Retirees Are Racking Up Credit Card Debt

Retirees Are Racking Up Credit Card Debt

New statistics point out an alarming financial problem.

Provided by Mike Fassi

 

$6,876. That is the average amount of credit card debt owed by an American household headed up by an individual aged 65-69.1

If you are newly retired or close to retiring, that figure may alarm you. It is more than twice the amount of Social Security’s maximum monthly income payment.2

Credit card use is surging, and seniors are taking on more revolving debt as part of the trend. That $6,876 figure comes from personal finance website ValuePenguin, which just published its latest yearly study on U.S. credit card debt. As ValuePenguin found, revolving debt shrinks little with age: in households headed up by those 75 and older, the mean credit card balance was $5,638.1 

In the second quarter of 2016, Americans charged $34.4 billion to their credit cards. According to research from WalletHub, that was the biggest second-quarter jump seen in 30 years. Undoubtedly, this was a byproduct of the quarter’s 4.4% boost in consumer spending. All this recently added consumer debt would seem less troubling were it not for two other statistics. One, Americans paid down just $27.5 billion in revolving debt in Q1 2016, the least in any first quarter since 2008. Two, U.S. consumers piled on $71 billion in credit card debt during 2015, representing the greatest annual increase since 2007.3,4

It seems Americans are returning to their pre-recession credit card habits. The question is: to what degree are households paying with plastic by choice? Retiree households saddled with mortgages and education debt may feel pressured to use their credit cards. The National Council on Aging recently identified credit card debt as a major financial worry among seniors.2

How can your household counter the trend? Here are some steps that might help you ease your debt burden. 

Try the snowball approach. This is the approach where you pay down the balance on the highest-interest card first, then the next highest-interest card, and so forth. You should always make the largest payment you can on your highest-interest debt.

Pay on time. Late fees are like an Achilles heel for many cardholders. They not only hurt your bank account, they hurt your credit score. (Conversely, improving your credit score may make your debt cheaper to pay off, and make it easier to refinance or arrange a consumer loan.)

Establish a budget. Most households do not live by a budget. Even retiree households can forget about the importance of budgeting. If you can rein in parts of your spending, you may find yourself a) using cash more often, and b) having cash left over to save, invest or pay down debt.

Use certain cards for certain things. If you have a large recurring debt, why not put it on your lowest-interest card for some savings? In fact, assigning as much debt as you can to a low-interest or zero-interest card positions you to pay down debt sooner, with smaller monthly payments.

Finally, consider ways to create more income. If you just cannot use credit cards less or live on less, then you must offset your credit card debt by a) earning more or b) selling assets or possessions to give you more cash, which can be used to attack the debt.

While you may always have some revolving debt, it is a potential strain on a comfortable retirement. See if you can buck the current trend in credit card use that seems to be driving mean credit card balances higher.

 

Mike Fassi, CLU, CHFC  is a Representative with Centaurus Financial Inc. and may be reached at Fassi Financial, 970-416-0088 or mike@fassifinancialnetwork.com.

 

 

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

Citations.

1 – valuepenguin.com/average-credit-card-debt [9/15/16]

2 – cnbc.com/2016/09/15/3-simple-ways-retirees-can-control-their-credit-card-debt.html [9/15/16]

3 – wallethub.com/edu/credit-card-debt-study/24400/ [9/12/16]

4 – reuters.com/article/us-usa-economy-idUSKCN1111FM [8/26/16]

Market-Linked CDs

Market-Linked CDs

These investments may yield more for you than the typical fixed rate of return.

   

Provided by Mike Fassi

 

You say you’re a conservative investor who wants more yield? Then you may want to consider market-linked CDs – certificates of deposit linked to the performance of a market index.

With yields on fixed-rate CDs so low right now, investors are turning to these indexed CDs because of their potential for comparatively greater returns.

These CDs credit you with a “participation rate” in return for your investment. For example, if the associated index rises 12% in a year and your participation rate is 50%, you get a 6% return. (That certainly beats a 1% return.) The linked index might be the S&P 500, the Dow Jones Industrial Average, a tech index, a global index – it varies per CD.1

A market-linked CD is usually a short-term investment. Most of these CDs have maturity dates of 3-5 years. The deposits typically range from $1,000-$20,000. You are guaranteed not to lose your principal if you hold the CD to maturity, for the Federal Deposit Insurance Corporation insures these investment vehicles.1

Indexed CDs do have some downsides. The interest on them is only paid when they mature, and before maturity, the CD might produce “phantom income” – that is, taxable interest you must report to the IRS. (These are not tax-deferred investments.) Some of these CDs are “callable” – if interest rates fall, the issuer has the option to execute a call and terminate the CD, paying you back your principal and accrued interest.1,2

If you decide to take money out of a market-linked CD before the end of its term, you will probably pay for that decision. You will likely be hit with a penalty as you redeem your principal. Some indexed CD contracts allow you to sell your CD before it matures, if you like – but if the linked index has performed poorly, there is the chance that you could sell at a loss since the value of the CD depends strongly on the performance of that index. These CDs can also be illiquid during their first year.1,2   

That said, there is much to like about these CDs. They offer you the principal protection guarantee of a standard certificate of deposit, plus the chance for notably better yield than a fixed-rate CD. You just have to recognize the necessity of holding the CD until maturity.   

 

Mike Fassi, CLU, CHFC  is a Representative with Centaurus Financial Inc. and may be reached at Fassi Financial, 970-416-0088 or mike@fassifinancialnetwork.com.

 

 

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

Citations.

1 – investopedia.com/articles/bonds/09/equity-index-cds.asp [8/25/16]

2 – finance.zacks.com/disadvantages-structured-cd-investment-11399.html [8/25/16]

 

Do Our Biases Inhibit Our Retirement Savings Efforts

Do Our Biases Inhibit Our Retirement Savings Efforts?

They may affect our attempts to build wealth.   

 

Provided by Mike Fassi

 

Picture an 18-wheeler, its 4,000-cubic-foot cargo trailer filled to capacity with stacks of $100 bills. The driver shuts and locks the trailer, closing the door on roughly $10 billion.

Now imagine that truck driving off to a landfill, where that $10 billion will be dumped, shredded and buried, rendered useless.

As the day goes on, 170 more 18-wheelers start up their engines and carry the exact same payload to the same destination. When the convoy finishes its work, $1.7 trillion is gone.

Unimaginable? Metaphorically speaking, perhaps not. The National Bureau of Economic Research, a respected non-profit think tank, says we are forfeiting $1.7 trillion in potential retirement savings. Why? Simply because of our biases.1

Two major biases can impact our saving & investment decisions. NBER identified them in a study published in its Bulletin on Aging & Health in April.1

Present bias occurs when we value the present over the future. To see how common this bias is, NBER’s research team asked people a simple question: “Would you rather receive $100 today or $120 in 12 months?” As a variation, they also offered a choice between having $100 now or having $144 after waiting 24 months. Fifty-five percent of the respondents turned out to be “present biased” – that is, they wanted to take the $100 right away rather than wait to get a greater sum.1,2

Patience, of course, is fundamental to investing and retirement saving. Present bias is one of its enemies. From another angle, it also rears its head when volatility rocks Wall Street and we see panic selling. That panic is partly fueled by present bias. The sellers feel the pain of the moment, and lose sight of the potential in the future.

Present bias may also influence participation in workplace retirement plans. If an employee has tight personal finances or little understanding of investment principles, dollars in hand today may seem much more tangible and important than dollars that might be earned years from now. That leads us straight to the second bias NBER says plagues us.      

Exponential-growth bias occurs when we misunderstand compounding. Illustrate the power of compounding to a young adult starting to save for retirement, and “it all becomes clear” – there is perhaps no better way to show the long-term savings potential of a tax-deferred retirement account.1

Sadly, this is a lesson some people never grasp – either because it is not shown to them or because they lack mathematical or financial literacy. Someone unfamiliar with compounding may reason that assets in a retirement account simply grow by a fixed amount each year. That kind of misconception may make a workplace retirement plan less attractive to an employee – or alternately, it may make them think of it as if it were a fixed-rate investment vehicle.

As part of its research, NBER asked retirement savers a simple compounding question. Seventy-five percent of the survey respondents answered it incorrectly, and about 70% of respondents underestimated how much the asset in question would grow in value over time.1,2

Even meager compounding can be impressive. The Rule of 72 is widely known, but the 2-20-50 Rule also deserves to be remembered: an asset that increases in value by just 2% annually for 20 years will be worth about 50% more at the end of that 20-year period.2

Present bias & exponential-growth bias can deter people from saving for the future. They are easy to harbor, and easy to fall back on. Even longtime investors and retirement savers may fall prey to them. Challenging these biases is not only wise, but potentially useful. NBER estimates that if Americans could rid themselves of these two biases, our nation’s total retirement savings would increase by 12%.1

     

Mike Fassi, CLU, CHFC  is a Representative with Centaurus Financial Inc. and may be reached at Fassi Financial, 970-416-0088 or mike@fassifinancialnetwork.com.

 

 

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

 

 

Citations.

1 – bloomberg.com/news/articles/2016-04-27/how-americans-blow-1-7-trillion-in-retirement-savings [4/27/16]

2 – theatlantic.com/business/archive/2016/07/two-biases/491576/ [7/6/16]

 

Good Retirement Savings Habits Before Age 40

Good Retirement Savings Habits Before Age 40

 Some early financial behaviors that may promote a comfortable future.  

Provided by Mike Fassi

 

You know you should start saving for retirement before you turn 40. What can you start doing today to make that effort more productive, to improve your chances of ending up with more retirement money, rather than less?

Structure your budget with the future in mind. Live within your means and assign a portion of what you earn to retirement savings. How much? Well, any percentage is better than nothing – but, ideally, you pour 10% or more of what you earn into your retirement fund. If that seems excessive, consider this: you are at risk of living 25-30% of your lifetime with no paycheck except for Social Security. (That is, assuming Social Security is still around when you retire.)

Saving and investing 10-15% of what you earn for retirement can really make an impact over time. For example, say you set aside $4,000 for retirement in your thirtieth year, in an investment account that earns a consistent (albeit hypothetical) 6% a year. Even if you never made a contribution to that retirement account again, that $4,000 would grow to $30,744 by age 65. If you supplant that initial $4,000 with monthly contributions of $400, that retirement fund mushrooms to $565,631 at 65.1

Avoid cashing out workplace retirement plan accounts. Learn from the terrible retirement saving mistake too many baby boomers and Gen Xers have made. It may be tempting to just take the cash when you leave a job, especially when the account balance is small. Resist the temptation. One recent study (conducted by behavioral finance analytics firm Boston Research Technologies) found that 53% of baby boomers who had drained a workplace retirement plan account regretted their decision. So did 46% of the Gen Xers who had cashed out.2

Instead, arrange a rollover of that money to an IRA, or to your new employer’s retirement plan if that employer allows. That way, the money can stay invested and retain the opportunity for growth. If the money loses that opportunity, you will pay an opportunity cost when it comes to retirement savings. As an example, say you cash out a $5,000 balance in a retirement plan when you are 25. If that $5,000 stays invested and yields 5% interest a year, it becomes $35,200 some 40 years later. So today’s $5,000 retirement account drawdown could amount to robbing yourself of $35,000 (or more) for retirement.3

Save enough to get a match. Some employers will match your retirement contributions to some degree. You may have to work at least 2-3 years for an employer for this to apply, but the match may be offered to you sooner than that. The match is often 50 cents for every dollar the employee puts into the account, up to 6% of his or her salary. With the exception of an inheritance, an employer match is the closest thing to free money you will ever see as you save for the future. That is why you should strive to save at a level to get it, if at all possible.4

Saving enough to get the match in your workplace retirement plan may make your overall retirement savings effort a bit easier. Say your goal is to save 10% of your income for retirement. If the employer match is 50 cents to the dollar and you direct 6% of your income into that savings plan, your employer contributes the equivalent of 3% of your income. You are almost to that 10% goal right there.4

Think about going Roth. The younger you are, the more attractive Roth retirement accounts (such as Roth IRAs) may look. The downside of a Roth account? Contributions are not tax-deductible. On the other hand, there is plenty of upside. You get tax-deferred growth of the invested assets, you may withdraw account contributions tax-free, and you get to withdraw account earnings tax-free once you are 59½ or older and have owned the account for at least five years. Having a tax-free retirement fund is pretty nice.4

To have a Roth IRA in 2016, your modified adjusted gross income must be less than $132,000 (single taxpayer) or $194,000 (married and filing taxes jointly).4

Set it & forget it. Saving consistently becomes easier when you have an automated direct deposit or salary deferral arrangement set up for you. You can gradually increase the monthly amount that goes into your accounts with time, as you earn more.

Invest for growth. Much wealth has been built through long-term investment in equities. Wall Street has good years and bad years, but the good years have outnumbered the bad. Early investment in equities may assist your retirement savings effort more than any other factor, except time.

Time is of the essence. Start saving and investing for retirement today, and you may find yourself way ahead of your peers financially by the time you reach 40 or 50.

 

Mike Fassi, CLU, CHFC  is a Representative with Centaurus Financial Inc. and may be reached at Fassi Financial, 970-416-0088 or mike@fassifinancialnetwork.com.

 

 

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

«RepresentativeDisclosure»

 

Citations.

1 – investor.gov/tools/calculators/compound-interest-calculator [7/7/16]

2 – marketwatch.com/story/millennials-can-save-more-for-retirement-by-learning-from-baby-boomers-mistakes-2016-06-30 [6/30/16]

3 – thefiscaltimes.com/2015/11/20/7-Ways-Millennials-Are-Getting-Retirement-Saving-Wrong [11/20/15]

4 – kiplinger.com/article/retirement/T001-C006-S001-retire-rich-saving-for-retirement-in-your-20s-30s.html [2/4/16]

Investing During Retirement

THE REALITY OF INVESTING DURING RETIREMENT

As retirees live longer, their portfolios need to be stronger.

 

Provided by Mike Fassi

 

Decades ago, the “typical” retiree left work for good between age 60-65 and typically passed away at about 70-75. Retirement lasted 10-12 years for many Americans. Now the picture has changed: some of us will spend 30, 40, perhaps even 50 years in retirement. (Imagine retiring at 55 and living to be 105 … it is possible.) We may live much longer than our parents, and if we do, we will need a lot more money.

A slight shift in outlook. Years ago, retirees were urged to invest conservatively – often, very conservatively. The idea was to build up your savings and net worth aggressively across two or three decades, and then adopt a risk-averse investment strategy for the “golden years.” But the reality of a 20- or 30-year retirement has changed that mentality.

The new presumption is that today’s retirees should never retire from accumulating wealth. Most Americans will not walk away from their careers with assets equivalent to 20 or 30 years worth of income. If you have $3 million in assets today, you may think you’ll have $100,000 a year to live on for 30 years. Sounds great, right? But that may not be enough. Questions of liquidity and taxes aside, what about the runaway costs of healthcare and eldercare? What about the effect of inflation across 30 years – do you remember what a gallon of gas or milk cost 30 years ago?

A new reality. You’re now seeing people in their sixties with the kind of portfolios that people used to have in their forties – portfolios with stocks, mutual funds, and other investments with appreciable risk. Sometimes they have to invest this way because they haven’t accumulated sufficient wealth for retirement. Or, they are simply being pragmatic about their long-term need to sustain wealth and keep their retirement assets growing.

What kinds of investments should you retire with? The answer to that question can only be determined after you carefully consider some variables, such as the age at which you retire, the assets you have saved up, the lifestyle you want to enjoy, family and health considerations, and how comfortable you are with certain types of investment. Be sure that you speak with a financial advisor who specializes in retirement planning before you make a decision to revise your investment portfolio. Even if you are ten or more years from retirement or plan to keep working into your seventies, I think you will find it eye-opening and useful. Most people underestimate their retirement income needs.

 

Mike Fassi, CLU, CHFC  is a Representative with Centaurus Financial Inc. and may be reached at Fassi Financial, 970-416-0088 or mike@fassifinancialnetwork.com.

 

These are the views of Peter Montoya, Inc., not the named Representative or Broker/Dealer, and should not be construed as investment advice. Neither the named Representative or Broker/Dealer give tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.

 

Why Roth IRA Conversions Can Make Sense in a Down Market

Why Roth IRA Conversions Can Make Sense in a Down Market

When stocks struggle or tread water, going Roth gains merit.

 

Provided by Mike Fassi

 

Converting a traditional IRA to a Roth IRA is no easy decision. After all, it is a taxable event. When the stock market is down or sluggish, however, a Roth conversion has more appeal.

Traditional IRA owners “go Roth” for some very good reasons. A Roth IRA can be a resource for tax-free retirement money. When you are 59½ or older and have owned a Roth IRA for at least five tax years, you can make tax-free withdrawals from your account.1

Original owners of Roth IRAs never have to contend with Required Minimum Distributions (RMDs). They can also contribute to their IRA all their lives, provided they have earned income below a certain ceiling.2,3

In a sense, a Roth IRA functions as a tax management tool in retirement; you can put just about any investment subject to taxable income into a Roth IRA and forego paying taxes on that income in the future.3 

Many people retire to a lower tax bracket. That fact alone is a good argument for timing a Roth conversion to coincide with retirement.

For example, say you contribute to a traditional IRA while you are working, all while you are in the 25% federal income tax bracket. Those contributions come with a perk; you may be saving up to 25 cents on every dollar you put into that traditional IRA, because traditional IRA contributions are tax-deductible in many instances. In this scenario, as you retire, you drop into the 15% federal income tax bracket. Making a Roth conversion at this point also comes with a perk: the conversion now costs 15 cents on the dollar instead of 25 cents on the dollar.3

Why is a poor year for stocks an auspicious moment for a Roth conversion? In a beaten-down market, the cost of conversion can be lower for retirees and pre-retirees alike.

As a mock example, suppose you own a traditional IRA that had a balance of $180,000 at the end of last year. You had hoped the bull market would push its value higher this year, but then the market waned, and now your traditional IRA is worth $170,000. Bad news, yes; if you want to “go Roth” with that IRA, though, there is a silver lining. The lower value of your traditional IRA means the tax bill on the conversion (i.e., the tax owed on the distribution of assets out of the traditional IRA) will be slightly lower. Additionally, when the market rallies in the future, you get growth in a Roth IRA with the potential for tax-free withdrawals, rather than growth in a traditional IRA where withdrawals will be taxed as regular income.4

Other financial factors can make a Roth conversion opportune. If you are unemployed, have major health care expenses, or face a net operating loss (NOL), it may also be a good time for this move. Any of these circumstances could leave you in a lower income tax bracket. An NOL, in fact, can offset the taxable income resulting from the conversion.4

If you are retired and in a low income tax bracket and have not yet claimed Social Security, those three factors may put you in a nice position for a Roth conversion.

A Roth conversion need not be all-or-nothing. Some traditional IRA owners opt for partial conversions; they “go Roth” with just a portion of their traditional IRA funds. A Roth conversion can even be recharacterized; that is, undone. If you want to undo a Roth conversion, in most cases, you have until October 15 of the following tax year to do so.5

When is a Roth conversion a bad idea? A few scenarios come to mind. One, you lack the ability to pay the income tax resulting from the conversion. Two, you are positive that you will be in a lower tax bracket than you are now when you start taking RMDs from your traditional IRA. Three, you have plans to relocate to a state with minimal or no state income tax. Four, you think you might make a major charitable IRA gift either at or before your death. Five, you are in your peak earning years and, correspondingly, in the highest tax bracket of your lifetime.

A Roth conversion is not for everyone, but it could be for you. The short-term tax hit may be a small price to pay for the potential benefits ahead. If you want to explore this move, by all means, talk with a tax or financial professional first. That conversation is essential.

 

Mike Fassi, CLU, CHFC  is a Representative with Centaurus Financial Inc. and may be reached at Fassi Financial, 970-416-0088 or mike@fassifinancialnetwork.com.

 

 

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

  

Citations.

1 – nerdwallet.com/blog/investing/know-rules-before-you-dip-into-roth-ira/ [1/29/16]

2 – irs.gov/Retirement-Plans/Roth-IRAs [12/17/15]

3 – time.com/money/4277306/how-to-contribute-to-a-roth-ira-if-youre-retired/ [4/4/16]

4 – usatoday.com/story/money/columnist/powell/2015/12/19/time-consider-roth-ira-conversion/75152514/ [12/19/15]

5 – irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-IRAs-Recharacterization-of-Roth-Rollovers-and-Conversions [7/14/15]

 

Alternative Approaches to Retirement Planning

Alternative Approaches to Retirement Planning

Is the conventional wisdom for everyone?

 

Provided by Mike Fassi

    

Questioning traditional assumptions about retirement planning can be illuminating. Some retirement planners and economists argue that they need to be reexamined.

Does most retirement planning focus on the future at the expense of the present? One noted economist makes that case. Laurence Kotlikoff, the former White House economic advisor who writes for PBS NewsHour, contends that your retirement savings effort should be structured in a way that allows you to protect your standard of living today and tomorrow.1

A key question in retirement planning is “How much will you need to spend in the future?” Kotlikoff thinks the appropriate question should be “How should you gradually adjust your household spending as you grow older?” He argues that basing your retirement planning on a projected retirement income target is faulty.1

As an illustration, he references the example of what you do when you have errands to run before you catch a flight. The wisest thing to do is to start with your departure time and think backward. (How early do you have to be at the airport? How much time will you need to complete errand A and errand B? How much time should you allow for travel between A & B and after B?) This is what we usually do, and how we figure out when to leave home with enough time to accomplish everything. You plan by looking backward from the future.1

Kotlikoff thinks that typical retirement planning only looks forward. It projects an income target and implies that you have to save $X per year or per paycheck for X years to build a sufficient nest egg to generate that income. This amounts to mere guesswork, he believes, and invites two potential problems. One, if the retirement income target is set too high, you can end up saving more for retirement than you really need and injure your standard of living before retiring. Two, if the retirement income target is set too low, you can end up spending more than you should before you retire and saving less than you need. (And there’s another question. Will your household spending in retirement match what it was years before? Maybe, maybe not.) Kotlikoff thinks that lifetime spending and saving plans have more merit – again, planning by looking backward from the future.1

Is saving overrated? It is pounded home that Americans aren’t saving enough for retirement, but some people don’t think saving is the only step to retiring well. In 2013, retirement planner Joe Hearn (one of MarketWatch’s RetireMentors) posted a column noting several other tips to entering retirement in better financial shape. One, retire without debt. Two, retire with a paycheck (start a small business or work part-time). Three, don’t claim Social Security at 62. There were other pointers, such as retiring to a cheaper part of the country (or world) and going overseas for major surgeries. (As an example, the largest cardiac hospital in the world is India’s Narayana Hrudayalaya Health Center, which is highly regarded and charges about $2,000 for open heart surgery.) If you haven’t saved much for retirement, alternative financial moves like these (and others) could conceivably leave you with lower expenses and more money to live on or invest.2

Should you borrow money & invest it for retirement? This idea definitely isn’t for everyone; it was championed in 2010 by Yale University economists Ian Ayres and Barry Nalebuff. As twenty-somethings have time on their side but not usually a lot of money, Ayres and Nalebuff contended that young people would do well to borrow money and invest it in equities. You don’t need to see a loan officer to make this happen, as there are ways to do it through brokerages; a family loan could also be made pursuant to the same goal. As the risks are potentially major for borrower and lender, you don’t see many such arrangements.3

How about asking your employer for a second retirement plan? Some people have the leverage to pull this off. In particular, doctors and executives without much in the way of savings can make a valid argument that they need (and should have) a deferred compensation plan in addition to the usual qualified retirement plan, as Social Security payments won’t seem large enough when retirement comes. It helps, of course, if they have worked for the employer for quite some time. A reasonable benefit from such a plan would = number of years that the executive or doctor has worked for the employer x 2.0%.

With many people finding it a challenge to save for their futures, it isn’t surprising that these unconventional moves are getting a look.

 

Mike Fassi, CLU, CHFC  is a Representative with Centaurus Financial Inc. and may be reached at Fassi Financial, 970-416-0088 or mike@fassifinancialnetwork.com.

 

 

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

Citations.

1 – pbs.org/newshour/making-sense/make-your-standard-of-living-the-basis-for-all-financial-planning/ [3/31/14]

2 – marketwatch.com/story/7-alternatives-to-saving-for-retirement-2013-09-27 [9/27/13]

3 – money.usnews.com/money/retirement/articles/2010/07/06/3-unconventional-retirement-investing-strategies [7/6/10]

In-Kind Distributions from IRAs

In-Kind Distributions from IRAs

Yes, you can take an IRA distribution in the form of an investment.

 

Provided by Mike Fassi

 

This may surprise you: you can take an IRA distribution in a form other than cash. This may seem unorthodox, but it can make financial sense for some older IRA owners as well as IRA heirs.

An in-kind distribution from a traditional IRA is fully taxable, just as a cash distribution from a traditional IRA becomes taxable income. Just how is the cash value of the in-kind withdrawal determined? The fair market value of the asset is reported to the IRS as a step in the distribution.1,2

Why would you want to make this type of IRA withdrawal? In certain cases, it may be preferable to withdrawing cash, especially when it comes to Required Minimum Distributions (RMDs) for traditional IRAs. 

Maybe you want to keep shares instead of selling them. There are times when you may be reluctant to sell some or all of an investment to satisfy an RMD, because the investment is really performing well. An in-kind withdrawal is an alternative. The amount of the distribution will be treated just like taxable income, but you will still own that asset once it is outside of the IRA. Those shares now have a chance to appreciate further, and you can also elect to donate them to charity.2,3

Maybe you have a cashless IRA. If 0% of your IRA assets are sitting in cash, then one option is to take either a partial or full in-kind withdrawal to satisfy the RMD requirement. You will still retain ownership of the asset(s) distributed in-kind.2

Maybe you see a loser turning into a winner. You hold a poorly performing investment in your IRA, but you sense it will turn around, you suspect its value will soon rise. Rather than liquidate it, shares of it could be withdrawn from the IRA as an in-kind distribution. They will be taxed at their current value when distributed from the IRA as in-kind distributions are treated like taxable income, but in future years, they will only be subject to capital gains tax rates rather than (higher) income tax rates.4

Maybe the IRA has little value. Some “stray” IRAs are not worth very much. If an IRA holds an investment that has so little worth that it seems pointless to have the IRA in the first place, an in-kind distribution may offer a solution. If you own a traditional (or Roth) IRA and make this move before age 59½, you are likely looking at an early-withdrawal penalty as well as taxes. Even so, you may prefer that to keeping up the IRA for years, or carrying a loser investment in the IRA for any number of years while paying attached account fees.2

In-kind IRA distributions can be tricky, as they often involve shares. Share prices fluctuate, and if you are trying to precisely meet your RMD amount with a distribution of shares, there is the risk of coming up short or long. If you come up short, you will need another transaction to satisfy the RMD. If you come out long, that could increase the income tax attached to the RMD. This is the risk you take.5

 

Mike Fassi, CLU, CHFC  is a Representative with Centaurus Financial Inc. and may be reached at Fassi Financial, 970-416-0088 or mike@fassifinancialnetwork.com.

 

 

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

Citations.

1 – tinyurl.com/hsdkwgn [1/19/14]

2 – newdirectionira.com/ira-info/distributions/what-is-a-distribution [2/3/16]

3 – azcentral.com/story/money/business/consumers/2015/12/22/right-size-your-portfolio-coming-year-nancy-tengler/77780344/ [12/22/15]

4 – time.com/money/2791159/how-are-stocks-taxed/ [2/3/16]

5 – marketwatch.com/story/should-you-take-stock-to-meet-required-minimum-distributions-2014-11-03 [11/3/14]

Is America Prepared to Retire

Is America Prepared to Retire?

Two-thirds of us have no financial plan.

 

Provided by Mike Fassi

 

Only 48% of Americans say they think they are saving enough. And 30% feel that they are not even slightly confident that they are saving enough for retirement. That finding comes from the 2015 Consumer Financial Literacy Survey conducted by the National Foundation for Credit Counseling. (The survey collected data from 2,017 U.S. adults.)1

Only 40% of us keep a regular budget. If you are one of those two out of five Americans, you’re on the right track. While this percentage is on par with findings going back to 2007, the study also finds that only 29% of Americans are saving any part of their annual income towards retirement.1

Relatively few seek the help of a financial professional. When asked “Considering what I already know about personal finance, I could still benefit from some advice and answers to everyday financial questions from a professional,” 75% of respondents agreed with the statement. Yet only 12% indicated that they would seek out the help of some sort of financial professional if they had “financial problems related to debt.” While it isn’t surprising to think that 25% of respondents would turn to friends and family, it may be alarming to learn that 18% would choose to turn to no one at all.1

Why don’t more people seek help? After all, Americans of all incomes and savings levels certainly are free to set financial goals. They may feel embarrassed about speaking to a stranger about personal financial issues. It may also be the case that they feel that they don’t make enough money to speak to a professional, that a financial professional is something that millionaires and billionaires have, not the average American worker. Another possibility is that they feel that they have a good handle on their financial future; they have a budget and stick to it, they save in an IRA (like a quarter of Americans), or a 401(k) (nearly three out of ten Americans), and many use other investments (30%, according to the survey). But that 75% admission above indicates that a vast majority of Americans are not as confident.1

Defined goals lead to definite plans. If you set financial objectives and plan for them, you vault ahead of most Americans – at least according to these findings. A written financial plan does not imply or guarantee wealth, of course; nor does it ensure that you will reach your goals. Yet that financial plan does give you an understanding of the distance between your current financial situation (where you are) and where you want to be.

How much planning have you done? Retiring without a financial plan is an enormous risk; retiring with a financial plan that hasn’t been reviewed in several years is also chancy. A relationship with a financial advisor can help to bring you up to date about what you need to do, and provide you with more clarity and confidence when it comes to the financial future.

Mike Fassi, CLU, CHFC  is a Representative with Centaurus Financial Inc. and may be reached at Fassi Financial, 970-416-0088 or mike@fassifinancialnetwork.com.

 

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

Citations.

1 – nfcc.org/wp-content/uploads/2015/04/NFCC_2015_Financial_Literacy_Survey_FINAL.pdf [4/15]