Hassan, I would say one important thing to keep in mind when choosing individual investments is to make sure you're properly diversified among multiple asset classes (i.e. stocks, bonds, real estate cash, etc.) and around the world, regardless of market conditions. That way, you're able to capture investment returns regardless of where they occur. As the old saying goes, "don't stick all your eggs in one basket."
Hi Jack, first, please refer to an earlier post where we talked about actually taking small distributions from your IRA before actually being forced to take RMDs. Taking small amounts out now, while taking full advantage of your lower tax brackets, can help lower those future RMDs. Note, only withdraw an amount that enables you to stay in lower tax brackets -- be sure not to take out so much that it forces you into the higher tax brackets. Also, note that withdrawing from the IRA now could be done via traditional withdrawals, or by converting those small amounts to Roth IRA dollars. Once you are taking money out in the form of RMDs, you don't have a lot of options. You can certainly reinvest those dollars in taxable investment accounts, but all gains will be subject to capital gains taxes. Fortunately, you can minimize those annual capital gains by utilizing tax-efficient ETFs. iShares has some great tax-efficient ETF that cover most major asset categories.
Bobby for both individuals AND our country.
And not to worry, those who sell products usually are making a lot of money......their clients just don't "see" IT.
Jack, if you don't think you'll need the money from your RMDs to live off of AND you're charitably inclined, it might be worth looking into donating the RMD to a favorite charity:-) In previous years, Congress has renewed a provision allowing IRA owners to donate RMDs to charity and avoid taxation. I'm not a CPA, but I believe we're still waiting to see whether or not Congress will do that again this year (and in future years). Either way, you'd avoid taxes on that money in the future (of course, you wouldn't have the money any longer either!).
Bobby in Colorado -- frankly, you are 100% correct. Any financial advisors who are charging 1% for simply choosing investments for their clients will be out of business very soon. Robo advisors can do that job for clients at a quarter of the cost, and many people (like yourself) are capable of doing that on their own. The financial advisors who will survive will provide expanded services, such as retirement and tax planning, working with client's estate attorneys and accountants, etc. Also, some people simply need the help of financial planners to keep their emotions in check. Personally, I think a good chunk of the value I provide to clients is keeping them from making a mistake when emotions are raised. For some, having someone watch their back when the world seems to be collapsing can be pretty valuable.
Hi Bobby, I think you're on to something here. There is a gradual shift that planners need to offer more than just investment advice or insurance planning. This is a very product focused approach and the industry is changing. I can probably speak on behalf of all the advisors here that we all bring more to our client relationships that just these two areas of focus. In fact to do planning, one has to look at the other areas within a plan, i.e. estate and tax matters, to name two. A
ll of these areas come into play when planning for someone.
Great thought Tyler. I wouldn't have thought about bringing up the value of charitable contributions to Jack, but that is certainly relevant.
Bobby, I love that Lon noted the emotional component. I tell clients that what I call the "personal" alpha I will provide will be the most valuable part of our relationship. Our relationship is what helps them do the right thing at the right time, even if it hurts.
Bobby, Lon brings up a great point! Research shows the average investor's returns are much less than a basic market index fund. Much of that is due to behavioral biases many of us have that make it difficult to maintain discipline during a market downturn, so a big part of our job as planners is to help our clients stick to their plan during times of market chaos.
Bobby, between 1986 and 2002 the S&P 500 returned 12.2% yet the average large cap mutual fund investor made less than 3%!!!! There is only one reason for this...buying high and selling low. The emotional part is VERY important to MANY people.
Thanks so much for reading, Hassan!
Dave, you've just identified what financial planning is all about. I like to do these kinds of projections interactively with clients, so we can see how each variable could impact their plan. Other issues such as possible long term care costs in retirement could impact how much a client might want to leave to their children. On the other hand, I've had clients decide that they're going to buy long term care insurance to be certain that they will leave an inheritance to their kids.
Hi Dave. A good financial plan goes through various stress-tests. Retirement projections should include "worst-case" scenarios. What if we go through an extended period with flat returns? What if inflation goes through the roof? What if taxes rates increase? What if I live 10 years longer than I thought I would? A good financial plan should provide answers to all these types of questions. If you are stressed about the unlimited number of potential obstacles out there, working with a financial planner who can address each of these concerns is key.
Hello Dave - I work with clients to test the statistical likelihood of their retirement goals. I also run various "what if" scenarios to illustrate how retirement might look using various assumptions. It really is a personal decision and each person has unique needs and feelings about retirement that need to be addressed.
Dave, first I should say that the earlier the conversation starts, the better. It is much easier to make simple adjustments when you are younger rather than be faced with impossible ones when it is too late....and I have had 60 year olds who make over 500K annually that have VERY LITTLE in savings (when it would take about 10 million to maintain their lifestyle). There are several components: how much do I have, how much can I save, what do I want in retirement, and how much risk am I willing to take. A good plan will balance out all of these to come up with an answer that is right for you.
Great point about long-term care, Delia. One more potential hazard out there. Still, a lot of times I have clients who learn through a financial plan that they are in better shape then they thought. Frequently clients visit the office worried about all the potential financial hazards out there. When we are done revising their financial plan, they often leave confident that even if these worst-case scenarios play out, they are capable of handling it. Even if they need to pay for their own long-term care policy for an extended period of time, they may still be capable of leaving enough money to their surviving spouse and their children that they are comfortable and happy. On the other hand, sometimes client's see they aren't there yet -- and that's ok! At least we have determined that we aren't yet where we want to be and we can develop a plan to get there.
Lon, revisiting a plan after a market downturn can often reassure clients that in the long-run, the current events won't impact their plan that much. Also, planner often bring issues to the table that clients haven't even considered.
Lon, you're right, there's nothing more satisfying than working with a client on a retirement projection and having them say "Wow, I'm better off than I thought! This really puts my mind at ease."
Joseph, Is that pension from a job where you paid into Social Security?
Joseph, when answering this question, remember that it is not about "break even." It is about providing for the possibility that you will live a long time.
Dave, you have "enough" when you can afford to accomplish your goals. That might include providing income retirement, charitable giving, leaving money to heirs, starting a business, or any number of other goals. For some folks who live frugally and have a secure pension and social security, hat might mean $100,000. For others, it might mean $100 million. That's why it's so important to work with an advisor (and check out calculators like the one shared below) to get a better idea of your "number."
Bobby in Colorado: you are right in that most of us probably wouldn't say that, even though it is a very accurate and secure strategy for many people. The reason we wouldn't make that as a blanket statement is dependent on the age of the client. For a client who is 70 years of age, you would have a hard time finding a period of investment returns where the strategy wouldn't produce sufficient returns to last the client throughout their life. However, for a client who is age 35, the 4% rule may not get the job done. In fact, the full rule is that generally speaking, a 4% withdrawal rate should enable a portfolio to last for about 30 years. Further, some industry experts, such as Wade Pfu, suggest that with the way the market looks now, a 2% withdrawal rate might be more appropriate going forward.
Joe, the answer to that question is determined by your anticipated living expenses, expected investment returns, life expectancy of you (and your spouse), and a number of other things. With that said, if you can afford it, many times it makes sense to postpone taking Social Security until age 70.
Joe are you married? Or are you divorced with a high earning ex spouse? If so, there are a myriad of possible strategies. For couples the planning should be done based on both of their benefits. For divorced people, they may be able to take a spousal benefit equal to half their ex's benefit at normal retirement age and delay their own benefit until 70. Current income and the largest possible benefit...the best of all worlds.
Lon's got a great point Bobby! The problem with "rules of thumb" like the 4% rule is that not everyone's thumb is the same size. It may be a good starting point or it may not be. There are a lot of factors to consider.
Never say "never" or "always." Alas it is almost always more complicated than that. And sometimes the littlest fact can be use to take great advantage of an opportunity.
"The problem with rules of thumb is that not everyone's thumb is the same size." Am I the only one here who hasn't heard that before? I like...
The article posted below is a great resource and good starting point to inform yourself regarding SS optimization options.
Thanks Lon! Not sure where I got that one from....it's too good for me to have thought that up on my own.
Pete, are you asking about whether you should change your asset allocation now that you're 60? I'm not clear on what you mean when you ask "what should I be doing with my money?"
Pete, sounds like you have a pretty good handle on things. A diversified portfolio between stocks and bonds, and diversified from a tax perspective. Do you have a range of stocks that includes large cap, small cap, and international stocks? Do you own a range of bonds, ranging from US government, corporate, and international bonds? Make sure you are diversified all around. Also, when is the last time you looked at how a 50% stock / 50% bond portfolio has performed over time? How did such an allocation perform during 2008? That level of loss has happened before, and it is going to happen again. Is that an amount of volatility that you are comfortable with?
Hassan, I would say one important thing to keep in mind when choosing individual investments is to make sure you're properly diversified among multiple asset classes (i.e. stocks, bonds, real estate cash, etc.) and around the world, regardless of market conditions. That way, you're able to capture investment returns regardless of where they occur. As the old saying goes, "don't stick all your eggs in one basket."
Hi Jack, first, please refer to an earlier post where we talked about actually taking small distributions from your IRA before actually being forced to take RMDs. Taking small amounts out now, while taking full advantage of your lower tax brackets, can help lower those future RMDs. Note, only withdraw an amount that enables you to stay in lower tax brackets -- be sure not to take out so much that it forces you into the higher tax brackets. Also, note that withdrawing from the IRA now could be done via traditional withdrawals, or by converting those small amounts to Roth IRA dollars. Once you are taking money out in the form of RMDs, you don't have a lot of options. You can certainly reinvest those dollars in taxable investment accounts, but all gains will be subject to capital gains taxes. Fortunately, you can minimize those annual capital gains by utilizing tax-efficient ETFs. iShares has some great tax-efficient ETF that cover most major asset categories.
Hi Hassan, the Vanguard funds you mentioned all have great track records and if you are looking for a more active bond manager Dodge and Cox is a good firm. Just know what your buying. For example the DODIX fund has more exposure to corporate and securitized debt versus treasuries where the Vanguard total bond fund has more treasuries and less in corporate and securitized debt. You can learn more about the funds through a popular resource the Morningstar or Kiplinger's research tool found below: http://http://www.kiplinger.com/fronts/channels/investing/index.html
Dave, you've just identified what financial planning is all about. I like to do these kinds of projections interactively with clients, so we can see how each variable could impact their plan. Other issues such as possible long term care costs in retirement could impact how much a client might want to leave to their children. On the other hand, I've had clients decide that they're going to buy long term care insurance to be certain that they will leave an inheritance to their kids.
Hello Dave - I work with clients to test the statistical likelihood of their retirement goals. I also run various "what if" scenarios to illustrate how retirement might look using various assumptions. It really is a personal decision and each person has unique needs and feelings about retirement that need to be addressed.
