Managing Retirement Income Decisions During Retirement

Jim Lorenzen, CFP®, AIF®

Managing retirement income has never been easy.  Those who retired in the early 1970s saw interest rates rise dramatically, then fall the same way – all within about a 15-year period.   When interest rates were going up, it made them feel good; but, few paid attention to inflation or tax implications.   During one period, interest rates were in the double-digits, but so was inflation, which meant their “increased” income wasn’t really increasing at all.    Money is worth only what it buys at the checkout counter.

So, the retiree who felt great about a 15% interest rate during 15% inflation (yes, it really happened and could happen again, blindsiding people who didn’t live through it before), weren’t really getting a raise at all – and that was before taxes!

The real problem, of course, came when interest rates began to fall.  During the period that interest rates (and inflation) dropped to 12% from 15%, retirees were seeing their incomes drop by 20% (a 3% drop in rates from 15%) while still seeing prices rise by 12%.

How do you manage income in retirement?  It ain’t easy.

Naturally, you could consider a basic withdrawal sequence using a straightforward strategy to take money in the following order:

  1. Required minimum distributions (RMDs) from IRAs, 401(k), or other qualified retirement accounts.
  2. Taxable accounts, such as brokerage and bank accounts.
  3. Tax-deferred traditional IRAs, 401(k), and other similar accounts
  4. Tax-free money – from Roth IRAs for example

This sequence can provide an order of withdrawals; but, other than the RMDs, it doesn’t tell you how much!

But wait! (as they say on tv).

How much?  And, how can you be sure you won’t run out of money?

RMD can provide a clue!

The RMD calculations can provide sound guidance for your entire portfolio!  Using the IRS formulas, Craig Iraelson, executive-in-residence in the financial planning program at Utah Valley University, did some back-testing with hypothetical portfolios invested in different investment allocations with RMD withdrawals starting in 1970 (the beginning of a relatively flat ten-year stock market).   Using beginning values, and even with a portfolio invested in 100% cash, there was still $850,000 left after 25 years!   And, a portfolio that was 25% stocks had $2 million left.

RMDs appear to address longevity risk pretty well; but, there’s another question.   Is the income level provided by the RMDs enough to preserve the pre-retirement lifestyle – or anything close?

There’s the rub.  In the back-tested portfolios, the initial RMD was 3.65% of assets… and that falls within the widely-accepted 4% rule…  but, that’s only $36,500 of pre-tax income.  Even if the retiree family has an additional $30,000 from Social Security, that’s still just $66,500 before taxes; and, for many successful individuals, that isn’t enough.

So, there’s the trade-off:  Sacrifice income for longevity, or accept longevity risk in order to take increased income.

Fotilla Images

Maybe there’s another way.    How can a couple have more freedom to take greater income early while still addressing the risk of running out of “late-life income”?

My “Late Life Income” report shows how many couples have addressed this issue.   You can access it here!

By the way, when you get my report, you’ll also receive a subscription to my ezine.    If you decide you don’t want the ezine when you receive it, you’ll be able to unsubscribe immediately with a single click and, of course, your email is never shared with anyone.

Enjoy the report!  Hope you find it helpful.

 

Enjoy!

Jim


Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

MONEY OR INCOME: Which is most important to you?- Part 3

Rising Inflation ScreenJim Lorenzen, CFP®, AIF®

An income for life – a lifetime retirement income strategy is what most people want – but are they willing to do what’s required?

For most, if not many, the idea of ‘bucketing’ money into categories – current needs, emergency needs, and future needs – is intuitive.  An that’s the ‘secret’ behind having a retirement income for life!  It’s not a secret, really; just a common sense strategy for creating a stress-free lifetime retirement income.

We don’t want to take money from one to fund another unless we’re absolutely FORCED to, which we seldom are – yet, that’s what a lifetime retirement income strategy demands.

This likely explains why people generally hate the idea of annuitization, even though retirees routinely say their biggest fear is running out of assets  –  aha!  Assets!  Not income?

I’ve known people who’re retired with generous pensions (with cost-of-living adjustments) from the federal government and lived amazing retirements, living on Florida waterfront property with boats outside their back doors, even though they had only a couple hundred thousand dollars in savings… and loving it.  You couldn’t get them to trade those pensions for anything!   It was predictable – it would never stop – and they had COLAs built-in!

But, the rest of society seemingly isn’t willing to make the liquidity trade.  Research seems to back this up, finding that the size of liquid holdings is directly related to their sense of well-being and satisfaction.  Apparently if they can’t achieve their need for future income until they meet their need for current assets, they feel cash-strapped – or they’ll choose retirement solutions that are inferior but psychologically more satisfying..

Mental bucketing comes in two forms:

  • Time segmentation:  Cash, bonds, and stocks are segmented according to time frames.  Cash funding near term, laddering bonds for intermediate term and interest-rate risk, and stocks for long-term inflation-hedges.
  • Spending segmentation:  Using financial tools to put predictability into outlays – Using Social Security and immediate annuities to create an ‘income floor’ for meeting essential expenses, and using portfolio withdrawals throughout the entire retirement period to provide for discretionary expenses.

For many, however, the delineation between essential and discretionary expenses can be fuzzy.   When people prioritize their goals, some will classify travel and cable tv as a need, while others will find few needs beyond food, shelter, transportation, medical expenses, etc.   And, many neglect to think about the biggest outlay they’ll make during their entire retirement – the annual tax payment to the I.R.S.

The most straightforward solution to longevity risk

For most, the biggest risk is outliving their money.  In short, it means running out of income.  The straightforward solution is simple:  Trading a portion of liquidity to pay cash for a lifetime income – and transferring longevity risk to an insurance company in exchange for an immediate annuity.  For many, this is a tough sell because they aren’t willing to give up liquidity of current assets to secure a lifetime income, despite the fact all those retired federal retirees in Florida have been doing it for years – and loving it.  And, also despite the fact that an immediate annuity solution is far superior to that of using a variable annuity with a guaranteed lifetime withdrawal benefit.[1]

Not only that, retirees want the potential for an increasing standard of living, as well!  Others may have additional legacy goals!   Inflation-adjusted immediate annuities are available, but haven’t been too popular due to their lower initial payout

The Hybrid Time-Segmentation™ (HTS) solves many of the issues and may appeal to investors who need a greater degree of certainty for their income strategy.

 

The HTS strategy puts an ‘income floor’ under the segments – a floor that’s both predictable and expected to last a lifetime, while still preserving short-term liquidity needs and providing for long-term inflation concerns.  For example, one popular approach is to use a portion of assets to purchase a ten-year deferred income annuity that provides a lifetime retirement income beginning in year #11.  In this way, an additional guaranteed income source is added providing an increased floor as the rest of the portfolio grows for future years.[2]  The entire strategy, of course, should coordinate liquidity, security, inflation-protection, and income needs.

If you’d like to learn more – and it’s worth doing – we have a twenty-minute educational video that explains this lifetime retirement income strategy.  I think you’ll  like it!   Grab some coffee, sit back, and learn more here.

 

Enjoy!

Jim

[1] I must admit my own bias against variable annuities.  To me, using the stock portion of a portfolio to purchase a variable annuity is only turning a potential capital gain into taxable income – something that’s made little sense to me, expenses aside.

[2] Using an ‘investment grade’ insurance company is more important, in my view, than simply grabbing for the best-sounding promise of a slick marketing campaign.

If you would like help, of course, we can always visit by phone.


Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

MONEY OR INCOME: Which is most important to you?- Part 2

Jim Lorenzen, CFP®, AIF®

Last week I asked which was most important to you:

Never running out of money

Never running out of income

Whether you’re building a house or your ‘financial house’, it begins with a plan – that’s common sense.  Yet, I’ve seen more than a few people make major financial decisions BEFORE ever walking through my door for the first time:  Ready, fire, aim.

I’ve seen them retire, make Social Security claiming decisions and even pension decisions… then seek out financial advice – moves that often put them behind the 8-ball before they start.

So, what are the hazards retirees face?

  • Being underfunded.   It’s not uncommon today for people to live thirty years in retirement – one good reason why so many are opting to continue working after their ‘formal’ retirement.  It takes a lot of capital to fund thirty years of income after taxes and inflation – for two lives.  The problem with this hazard is that it’s extremely difficult, if not impossible, for an advisor to change at the point of retirement.
  • Bad timing.  This is something we call ‘sequence of returns’ risk.   To illustrate using simple numbers and ignoring taxes, imagine this scenario:  You retire with $1 million and plan to withdraw 4% annually.  That $40,000 combined with Social Security should meet your needs.

If the market goes up 20% and you withdraw 4%, you should have $1,160,000 after the first year.   Allowing for a 3% inflation rate, you can withdraw $40,000 + inflation = $41,200 in your second year, which computes to 3.55% of the second year’s beginning balance.  Not bad.  If the market does that every year forever, you’re fine!

What if the market goes down 20% in the first year as you withdrew your $40,000 (4% of the original balance)?  The market loss was $200,000 and you withdrew $40,000.  At the end of year #1, you’re down $240,000 and your new balance is $760,000 at the beginning of year #2.    And, of course, prices are higher – inflation has driven your living costs up by 3%!  You’ll need to take $41,200 in the second year, just as in the first scenario above, but now it’s coming from a starting balance of $760,000, which means your withdrawals now represent  5.42% of assets.  Another down year could be disasterous.

Diversification can help[1].   Diversification is all about using asset classes that have low correlation in their movements.  Think of pistons in a car:  If they all went up and down and down at the same time, where would they all be if the engine were to shut down?  Oddly enough, you may not want a portfolio that contains investments that all go up – the opposite could happen, too!

  • Withdrawing too much too soon.

Some people may simply not know how much they can, or should, withdraw.  With longevity risk becoming greater with our medical advances, knowing how much we can withdraw presents a problem for many.

How do you know how much you CAN withdraw and never run out of money?  The government has the answer!   They even publish it!  It’s the IRS required minimum distribution rules!  Just plug your numbers into the calculator[2] and that shows how much can be withdrawn!  The RMD rules apply to all qualified plans, but not to Roth IRAs while the owner is alive, and can be used for other accounts as a guide to avoiding longevity risk.

The good news:  RMD math virtually guarantees against running out of money within 45 years if the amount withdrawn is that calculated and no more.   There’s a practical weakness in this method as a guide for annual income, as well:   Remember our sample $1 million portfolio?

Practical:  Withdraw 4% of the original account balance each year, adjusted for inflation, regardless of market returns, i.e., $40,000 base adjusted only for COLAs each year.  Weakness:  Could lead to early depletion of assets if there are continuous market declines.

Not practical:  The RMD calculation is based on a percentage of the account value.  If the market declines, the percentage could result in a declining income for one or more years.

The bad news:  The RMD amount might be less than what’s needed to meet living expenses and, as noted, could even decline!  So, asset allocation, using the RMD rules, does not affect portfolio survival; but it does affect how much the retiree might receive each year – an unpredictable income.

How do we create a sustainable LIFETIME income?

That’s our subject for next time.

[1] You might want to access our report, Understanding the Diversification Puzzle.

[2] http://apps.finra.org/calcs/1/retirement

Enjoy!

Jim

If you would like help, of course, we can always visit by phone.


Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

MONEY OR INCOME: Which is most important to you?

Jim Lorenzen, CFP®, AIF®

Which goal is most important to you?

–   Never running out of retirement money

–   Never running out of retirement income

–   Both

Sure, you said both.  And, maybe that’s possible!

The problem for many is that not only are substantial assets required to provide a comfortable retirement income – you also have to live a lifestyle below what many would believe you could afford.

I have a client couple who have done just that.  They’ve worked hard, invested responsibly, and lived well within their means allowing them to save at a rate greater than what would appeal to many others.  The result:  They’ve been able to retire in their late ‘50s in a beautiful area  – and doing it at a time their son graduated from college and is now entering grad school.  How many parents could afford to retire with a child entering grad school?   In short, they’re set!  They’ve taken all the right steps to insure their future, even into their 80’s and 90s… and even if everything in “the markets” went south on them.

I’ve also seen others who have amassed ten times that couple’s assets, but are living at a lifestyle that keeps them in perpetual jeopardy.  They’re constantly in danger of running out of money.   Their lives are like a hamster running on the spinning wheel, constantly chasing the cheese.  The lesson:  Even people with $30 million dollars can still be on the edge of disaster.  Think of all the multi-million dollar sports and entertainment figures who’ve ended-up broke, sometimes due to poor management, sometimes due to overspending, sometimes both, virtually always because of ignorance…. either on their part or the part of their ‘managers’, or both.

Choosing the right strategy

What kind of retirement income or wealth management strategy makes sense any given investor?  Naturally, it depends on age, goals, asset level and lifestyle.  It also depends upon what type of strategy the individual is open to considering – most of us have built-in biases based on how we’ve been programmed.

Given the level of financial literacy in America today, it’s a real concern.  Most of what people know about financial instruments they’ve learned from entertainment gurus, their parents, or their friends.  I saw a recent study that revealed more than 31% of Americans didn’t know they could lose money in fixed income investments; and 68%  thought rising interest rates would be good for bonds… all while 60% said they don’t consider themselves knowledgeable regarding fixed income, the market, or economic forces that drive bond pricing.

Generalizations are always dangerous; but hey, you’ve have to start somewhere, right?   So, let’s begin, as a starting point, with this basic admittedly oversimplified outline of what an overall retirement strategy might be:

Retirement Strategy

You might be wondering why those below age 45 aren’t included in my little over-generalized grid.  The answer is simple:  In 25 years’ of practice, only ONCE has someone below age 45 come to my office.  That was almost 20 years ago and I haven’t seen anyone in their 40s come to my office since – they’re still watching Kramer – but, I’ll see them after they turn 50 and finally figured something out they don’t know today.

Back to our grid:

The definitions of “modest” and “substantial” are somewhat squishy.  It’s like trying to define what a ‘middle-market’ company is – you can ask a hundred people and get a hundred different answers.  So, let’s just say the definition is whatever you think it is.

If you’re worried about running out of money, you might consider yourself to be a “constrained investor” – and you probably shouldn’t be trying to ‘make up for lost time’ by making risky bets.

If you’re like the couple who’s sitting pretty and just doesn’t want to blow it, you might be preservation minded – someone who wants to maintain their lifestyle after inflation and taxes and not do anything stupid.   [See my blog post, “Inflation and Stockshere.]

Back to our initial quiz:

Which worries you most:  Running out of money or running out of income?

Long-term plans don’t change just because temporary conditions do.

You can have an income forever; but, it may not be enough to even pay your utility bill if the asset base is too small; and, if you

run out of money, there’s no income.

Navigating it all is much like navigating a ship at sea, surrounded by all sorts of potential hazards.

Too much to cover in a single post, as you might imagine; so, we’ll be covering the issues and strategies you can use in upcoming installments.  I hope you’ll find them helpful.

If you would like help, of course, we can always visit by phone.

Enjoy!

Jim


Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Old-Age Financial Security: Silence is NOT Golden, yet Some aren’t talking!

Jim Lorenzen, CFP®, AIF®

Generational planning didn’t seem important  for old age financial security in my grandparent’s day.   They were living at  a time when Social Security was passed and designed to last for a lifetime beginning at age 65.  Of course, life expectancy back then was around age 68!  Who needed to worry about generational issues?  Longevity wasn’t a risk.

My generation—the baby boomerss—became the first  to experience the ‘sandwich’ effect:  Taking care of aging parents and children at the same time.   And, as that was unfolding, people were beginning to realize they were living longer, too!

The cultural quicksand began to materialize, but few have recognized it.  It’s like glaucoma:  You don’t see it coming; but, all of a sudden, it’s there.   It’s silence.  In a recent online survey (cited below), over half of GenX respondents and 60% of baby boomers indicated they’ve never had a conversation about planning for retirement or financial security in their old age, yet their fears were the same.

The reasons tend to tell is why.  They’re repeating the same mistakes their parents made.

Why do we study history?  Because we know human nature doesn’t change—it hasn’t changed for thousands of years.  Studying history allows us to learn the mistakes human nature, unencumbered by knowledge, tends to make.  But, knowledge helps us prevent a repetition!

When parents and children don’t talk about finances, guess what…

Why do they feel they’re not making enough money?  Why do they have too many other expenses and are paying off debt?  The answer is simple.

They’re  repeating mistakes.  But, the GenX group seems to be making more of them.  Are the boomers not talking to their kids?   Are their kids not involved in their parent’s own planning?   Maybe they should be.

As parents are living longer—longevity risk– they run a very real risk of needing long-term care.  If ever there was a threat to old age financial security, this may be it; yet,  relatively few address that issue usually because of cost or for fear of losing all that money paid in premiums if they don’t use it.   However if they do need it, and the kids end up having to pay some or all of the ultimate cost for that and their parents’ support, it also could eat-up their inheritance!

What we don’t know can cause financial hurt.  Perhaps they don’t know  that a professionally-designed life insurance policy might provide tax-free money that could be used to cover long-term care if needed and yet preserves cash if it isn’t—and still maintain the children’s inheritance!   It’s a financial ‘Swiss Army Knife”  type tool that can solve a lot of issues at once.

Unfortunately, few people take the time to have a generational financial planning session either on their own or  – maybe better—facilitated with a  family financial advisor acting as a guide and facilitator.   Some advance planning can make a big difference.  Here’s an example:

Real Life Case History (Names changed)

Fred and Wilma never discussed their finances with Pebbles or Bam Bam.  As Fred and Wilma grew into their 90s, it became evident they could no longer live on their own.  Fred was diagnosed with a terminal disease and Wilma, at  90, was diagnosed with Alzheimer’s.  They could no longer function and it was now Pebbles’ and Bam Bam’s turn to take care of their parents.  Fred lived for eight more months, but Wilma continued living for nine more years.  Despite the fact they did have some retirement savings, it was no where near enough to cover the more than $600,000 in costs that were incurred  by Pebbles and Bam Bam during that 9-year period. 

Had Fred and Wilma taken the right steps sooner, those costs threatening the old age financial security of Pebbles and Bam Bam might have been covered, or—at the very least—Pebbles and Bam Bam would have been reimbursed, protecting their inheritance … and all of the money might have been provided tax-free!   Unfortunately, their attitudes about various financial solutions available to them were colored by what they’ve heard from parents, friends, and even entertainment media, including television gurus selling DVDs.   Not surprising.  Some people even get their medical advice that way.

Old strategies simply don’t address today’s longevity and ageing issues.  Different strategies are required.   How can it be possible to make sure the parents have a lifetime of inflation-adjusted income and still provide an inheritance for the kids?

Rising Inflation ScreenYou might enjoy viewing this educational 20-minute video that shows one strategy that likely makes sense for many people.  While the tools used to implement it might vary, it’s still worth a view.  So, grab some coffee and see for yourself.

If you haven’t had a generational meeting with your family financial advisor, maybe it’s time you did.  Like Mark Cuban’s dad once told him:  This is as young as you’re ever going to be.

If you would like help, of course, we can always visit by phone.

Enjoy!

Jim


Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

ROLLOVER DECISIONS – THE BEST AND THE WORST

Jim Lorenzen, CFP®, AIF®

 

Bad decisions = bad consequences = big costs!

As you may have seen or heard me say many times, it’s not wise to act first and plan later; yet, that’s exactly what I’ve seen people do time and again over the last twenty-five years.  As you can imagine, I’ve seen a few mistakes.   That applies to rollover decisions, as well as other decisions regarding 401(k) and other retirement account assets.

You might enjoy seeing a short video on one big mistake many people make – and you can also get access to some additional resources and a rollover checklist I think you’ll find useful.  You can find it all here.

There’s a right way and wrong way to do a rollover, if you should do one at all.   Let’s quickly capsulize – there’s more to know, so you should consult with appropriate tax and legal advisors before acting.   Here are the six best and worst rollover decisions people make:

The Best

  1. Leave money in the qualified plan if retiring between ages 55 and 59½ and distributions are required.Since there is no penalty on withdrawals from a qualified plan after attainment of age 55 and separation from service (age 50 for qualified public safety employees), distributions are more liberal than if funds are rolled to an IRA. Once funds are rolled to an IRA, there is generally a penalty for withdrawals prior to age 59½. Therefore, it’s best for people who need money from their retirement account in this age bracket to leave the money as is, in their company retirement plan.Often, people who have already completed their rollover are younger than age 59½ and need a distribution.  In these cases, they can use rule 72(t) to avoid penalties.  When they do this, it’s best to split the IRA into pieces for maximum benefit.Each IRA stands on its own, which means that taking 72(t) distributions from one account has no effect on the others.  Therefore, if one IRA produces more income than is needed when placed on 72(t) distributions, you could split the IRA into more than one account, and use one of the smaller accounts to make your withdrawals.  I am not a CPA or an attorney; so, check with the appropriate advisors.And in the future, if you need more income, you could begin equal distributions from another account as well. This could provide greater flexibility in meeting your immediate and future income requirements if under age 59½.
  2. Make optimal use of creditor protectionSome IRA owners and financial advisors think that the recent changes to the federal bankruptcy rules automatically protect IRAs.  That is not true.  For creditor protection purposes, an individual would be wise to leave his funds in his qualified plan because ERISA gives complete creditor protection to qualified plans (note that one person qualified plans do not receive the protection—there needs to be at least one “real” employee in the plan).   If the individual does roll over his qualified plan into an IRA, it is optimal to leave these funds in a separate rollover IRA, because the protection that the funds had under ERISA will follow the funds into the rollover IRA.
  3. Re-Check Your BeneficiariesA company retirement plan (a qualified plan) is governed by the ERISA rules.  And those rules state that you must name your spouse as a beneficiary or get spousal consent to name another person.  The same rules do not apply to IRAs.Remember this all important rule—whoever you name as beneficiaries on your IRA account will inherit your IRA. Your will or living trust has no control over your IRA, so make sure your IRA beneficiaries are exactly as you desire.

The Worst

  1. Get a check from the companyOf course, this is just foolish. The company must withhold 20% from the payment, so that a person with a $100,000 account will have $20,000 withheld, and will receive a check for $80,000. In order to complete a tax-free rollover, the taxpayer must deposit that $80,000 in an IRA plus $20,000 from their pocket to complete a tax-free $100,000 rollover.The taxpayer may eventually get the $20,000 withheld as a tax refund the following year, but that will not help their cash flow, as they need to complete their IRA rollover within 60 days of receiving the check from their qualified plan.The bottom line is that people should never touch their qualified funds. The only sensible way to move funds is a direct transfer from the qualified plan to the IRA custodian and avoid withholding.
  2. Rollover company stockShares of employer stock get special tax treatment, and in many cases, it may be fine to ignore this special status and roll the shares to an IRA. This would be true when the amount of employer stock is small, or the basis of the shares is high relative to the current market value.However, if you have large amounts of shares or low basis, it might be a very costly mistake not to use the Net Unrealized Appreciation (NUA) Rules.[1]  If your company retirement account includes highly appreciated company stock, one option is to withdraw the stock, pay tax on it now, and roll the balance of the plan assets to an IRA.  This way you will pay no current tax on the Net Unrealized Appreciation (NUA), or on the amount rolled over to the IRA.  The only tax you pay now would be on the cost of the stock (the basis) when acquired by the plan.By the way, if you withdraw the stock and are under 55 years old, you have to pay a 10% penalty (the penalty is applied only to the amount that is taxable).For more information on NUA, get our complete report on the Six Best and Worst IRA Rollover Decisions.  You can do that here.
    Click here for your report!
    [1] IRS Publication 575
  3. Rollover after-tax dollarsSometimes, qualified plan accounts contain after-tax dollars.  At the time of rollover, it is preferable to remove these after-tax dollars, and not roll them to an IRA.  That way, if the account owner chooses to use the after-tax dollars, he will have total liquidity to do so.You can take out all of the after-tax contributions, tax-free, before rolling the qualified plan dollars to an IRA. You also have the option to rollover pre-tax and after-tax funds from a qualified plan to an IRA and allow all the money to continue to grow tax-deferred.The big question is, “will you need the money soon?” If so, it probably will not pay to rollover the after-tax money to an IRA, because once you roll over after-tax money to an IRA, you cannot withdraw it tax-free. The after-tax funds become part of the IRA, and any withdrawals from the IRA are subject to the “Pro Rata Rule.”

Don’t forget the video, resources and checklist, which you can access here.  And, don’t forget the report!

If you would like help, of course, we can always visit by phone.


Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Planning to Roll Your 401(k) to Your Own IRA?

Jim Lorenzen, CFP®, AIF®

Getting ready to retire?  Planning to roll your 401(k) into your own IRA?  It will pay to do your homework first.

To help you get started, you might find our 401(k) Rollover Review helpful.  It contains information on changing jobs, retiring, methods, rollover taxation issues, and more.

i303a_ira-rollover-review_overview-report_vsa_001Click Here for your 401(k) Rollover Review!

 

Will Your Retirement Money last? Maybe – with the right ‘Late Life Income’ strategy.

iStock Images

iStock Images

Jim Lorenzen, CFP®, AIF®

This past Monday, I retweeted a Fox Business post, Why Your Retirement Savings May Be a Pipedream.

A number of my clients, deciding to help ensure their late-life income needs will be met, have  in the past elected to execute a “late life income” strategy – however, they wanted one that would not lock them in to the low rates and liquidity issues that come with annuities.

I created a hypothetical – translate fictitiousLate Life Income “case study” of what such a strategy might look like for the right candidate couple (this may not be right for everyone).  You can learn more by getting it here.

Enjoy,

Jim

————

Resized CFP_Logo_GoldJim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and an Accredited Investment Fiduciary® serving private clients providing retirement planning and wealth management services since 1991. Jim is Founding Principal of The Independent Financial Group, a registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.6a017c332c5ecb970b01a51174cbb0970c-120wi

TO ROLL? OR, NOT TO ROLL….

iStock Images

iStock Images

Jim Lorenzen, CFP®, AIF®

Getting ready to pull the retirement cord?  In a previous post, I had talked about pension options – worth reviewing if that’s an issue for you.  I also recently provided an IRA rollover checklist  for those evaluating the pros and cons of such a decision.

Whether or not to to do a rollover is not a simple ‘yes’ or ‘no’ question.  It depends on your particular situation.  There are good reasons both for and against rolling over your retirement plan to an IRA – the checklist can help sort those out.

Believe it or not, there may be a reason to take some of your retirement out in cash and pay taxes right now!  How can that be?

If you’re on of those now doing your homework – good for you – you may enjoy reading this report, Six Best and Worst IRA Rollover Decisions.  This report not only discusses those decisions, it will also provide some insight on additional issues worth considering.

I hope you find it worthwhile.  You can download it here>  Click here for your report!

Before you get to the report, however, here’s a bit of news I came across from Mark Dreschler, the president and founder of Premier Trust.  His words:

The US Supreme court ruled this past June, in Clark v. Rameker, that inherited IRAs are NOT protected from a beneficiaries’ bankruptcy. Previously, this was an open issue. Now, the only way to protect an inherited IRA from inclusion in the beneficiaries’  bankruptcy, is to have a correctly worded IRA Inheritance Trust named as the beneficiary. This will also protect the IRA principal from other creditors, or divorce proceedings.

However, if the distributions are paid directly to the beneficiary, they are NOT protected from bankruptcy or even attack in the event of a divorce. An IRA Inheritance Trust which also protects distributions from attack is called an “accumulation trust.”  The trustee cannot be the child. The trustee has full discretion to hold distributions from the IRA in trust to protect the child or pass them out, depending on the circumstances. The child beneficiary may benefit from the distributed assets that the trust holds, but does not own them individually. Obviously, if the child-beneficiary has no title or control of the IRA distributions, they cannot be taken by a charging order or other legal means of attack.

Hope you find that helpful.  And, don’t forget to download your report.

Jim

 


Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

 

 

Thinking of Rolling your 401(k)? This checklist may help!

iStock Images

iStock Images

Jim Lorenzen, CFP®, AIF®

Getting ready to leave your company?  Considering doing a rollover?  This isn’t a decision to be taken lightly.  While rolling over your 401(k) or other qualified retirement plan to an IRA makes perfect sense for many people, it’s not an “automatic” decision.

I’ve put together a little checklist that may provide some help.  I hope you feel it’s helpful for you.

Jim

Click Here for your checklist!

 

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and an Accredited Investment Fiduciary® serving private clients’ wealth management needs since 1991.   Jim is Founding Principal of The Independent Financial Group, a Registered Investment Advisor providing retirement planning and investment advisory services on a fee-only basis.   He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriately licensed professional.  All images used in this communication are in  public domain unless otherwise noted.