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How to Spend Money Only on Things That Will Make You Happy

How to Spend Money Only on Things That Will Make You Happy

How can you enjoy life and save for your future at the same time?

Choosing where to spend your money is harder than ever. With so many technological advances, it’s tough to not want every gadget that comes out.

Take the high-tech doorbell, for instance. Not only does it ring, but you can monitor it on your phone to see who is there and talk with them from wherever you are.

Traeger, a smoker grill, has disrupted the barbeque industry. The problem with a smoker is it takes hours to cook, and you need to be close by to monitor it. Traeger solved that problem by using wood pellets on a belt that is controlled by your phone so you can make adjustments on the go.

In the world of beauty, we have hair and eyelash extensions, fillers, teeth whitening, and eyebrow blading techniques to enhance your already great looks. All of them are expensive.

We could go on and on with technological improvements in every area of our lives. The result is that we are bombarded with choices of appealing things to spend our money on. So the question is, how do we make those choices when need to save up for planned expenses, pad an emergency fund, and invest for retirement?

Consider what makes you happy

There is a difference, however, between pleasure (immediate gratification with a dopamine high) and happiness (contentment and bliss). Understanding the difference between pleasure and happiness and spending your money where your happiness lies could be the key.

Entrepreneur and thought leader Seth Godin wrote in an article titled “The Pleasure/ Happiness Gap” that there is a distinct difference between pleasure and happiness. “Pleasure is short-term, addictive and selfish. It’s taken, not given. It works on dopamine,” he wrote. “Happiness is long-term, additive and generous. It’s giving, not taking. It works on serotonin.”

Godin goes on to say, “Marketers usually sell pleasure … On the other hand, happiness is something that’s difficult to purchase. It requires more patience, more planning, and more confidence. It’s possible to find happiness in the unhurried child’s view of the world, but we’re more likely to find it with a mature, mindful series of choices, most of which have to do with seeking out connection and generosity and avoiding the short-term dopamine hits of marketed pleasure.”

This struck a chord with me because I don’t believe many people distinguish between pleasure and happiness when it comes to their money. Understanding the difference and putting our money where our happiness truly is can make or break our retirement planning — or determine whether we can retire at all.

Over our lifetime, millions of dollars flow through our households

Yet it’s challenging to siphon off those funds into investment accounts when so many things grab our attention.

In fact, Mark Zuckerberg, CEO and founder of Facebook, shared in his congressional testimony in April 2018 that ads on Facebook allow the service to be free of cost to all the users, and as the company develops new models, he vows there will always be a free version.

If you are a social media user, you’ve seen posts come through that say “sponsored.” Have you seen ads on social media that specifically target things you like? Sometimes it feels like someone is reading your mind.

A sponsored ad for some outdoor pants for cross-country skiing, snowshoeing, or hiking came across my Facebook feed. They seemed perfect for me and were a reasonable price. I purchased them, even though I really didn’t need another pair.

My neighbor, who is about my age and an avid hiker and skier noticed my pants and mentioned she saw them on Facebook, too. Since I post quite a few pictures of outdoor adventures, they must have pegged both of us as the right demographic for their product. Though I do like the pants and have worn them many times, I feel “marketed to” and “sold.”

This type of marketing results in a parting of ways between you and your hard-earned money for short-term pleasure. If you are a late starter in saving for retirement or had a few financial setbacks and aren’t on track for retirement, you need to be saving your money for long-term happiness.

A higher and better use of your money would be investing rather than spending. If you need to catch up, wasting money isn’t an option for you. Your long-term happiness is at stake.

You may not think 50 bucks here or there makes a difference, but it does. It all adds up.

Here’s how to find out where your money is really going

Track your spending for one month to see where your money is going. Use an app or a little notebook. Account for every dollar like a nutritionist asks you to track every single thing you eat or drink in a food tracker — you have to account for even a ketchup packet.

Then analyze your spending to see if your money is going where your happiness lies or just toward a quick dopamine boost. Before you make a knee-jerk purchase, consider whether it is something you need or something you have carefully considered and really want. If so, save up for it and fit the purchase into your overall financial plan.

In my case, the cross-country ski pants are a reminder of something I like (they are really stylish) but absolutely didn’t need. Because I realize that, I’m going to make sure I get a ton of use out of them. Going forward, I will be a more wary shopper.

What about you?  What marketer has your number?  Before you make a purchase, what questions are you going to ask yourself?

Author Bio

Nancy Anderson writes about living your richest life while transitioning to retirement, working in retirement and personal finance. She firmly believes that we can have it all – a rewarding career and fulfilling personal life while planning for retirement.

Source: Forbes
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Adapting the Home Mortgage to the Retirement Funds Crisis

Adapting the Home Mortgage to the Retirement Funds Crisis

The Retirement Funds Crisis arises out of increasing life expectancy, and the shift from defined benefit pension plans provided by employers to defined contribution plans funded mainly by retirees.

The home mortgage affects the crisis, one way or the other. At worst, the home mortgage is carried into retirement, with the required monthly payment constituting an additional drain from the retiree’s pocket. At best, the mortgage has long since been repaid, clearing the decks for a possible reverse mortgage that will put money back into her pocket.

This article and the several that follow describe a number of policy changes that will encourage faster loan balance pay-downs, without reducing affordability.

Equity-Growth and Affordability

Since the 1930s, public policy has focused on the affordability of mortgages rather than the rapidity of repayment. This affordability bias reached its peak in the years leading up to the financial crisis, which saw the emergence of interest-only provisions tacked onto the first 5 or 10 years of 30-year mortgages — which meant that for 5 or 10 years there was no pay down in the loan balance at all. Option ARMs went even further, allowing borrowers to make payments that didn’t fully cover the interest, which resulted in an increase in the loan balance – called “negative amortization”.

These instruments are gone and good riddance, but affordability continues to be an important policy objective. Hence, the new objective should be to find ways to accelerate equity growth that do not impair affordability. Given that restriction, the most direct approach to faster equity growth, shortening the maximum allowable term, is off the table.

Eliminating the Rigid Monthly Payment Requirement

The fixed monthly payment required on all home mortgages is a design for robots that leaves no scope for discretion. In particular, there is no way for the borrower to accumulate reserves in order to skip some future payments. The borrower who wins the lottery and pays off half the balance must make the same payment on the next due date.

The requirement of a fixed monthly payment could be replaced by a schedule of required balances, declining month by month over the life of the loan. The initial required payment would be fully amortizing, calculated in the same way as it is now, but beginning in month 2 the required payment would be whatever amount is needed to meet the maximum balance in that month. If the borrower pays more than the fully amortizing payment in some months, he would be able to pay less in subsequent months while meeting the balances required in those months.

Going from a minimum required payment to a maximum required loan balance allows borrowers to accumulate a reserve within the mortgage, which provides payment flexibility. The larger the reserve from making payments in excess of the initial fully-amortizing payment, the longer the borrower can go with reduced payments or none at all.

Importance of Reserve Accounts

There are two reasons why balances on the proposed mortgage will be paid down faster. The first is that the practices that a borrower adopts to generate a reserve will serve as well to pay off the balance early. For example, the borrower who uses a periodic bonus to increase her reserve is very likely to continue with the practice until the loan is fully repaid. .

In addition, the required balance mortgage will dislodge “payment myopia”, which is the widespread practice of basing financial decisions solely on the affordability of monthly payments, without considering how the decisions will affect wealth. Consumers who are payment myopic seldom retire with significant wealth. The required balance mortgage forces the borrower to focus on wealth.

A Right to Recast the Payment Will Further Encourage Creation of Reserve Accounts

For many borrowers, becoming mortgage-free is a long way off, and benefits deferred so long may not provide enough incentive to reallocate funds to an extra payment plan. Providing all mortgage borrowers with the right to recast their mortgage will provide an added incentive for borrowers to develop and stick to an extra payment plan. The cost to lenders would be minimal.

A mortgage recast is a change in the monthly payment that makes the payment fully-amortizing. On existing mortgages, recasts are mandated when the payment is less than fully amortizing (as on a loan with an interest-only provision) but they are not allowed when the payment is more than fully amortizing without the lender’s permission.  Allowing recasts at the borrower’s discretion when the borrower has accumulated a reserve would encourage them to make the extra payments that generate the reserve.

Adapting Loan Servicing Systems

To realize the full potential of the required balance mortgage, servicing systems must become interactive. A borrower at any time should be able to “try out“ alternative payment schemes and immediately see the implications for future loan balances and required payments.

Source: Forbes
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Variable Annuities Can Be Good, Bad or Ugly

Annuities Can Be Good, Bad or Ugly

Annuities can be good, bad or downright ugly. How can you tell if your annuity is good, or if you should consider purchasing one? And what’s an annuity, anyway?

In this two-part series, I’ll begin with a review of the “bad and ugly” annuities (most variable annuities). In Part 2, to follow, I’ll review “good” annuities (primarily immediate and deferred fixed annuities).

How Variable Annuities Work:

Annuities have two phases: 1) the investment/accumulation phase and 2) the payout phase. During the investment/accumulation phase, clients place taxable or after-tax assets in an annuity, invest in the investments offered by the annuity company and sit back and wait. Like any investment, the investor hopes to see his/her investments appreciate. At a certain point, the annuitant (annuity owner) flips a switch and converts this account into a stream of income (note: some annuitants never “flip the switch” by choice). When this happens, the size of the monthly annuity payment stream is based upon actuarial tables. If you live past your predicted life span, you continue to collect payments and you “won” in terms of getting more out of your annuity. If you live a shorter life than the actuarial tables predict, you’ve lost in two ways: your life ended prematurely and so did your payment stream – unless you have a joint annuity that continues to pay your annuity joint owner (spouse).

Objections to Variable Annuities:

It all sounds wonderful so far but Fee-Only advisors like myself have reason to be suspicious of advisors who flog variable annuities. I’ve been called by prospective clients who related that advisors locked up most of their liquid investments into annuities. The annuity seller collected a tidy commission while the client is handcuffed and subject to the annuity rules and fees.

Here are some of the problems with variable annuities and indexed variable annuities:

  1. Annuities are complex and hard to understand (good for the seller, bad for the purchaser). In my opinion, the annuity investor is easily confused and dazzled by projected return charts and promises of “never running out of money in retirement.”
  2. Annuities can be expensive (poor disclosure by the seller regarding expense and mortality charges + expensive investments in the line-up).
  3. Annuities can be restrictive (heavy redemption penalties). Annuity companies can pay handsome commissions to annuity sellers, esp. if the funds are locked up for 10 years or more.
  4. Indexed variable annuities are sold with the attractive story that an investment does as well as the market (e.g. S&P 500) PLUS the investor has downside protection. What’s not to like? I’ve been told by annuity sellers, with straight faces, that indexed variable annuities have “zero costs.” This is far from the truth since the annuity firm makes money in part by gobbling up all of the dividend income an annuitant otherwise would earn in a regular account. Dividend income can make up 2% or more of an annual return; the upside return potential is diminished in exchange for some support on the downside. This isn’t clearly explained to the investor.
  5. The annuity investor is pinning his/her future on the financial strength of the annuity provider. If it goes under, there’s no guarantee the funds can be recovered.
  6. There are important tax consequences if purchasing an annuity in an IRA (qualified annuities) or purchasing it with after-tax money (non-qualified annuities). It’s reckless to invest in an annuity without considering the tax consequences!
  7. Non-qualified annuities are disadvantageous to inherit vs. regular taxable investment accounts because there is no “step-up” in cost basis.
  8. Worst of all, selling them can pose a serious conflict of interest (the seller makes out well, the purchaser can… er um…be screwed).

Fee-Only (no products sold, no commissions) advisors put our clients’ interests before our own in large part because we don’t sell products that put the interest of the seller before the client. In other words, we’re Fiduciaries. Advisors who sell annuities can’t make this Fiduciary guarantee. Regretfully, previous government administration moves to hold annuity sellers (and retirement plan advisors) more accountable have been shelved this year.

Recent Positive Trends in Variable Annuities:

A minority of variable annuity providers take a different tack by appealing to Fee-Only (no commissions) advisors. These annuities have lower fees and greater transparency. All-in fees formerly in the 3-4%+ annual range can be as low as 1% or less. Accordingly, such annuities may have a role in a client’s portfolio in the content of an overall financial plan and investment portfolio. I stress context because annuities should be evaluated by an advisor who has no skin in the commissioned product game. Finally, investors in ugly annuities have access to the IRS 1035 Exchange rule that allows annuity holders (before the annuity is annuitized) to roll out of their ugly annuity and into an acceptable annuity of the same type as long as surrender penalties don’t stand in the way.

Source: Forbes
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Six Tips for Managing Financial Risks in Middle Age

Six Tips for Managing Financial Risks in Middle Age

According to a 2016 survey by the Transamerica Center for Retirement Studies, those in Generation X currently have an average household retirement savings of just $69,000.

Of course, this data could be concerning: How will this generation effectively move toward a comfortable retirement? Additionally, multiple financial risks can further reduce their retirement options, so it’s important for middle-aged Americans to be aware of them.

Six members of Forbes Finance Council shared some of the biggest financial risks middle-aged adults face — from changing careers to overspending and even getting a divorce — and what they can do to overcome or avoid them.

1. Changing Careers

A career change at middle age can be scary and may mean paying for additional schooling, training or certifications. It may also mean taking a salary cut as you enter a new industry. Affording this change can be daunting, as there may be fixed overhead expenses that need to be maintained. Research the career paths available and expected salary growth in the new industry before making the leap. – Jeff Pitta, Senior Market Advisors

2. Overspending

The biggest risk I see is overspending. Many times people in this phase of life may be buying big fancy houses and cars they honestly cannot afford, which can affect their saving rates and their ability to build wealth in the long term. During this time, I believe their focus should be on saving 15–20% of their income for retirement and creating wealth-building strategies to meet their long-term goals. – Justin Goodbread, Heritage Investors

3. Lifestyle Creep

When adults get to middle age, their families and lifestyles often seem to grow quickly. With increasing paychecks often come increasing costs and current demands for money. As you start to make more money, beware of “lifestyle creep.” Before you buy a better vacation, home or fancy new car, do some projections to see if you are on track for your other goals and objectives, like college planning or retirement. – Scott Bishop, STA Wealth Management

4. Tighter Lending Standards

It can be hard to get a 30-year mortgage past age 40. Many lenders now consider not just a borrower’s current income, but his or her projected income throughout the life of the loan, which tends to drop significantly post-retirement. To avoid being turned down, middle-aged consumers can improve their income outlook by paying down debts and building up retirement savings. – Kyle Kamrooz, Cloudvirga

5. Divorce

Divorce later in life can be devastating to finances. U.S. adults 50 and over are divorcing at twice the rate they did 25 years ago, according to data from Pew Research. With less time to recover financially, I believe people in their 50s must take steps to downsize, minimize debt and bolster savings. That often means working longer than originally planned — perhaps another three to five years — and spending less throughout retirement. – Richard Rosso, Clarity Financial LLC

6. Lack Of A Backup Plan

For some, middle age can be their highest earning period, but it can be very difficult to substitute that income in the case of job loss. I have witnessed a few high earners get downsized and subsequently find it very difficult to get a comparable job. Job security is not 100% certain, and you should have a backup plan in case you find yourself in the market for a job once again. – Vlad Rusz, Vlad Corp. USA

Source: Forbes
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Boosting Bond Yield Without The Risk, Using Muni Bonds

Boosting Bond Yield Without The Risk, Using Muni Bonds

In the current market environment it’s tempting to want to juice more yield from your bond portfolio. Especially because those with longer memories will notice that bond yields, though rising, remain low by historical standards.

Often higher yields can come with a catch, namely that when you’re bumping up your yield, then you are probably also taking on more risk. However, in certain situations, owning municipal (muni) bonds can effectively increase your after-tax returns without necessarily adding more risk to the bargain. Munis can be thought of one of the few free lunches available when investing, this is due to munis’ tax treatment which we’ll explain.

Taxable Portfolios

This move to owning munis is only worth considering for taxable portfolios, especially if you’re in a higher tax bracket. If you have money in a 401(k), 403(b) or an IRA to name just a few tax-advantaged ways to save, then munis may offer little help. Equally if your tax rate is low, munis may not be worth the hassle and you can likely use tax-advantaged savings protects for virtually all your saving anyway.

The advantage of munis is that the interest isn’t taxed at the federal, and sometimes, the state level too. That’s good as you potentially pay less tax on your investments. However, if you’re invested in a 401(k) then you’re not paying investment taxes anyway, so munis aren’t too much use. As such, munis generally make the most sense for taxable accounts for higher income investors, particularly in higher-tax states, as that’s where they offer their greatest tax-advantage.

What’s The Risk?

Municipal bonds aren’t considered quite as low risk as U.S. Treasuries. Basically, the U.S. Treasury, should it need to, can print money to pay-off debt. Printing money is a great way to solve a host of financial problems. On the other hand, the entities that issue muni bonds, don’t have the same ability to print money should they need to. For example, Arkansas had to essentially restructure its state-level debt it 1933, it wasn’t quite a bankruptcy but it was close. Equally, in 2017 Puerto Rico restructured its debt and in 1994 Orange County in California declared bankruptcy after some unfortunate trading activity. Today there are concerns about the accounts of Illinois. The idea of any debt being truly risk-free is ambitious. Municipal debt is generally less risky than most. However, there have been a few episodes in history when muni bond holders didn’t get back what they expected. Muni debt is generally considered lower risk, but it is not risk-free. As always, spreading your bets through diversification may be a helpful technique.

The Wrong Way To Reach For Yield

As an alternative to munis, income starved investors can start to make potentially riskier trade-offs. For example, a U.S. Treasury bond pays around 3% yield today, but a diversified basket of emerging market debt pays 5% or so. Yet, there’s a need to be cautious here. A yield on a bond is just a promise to pay, not an iron-clad guarantee. The U.S. has historically been a relatively reliable borrower. However, as Bank of Canada research shows, there’s been at least one ongoing emerging or frontier market in default during each one of the past 30 years. That’s not to say that higher yield on emerging market debt is a bad deal, but you have to go in with your eyes open. Ultimately, it’s not an apples-to-apples comparison, the U.S. government appears highly unlikely to default, whereas some emerging market economies almost certainly will again. As a result, you have to be sure that the extra yield, of 2% currently, compensates you for any loses should certain emerging market economies end up not paying their debts in full and on time. A similar thing is true of corporate debt as well. Yes, corporations generally pay you back. Nonetheless, in every economic cycle a few companies, and sometime many companies in entire industries, fail to meet their debt payments. Again, you need to make sure that the extra risk you’re taking really is compensated for by that higher yield. So, the nice aspect of munis is yes, you’re getting more after-tax yield on your money. Yet, that’s coming primarily via the way munis are treated for tax purposes, not necessarily because you are taking on a greater investment risk by owning munis.

Which To Buy?

Exchange Traded Funds (ETFs) are one way to access a diversified portfolio of muni bonds. Both iShares and Vanguard offer low-cost muni ETFs containing a host of different bonds. The iShares National Muni Bond ETF owns over 3,000 bonds and its largest exposures are to California and New York, both currently representing about a fifth of the overall fund. Vanguard’s Tax-Exempt Bond ETF is perhaps slightly better diversified with over 4,000 bonds and slightly lower exposure to California, though the two funds should be considered broadly similar. Importantly, they are both low-cost funds, with the iShares fund at an annual expense ratio of 0.07% and Vanguard at 0.09%. That means you’re paying a holding cost of $7 to $9 respectively for every $10,000 invested per year. In the grand scheme of things, that’s inexpensive, though free funds are also now available for some asset classes.

Tax-Equivalent Yield

One concept you must understand with munis is their tax-equivalent yield. Let’s say you have a Treasury bond and a muni bond, both pay you 4% interest. Note, I’m using simple numbers here, in reality rates are a little lower today. You’ll likely pay tax on the Treasury bond’s interest, but not the muni bond. So the value of the muni bond depends, in part, on your tax rate. If you pay a 25% rate of tax on your interest income from your bonds, then after-tax you’ll receive effectively 3% interest on your Treasury bond, but a full 4% on your muni bond because it isn’t taxed. Things are further complicated by state and local taxes, your muni bonds may be free from state and local taxes to the extent the bonds are issued by your state and locality. As you can see, the more tax you pay on your investment income, the better the relative yield on the muni bond looks. Plus, where you live has an impact too.

Options For California And New York Residents

Building on this taxation logic, there are also state-specific muni bond funds, for example the iShares California Muni Bond ETF or the iShares New York Muni Bond ETF. The expense ratios come in a little higher at 0.25% or $25 per $10,000 invested per year. However, you may save on State taxation too by owning these bonds. The trade-off is some loss of diversification. Some investors might consider large holdings in bonds issued solely by a single state too risky, despite the greater tax benefits on offer. If that’s the case you could combine a broad muni fund with your State-specific fund in a ratio that you feel comfortable with. Note that smaller or low-tax states may not have specific muni bond options, however certain other states have mutual funds branded ‘Municipal’ or ‘Tax Free’ that track their State’s muni markets. However, in many cases the expense ratio can nudge up to 0.50% or more, making them a little less desirable, as these higher fees can offset a decent chunk of the yields received on debt, making the returns after all fees are considered uninspiring.

Thus, muni bonds can be an option for your taxable portfolio. This is particularly true if you’re a bond-centric investor and fall under a higher tax bracket. Owning munis may improve your after tax returns slightly because of the tax advantages. However, munis should not be considered completely risk-free because historically there have been some states that were unable to pay their debts as expected, though these cases have been relatively rare.

Source: Forbes
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When to Replace Bonds with Annuities

When to Replace Bonds with Annuities

Annuities receive a bad rap in many circles, yet there is solid evidence that supports including the right kinds of annuities in your portfolio.

Much of the criticism of annuities is deserved, and I’ve joined in it. There are annuities that are complicated, charge high fees and have a lot of restrictions. There also are annuities that are sold to the wrong people.

The right annuity, however, can increase your financial security and portfolio returns.

In the past, I’ve recommended immediate annuities and deferred income annuities (DIAs, also known as longevity annuities) for retirees. They provide protection against two of the greatest retirement risks: low investment returns and living a long time.

People who aren’t retired and are still saving for the future should consider replacing bonds in their portfolios with fixed annuities or fixed indexed annuities.

There are several reasons you might want to reduce the percentage of your portfolio invested in bonds and bond funds in the coming years.

Interest rates remain very low, despite the increases since late 2017. The best likely result over the next 10 years is earning the current yield on bonds, which is 3% or less. But returns could be worse. If interest rates continue to rise, the value of bonds and bond funds will decline.

A recession also will cause losses in high-yield bonds and even some investment-grade bonds.

Fixed annuities and fixed indexed annuities offer several advantages over bonds and bond funds, while maintaining the diversification benefits.

The biggest advantage is that the insurer guarantees the value of your principal. Even if interest rates rise, the value of your principal remains the same. In addition, you’ll earn interest on the principal.

There are two types of fixed annuities. The most common is the Multi-Year Guaranteed Annuity (MYGA). The MYGA locks in a fixed rate for the term you select, usually five to 10 years. The interest you earn grows and compounds tax-deferred within the annuity. One of the top-paying MYGAs is paying 3.6% for five years. So if you started with $100,000, at the end of the five years the annuity value would be $119,343. The big advantage of an MYGA is a stated predictable return.

In the other type of fixed annuity, the interest rate changes each year. Usually the year’s interest rate is set by the insurer based on current interest rates and the insurer’s costs. The yield often is similar to what is earned by intermediate corporate bonds, but it can be higher or lower depending on the insurer.

The interest on a fixed indexed annuity (FIA) is more complicated. An index is designated as the benchmark for the annuity. When the index rises, the annuity account receives an interest credit. The interest usually is a percentage of the index increase.

Suppose an FIA credits an account with 80% of the index’s increase. If the index rises 10%, the annuity receives 8% (80% of 10%).

Many FIAs also have an annual cap. No matter how much the index increases, the interest credit won’t exceed the cap. For example, suppose the same FIA has a 10% cap. If the index rises 20%, 80% of that would be 16%. But because of the cap, an account will receive a 10% interest credit. Other factors in the annuity contract also might reduce interest credits, such as spreads, margins and expenses.

These rules reveal some of the reasons people criticize FIAs. They’re complicated and have several levels of expenses. While some brokers sell them based on stock index returns, the caps and crediting formulas usually keep the returns below stock index returns. But, as I’ll show, FIAs can play a positive role in some portfolios, especially if you work with a financial professional who is well-versed in them, knows they are substitutes for safe investments, not stocks, and considers all the FIAs in the market.

FIAs also have a minimum guaranteed return. For many of them today, the minimum return is 0%.

In the past, I’ve recommended considering fixed annuities or FIAs instead of bonds in pre-retirement portfolios, especially when interest rates are expected to rise.

New support for that recommendation comes from a study by Roger Ibbotson, a professor emeritus of finance at Yale University and a long-respected investment researcher. Ibbotson’s latest research concludes that uncapped FIAs would have outperformed bonds on an annualized basis for the past 90 years. He’s also concerned about interest rates over the next 10 years or so and believes bonds won’t deliver the returns most investors need to fund their retirements.

So, Ibbotson joins in recommending that you consider replacing some bond positions with annuities. You need to decide if you want a traditional fixed annuity, a MYGA, or an FIA. (Ibbotson favors FIAs.)

The MYGAs pretty much speak for themselves, says annuity agent Todd Phillips of Phillips Financial Services in Phoenix, Arizona. The longer you’re willing to lock up your money in a MYGA, the higher the guaranteed annual yield. If you don’t want to lock up your money that long or expect to earn a higher yield as rates rise in the next few years, consider a fixed annuity with annual interest resets. These currently pay a little under 3%. When you’re ready to buy, Phillips says to search the market, because the highest-yielding annuity from a highly-rated insurer changes over time.

The FIAs are more complicated but offer the potential for a higher interest rate.

Let’s look at the Midland National Summit Edge 7 as an example of both how complicated FIAs can be and how they can be used. This FIA offers several indexes from which you can choose, and you can have the account’s interest based on more than one index.

In addition, this FIA offers an inverse of the S&P 500 with which you basically sell short the S&P 500. With the inverse option, if the S&P 500 declines by any amount for the year, the portion of your account based on it is credited with 8.3% interest. On the other hand, if the S&P 500 appreciates, there’s no change in that portion of your account.

Here’s how you could use this FIA. You could have 50% of your account based on the S&P 500 and 50% based on the inverse S&P 500. If the S&P 500 returns 10% for the year, your account is credited with 4.9%. The 50% of the account based on the inverse option receives 0%. The half based on the S&P 500 receives 9.8% (the 10% return for the S&P 500 minus a 0.20% spread). So, 50% times 9.8% is a 4.9% return for the entire account.

Suppose the S&P 500 declines 5%.

The half of the account based on the S&P 500 receives a 0% return. The half based on the inverse option is credited with 8.3%. The total increase in the account is 4.15% (50% times 8.3%).

This is just one way this FIA can be used. Many other FIAs also let you choose from among a number of indexes and combine them. FIAs obviously can be complicated. They’re not alternatives to investing in stocks. But FIAs can be good choices for an investor who wants the opportunity to earn more interest than bonds are likely to deliver while keeping the principal secure.

Remember, fixed annuities and FIAs should be considered by people who still are in the accumulation years and want diversification in their portfolios. People who already are retired and want guaranteed lifetime income should consider immediate annuities and deferred income annuities.

Source: Forbes
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Retire Early With No IRS Penalties

Retire Early With No IRS Penalties

So you want to retire early? Good for you.

But, even if you have enough total funds to comfortably support yourself, some retirement plan assets may be locked away or awkward to access. But if you need them to support your life style here’s how to unlock them without penalty.

By now, almost everyone is aware of the 10% penalty imposed on early withdrawals from qualified retirement plans. These are imposed subject to a few exceptions (death, disability, education expense, first time home purchase, etc.) on any distribution prior to age 59 ½.

To avoid the penalty, try to live off your personal accounts until at least past the age 59 ½ early retirement penalty tax period. This maximizes deferral, avoids potential tax penalties for early retirement, and provides the greatest flexibility.

However, if you don’t have sufficient personal assets to provide for your income needs until age 59 ½, and you don’t qualify for one of the exceptions, all is not lost. There are three provisions you should know about:

  1. If you have money in a 401(k) or other qualified retirement plan, and you employer permits it, you may be able withdraw assets without penalty if you separated from service after age 55. This might be a great source of funds if you retire between 55 and 59 ½. Note: Not all qualified plans allow this. It’s depends on the plan document. This distribution option is not available to IRA’s.
  2. If you have employer stock at a low basis inside your retirement plan, there is a little known provision that may be very valuable to you. You may withdraw your employer stock from the plan paying tax only on your basis. If you sell the stock immediately the profit is subject to capital gains rates. However, if you hold the stock, any further appreciation after distribution will be taxed at ordinary income tax rates until held for an additional year.This provision may allow you to transfer a significant value out of your plan at very favorable tax rates. By systematically liquidating your company stock over the number of years until age 59 ½ you may be able to support yourself at very low total tax cost. Keep in mind that this special provision for company stock must be part of a total distribution from the plan, and you may not pick and choose shares at other than the average cost basis of the stock. The balance of the distribution may be rolled over in to an IRA just like any other total distribution. However, if you roll over the stock into an IRA, the option is lost.
  3. Finally, if you have not reached age 59 ½ you still can tap into your retirement plan assets under a plan of “substantially equal distributions over your projected lifetime” under an IRS regulation commonly referred to as Section 72(t).

Even if you decide to reenter the work force, you will be required to continue your distributions until the later of age 59 ½ or five years. Any deviations will subject you to 10% penalties on all previous distributions. So, it’s definitely not flexible.

The regulations give us three ways to calculate allowable withdrawals. Between them you can design almost any reasonable schedule of distributions. Starting from the smallest distributions they are:

  1. Divide your life expectancy or the joint life expectancy of you and your beneficiary per the appropriate IRS table into the balance of your account on December 31 of the previous year. This method required annual recalculation using both your new attained age and previous year’s balance.
  2. Amortize your account over your life expectancy or your joint life expectancy with your beneficiary using a “reasonable” interest rate.
  3. Use an annuity factor derived from the IRS tables for your life expectancy or the joint life expectancy of you and your beneficiary.

If your calculated distribution is more than you think you will need, you can split your IRA into smaller accounts that give you the distribution you want. Later, if you need to, you can begin another distribution from another IRA. But each separate distribution will start the clock running for its own five-year period.


If you have enough capital to retire, the various tax and pension regulations will not provide much of an obstacle. With just a little advanced planning, you will soon be sailing off into the sunset.

Source: Forbes
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Are You a Baby Boomer? What is Your Retirement Readiness?

Are You a Baby Boomer? What is Your Retirement Readiness?

The generation referred to as Baby Boomers includes individuals born between 1946 and 1964 and is often a difficult group to analyze and target.

Baby Boomers run the gamut of different life stages – from single to married with young children to empty nesters and everywhere in between. According to the Insured Retirement Institute (IRI), only 25% of this age cohort are confident their savings will last throughout retirement. Creating a retirement income plan, deferring your retirement by even one year, analyzing your guaranteed incomes, understanding the makeup of your accounts and the differences in taxation laws are some of the ways to help improve your financial security as you enter retirement. Are you ready for retirement? How do you compare to other Boomers?

1. 4 in 10 Boomers plan to take money out of their 401(k) accounts before retirement.

This is a big NO in the world of retirement financial planning 101. Your 401(k) is principle protected and is designed to pay your income for the rest of your life. Withdrawing sooner is a huge mistake. While 4 in 10 plan to withdraw from this type of account, only 22 percent consider their 401(k) to be a major source of their retirement income.

2. 7 in 10 Boomers like the idea of a guaranteed pension style income.

Pensions are not as frequently found as they were in the past. Boomers value that certainty and security of a pension style income as they get close to retirement. Yet, only 14 percent plan to purchase an annuity with a portion of their 401(k) or IRA.

3. More than half of all Boomers are relying on Social Security as a big source of their income.

Statistically, Boomers don’t have enough savings, are not managing their accounts well enough and therefore are relying heavily on Social Security. Over 76 percent of individuals say that changes in Social Security which will negatively affect their income is one of the top two concerns regarding their retirement year. The other major concern is that the unpredictability of Social Security will impact their health care expenses. And, we know from many studies and research that the increasing cost of long-term care and health care expenses will cause many families hardships unless they have planned accordingly.

4. Over 50% of individuals do not manage or review their accounts regularly.

It is very important to rebalance your investments about once a year. While 80% of Boomers check their balances quarterly, only half actually take the time to analyze their accounts and then rebalance.

If you are a Baby Boomer, most likely some of the statistics and findings resonate very closely with you. On a positive note, it is never too late to turn things around. Creating a relationship with a financial advisor or retirement planning specialist highly correlates to feeling prepared for retirement. According to the Insured Retirement Institute, close to 80 percent of Boomers who worked with a financial professional have at least $100,000 saved for retirement compared to 48 percent who have not worked with someone.

Source: Forbes
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5 Steps to Prep for a Better Retirement in Your Sixties

5 Steps to Prep for a Better Retirement in Your Sixties

Whether you would like to retire early or plan to work up until the typical retirement age of 67, financial freedom or retirement is nearing.

I regularly talk with people in their 60s who are so close to the freedom of financial independence, and retirement, they can almost taste it. Many of them love what they do and only want to be told that they can retire when they choose. At the same time, there are others who only want to know how soon they can stop working. Those individuals are quite literally counting the weeks, days, hours and minutes until they can shut the office door for the last time. Whatever your attitude, it is important to think about what your dream retirement will look like. Equally important is determining whether or not your finances are up to the task of providing that retirement for you.

If you are in your 60s, your friends are probably retiring all around you. Don’t let financial angst dampen your golden years. Here are five tips to help get ready to leave the full-time workforce and sail away to retirement.

1. Have a Plan for Retirement Activities

Do you want to travel the world? Explore passions and hobbies or volunteer? The happiest people I know have things they like to do such as spending time with family and friends and cruising the world. Some have even managed to see what seems like every movie ever made. Of course, those interests and hobbies may change overtime.

The important thing is to think about how you want to spend your days when you won’t have to spend a third, or more, of your time working. There is no right or wrong answer here, but be conscious of what some of these hobbies and interests may cost you. First class travel around the world costs a whole lot more than volunteering or babysitting.

2. Have a Holistic Financial Plan for your Retirement

You are likely in the home stretch of retirement planning and want to avoid worrying about money. Financial stress is not fun and going broke is worse. You probably have an idea of where you want to live, some of the things you would like to do and, in a perfect world, how much money you would like to have.

Think about what you will need, financially, to support your lifestyle in retirement.  Between investment income, pensions (if you are lucky) and Social Security, what type of income will you have to cover the basics? That includes things like housing, food, healthcare and any debt you may have going into retirement. Hopefully you will only have a mortgage and maybe a car payment or two. Once the basics are covered, add in your spending for fun items such as travel and entertainment. That would include anything beyond basic necessities. Once everything has been added together, will you be in good shape or struggling to pay bills?

If you are flush, great! Keep working until you feel compelled to stop. If it looks tight, consider working a little longer or scaling back some of your expenses. If things are tight when you initially retire, they will only worsen as inflation drives up the cost of things you love to do, like eating. Consider saving more and making catch up contributions to top off your retirement accounts. That will allow your retirement income to grow and potentially help you avoid barely making ends meet once you are retired.

If you are way behind and there is no way your savings will give you an adequate income in retirement, you may need to look at even more drastic changes to help you have a secure retirement. You may need to further delay retirement, which will give you more time to save money, grow your assets, pay down debts and increase social security benefits. You may also want to consider moving to a locale with a cheaper cost of living or perhaps right-size your housing expense. You may even want to consider sharing costs (and quality of life) with a Golden Girls type of arrangement.

3. Top off your Retirement Savings

Take advantage of all your tax favored accounts. Contribute to your 401(k) and make catch up contributions. If you are eligible, max out a Roth IRA account. The more you save now the less income you will need to replace in retirement. You want to accumulate as much net worth as possible to help generate income in retirement.

Once you are 50 years old, you can make catch up contributions. For example, if you already invest the maximum amount allowed ($18,500), you could put in an extra $6,000 for a total of $24,500, per year. For Roth and Traditional IRAs, you would be able to contribute an extra $1,000 for a total of $6,500, per year. In general, you should strive to save 10-20% of your income, per year, assuming you started early. If you are behind, you may need to save even more to hit your target retirement date.  If you need to save even more or perhaps need some Long Term Care coverage check out the Rich Person Roth – click here for more info.

4. Maximize your Social Security Benefits

Hopefully, you won’t be relying solely on your Social Security benefits to fund your retirement. Regardless of your situation, consider contacting a fiduciary financial planner and working with that person to maximize your Social Security benefits . At a minimum, get an estimate of the benefit amount you will receive at the age you plan to retire. I live in Los Angeles and the average Social Security check won’t cover the rent for an average one bedroom here.

Your Social Security benefit will be determined by a combination of your earnings over your career and the age that you choose to start receiving benefits. Spousal benefits are based on your spouse’s earnings and your age. The longer you delay retirement, the more your Social Security benefits will increase. Conversely, retiring earlier will decrease your benefits. You can start as early as 62 and delay as long as 70.

Visit the Social Security Administration to use calculators that will help you estimate your benefits at various ages. I’d also recommend you visit my Social Security to create or sign into your account and view your estimated benefits. After signing into your account, you should see three numbers: the amount you’ll receive at full retirement (likely age 67), the amount you would receive if you retired early at 62 and the increased amount you could receive if you waited until age 70.

The smaller your nest egg the more important it will be to get back every penny you earned from Social Security. Remember, this income will last the rest of your life. Lastly, keep in mind that cost-of-living adjustments will also be larger the longer you wait to start receiving benefits.

5. Prepare you Portfolio to Maintain Financial Freedom for the rest of your life

There are so many rules of thumb out there about investing and retirement planning. Strategies that at one time provided great returns are barely paying anything in today’s market. Certificates of Deposit (CDs) are a great example. Your grandmother may have had CDs that paid 9% interest but those types of interest rates haven’t been around for more than a decade. She also likely had a pension (lifetime income), Social Security (lifetime income), savings and a paid-off home mortgage. I will expect that most people reading this will have a harder time funding the retirement they worked hard for and looked forward to.

Work with a fee-only fiduciary financial planner to make sure you are holding an appropriate portfolio that will provide income for the rest of your life. Plan for the various curve balls life with inevitably throw your way. You may think I’m just a few years from retirement, I can’t stay invested in the stock market. That may be true for a portion of your portfolio, but keep in mind that this money may need to last 30 years or more. Knowing this will allow you to work towards the appropriate portfolio. One that will generate enough income for your needs and grow over time to keep up with inflation.

I don’t know about you but I plan to live to 100 so Al Roker can say happy birthday to me on national TV. Of course, he will be like 200 at that time. All joking aside, I often hear, “I want to bounce the last check I write.” That would be great if we knew the date of your last day on Earth. Being cash poor at 95 really doesn’t leave you many options to adjust your plan or earn an income.

Whatever your dream retirement looks like, it will take a little financial planning to make it reality. The sooner you make the appropriate adjustment, the easier it will be to fund endless trips to the beach to sip cocktails and watch sunsets.

Source: Forbes
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Life Insurance, It’s Not For You

Life Insurance, It's Not For You

Life insurance is one of those things that many people prefer to avoid thinking about because it often conjures up dark images. 

Many people are jarred into realizing the importance of buying life insurance after a close friend or family member has passed away or even after hearing a news story about a tragic death that hit close to home. The reality is that it is better to be prepared and know that our loved ones will not be left to fend for themselves. Consider these important questions to determine your need for life insurance.

How Will Your Loved Ones Live Without Your Income?

Some households are run on a paycheck to paycheck basis. Some people may have a modest amount of savings, but it may take two incomes to pay the monthly bills. Your spouse and children may quickly run out of money without your income to support them. Life insurance benefits are most commonly used to supplement lost wages and to eliminate debts after an income-producing adult passes away. By eliminating debts with insurance proceeds, your loved ones will need less money to live off of each month. Some people will purchase enough insurance to pay off all outstanding debts including the home mortgage. The surviving spouse may even be able to support the family through his or her income alone after the debts have been eliminated. Others will purchase enough coverage so that the proceeds can be invested to generate supplemental income.

How Will Your Spouse Be Able to Retire?

While some life insurance services is needed to help your loved ones to survive on a monthly basis, you also need to think about the future. Your income may currently be instrumental in your spouse’s ability to fund a retirement account. Without your income, your spouse may be forced to work for many years past the traditional retirement age, this can create an unnecessary hardship on him or her. It can be wise to purchase extra coverage to fund a retirement account.

Do Your Kids Need Financial Assistance Getting Their Adult Lives Started?

If you have kids, you may be well aware of their financial dependence on you, and this will often not simply evaporate when they turn 18. Many children need financial assistance buying their first car, paying for their wedding, paying for college and more. Some parents will purchase additional death benefits so that their kids’ lives are not financially impacted by a death.

How Much Coverage Do You Need?

This is a complicated question that often requires you to create a solid financial plan for the future. Funds can be used strategically in different ways, such as to purchase income-producing assets, to pay off debts and more. Your current lifestyle, debts and assets all must be taken into account. It is wise to work with an experienced life insurance expert to review your financial needs.

Remember, life insurance has evolved over the years and there are many benefit programs that can come to your families rescue even if you don’t pass away but are too sick to work.  Now can be a great time to review what coverage you currently have and what coverage is available to you. Some people will live well into their 90s or beyond, but others have a life that is cut short far too soon.