, CFP®

1) Financial planning is complicated, but taking advice from a professional is easy.

In the age of technology, where a vast array of resources are at our immediate fingertips, “do-it-yourself” has become a much more popular strategy among Americans. For most projects, DIY is great for cost savings, but in the world of finance, this is not always practical. In financial planning, daily monitoring of your investments is sometimes required. Consider the current pandemic, with market volatility all over the map, investment opportunities can come and go in the blink of an eye. If you aren’t keeping a close eye on your finances, these opportunities can be missed. Most DIY investors already have a full-time job, so they simply do not have the time capacity that a financial planner has. Not to be overshadowed by the technical aspects of financial planning, behavioral finance is arguably just as important. As a third party, a financial planner can help mitigate the emotions that go into investing.  As my colleague eloquently wrote, investing is a lot like being a sports fan, and your financial planner can help you stay the course when the going gets rough.

2) No matter how simple or complex your financial issues may seem, an advisor can help.

Many people I’ve spoken to seem to think that financial planning is only required when you have a complex financial picture. However, this is a misguided belief, most people seek out financial help far too late in life. Financial advisors, especially CFP® professionals, are trained to evaluate both simple and complex issues and map out various routes for the best financial future. Another common belief is that financial advice is only needed when you are about to retire, however some of the most productive conversations I have had with clients have been centered around about getting on the right path early and setting your finances on cruise control.

3) Financial planning is not “only for the rich”.

One response I frequently hear that makes me squirm in my seat is that “financial planning is only for the wealthy”. Financial planning can be useful in several life events, such as a change in marital status, a job change, a growing family, or even just simply feeling overwhelmed with your financial matters. The objective of financial planning is to set someone on a path to reach their financial goals. Regardless of where you start or how large your goals may be, accomplishing those goals is what matters. Whether it be saving for a home, understanding your retirement plan at work, or establishing a debt payoff plan, a financial planner can help you make sure all your bases are covered.

Josh Bitel, CFP® is an Associate Financial Planner at Center for Financial Planning, Inc.® He conducts financial planning analysis for clients and has a special interest in retirement income analysis.

Will Social Security Recipients Get A Raise In 2021?

Contributed by: Kali Hassinger, CFP®, CDFA®

Social Security benefits for nearly 64 million Americans will increase by 1.3% beginning in January 2021. The adjustment is calculated based on data from the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI‐W, through the third quarter. This cost of living adjustment (COLA for short) is among one of the smallest received, other than when the adjustment was zero.

The Social Security taxable wage base will increase to $142,800 for 2021, which is a 3.7% increase from $137,700 in 2020. This means that employees will pay 6.2% of Social Security tax on the first $142,800 earned, which translates to $8,854 of tax. Employers match the employee amount with an equal contribution. The Medicare tax remains at 1.45% on all income, with an additional surtax for individuals earning over $200,00 and married couples filing jointly who earn over $250,000.

Medicare premium increases have not yet been announced, but trustees are estimating Part B premiums will increase by about $9 or less per month for those not subject to the income‐related surcharge. Unfortunately, the Social Security COLA adjustment is often partially or completely wiped out by the increase in Medicare premiums.

For many, Social Security is one of the only forms of guaranteed fixed income that will rise over the course of retirement. The Senior Citizens League estimates, however, that Social Security benefits have lost approximately 33% of their buying power since the year 2000. This is why, when working to run retirement spending and safety projections, we factor an erosion of Social Security’s purchasing power into our clients’ financial plans.

Kali Hassinger, CFP®, CDFA®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.