Elisabeth Dawson

What can you do to allay this risk?

Knowledgeable investors are aware that investing in the capital markets presents any number of risks – interest-rate risk, company risk, and market risk. Risk is an inseparable companion to the potential for long-term growth. Some of the investment risks we face can be mitigated through diversification.1

As an investor, you face another, less-known risk for which the market does not compensate you, nor can it be easily reduced through diversification. Yet, it may be the biggest challenge to the sustainability of your retirement income.

This risk is called the sequence-of-returns risk.

The sequence-of-returns risk refers to the uncertainty of the order of returns an investor will receive over an extended period of time. As Milton Friedman once observed, you should “Never try to walk across a river just because it has an average depth of four feet.”2

Sequence of Returns. Mr. Friedman’s point was that averages may hide dangerous possibilities. This is especially true with the stock market. You may be comfortable that the market will deliver its historical average return over the long term, but you can never know when you will be receiving the varying positive and negative returns that comprise the average. The order in which you receive these returns can make a big difference.

For instance, a hypothetical market decline of 30% is not to be unexpected. However, would you rather experience this decline when you have relatively small retirement savings or at the moment you are ready to retire – when your savings may never be more valuable? Without a doubt, the former scenario is preferable, but the timing of that large potential decline is out of your control.

Timing, Timing, Timing. The sequence-of-returns risk is especially problematic while you are in retirement. Down years, in combination with portfolio withdrawals taken to provide retirement income, have the potential to seriously damage the ability of your savings to recover sufficiently, even as the markets fully rebound.

As you consider your options, keep in mind that a certain amount of risk is unavoidable. Diversification is helpful, to a degree, but it can also be helpful to have a plan in mind if you face a difficult year ahead. Are you able to delay retirement for a year or more, potentially adding additional years to save as well as allowing the financial environment to recover? Another alternative may be to reconsider, downsize, or delay some of your bigger plans. These alternatives may not be preferable, but you can take comfort in having those plans and ideas in place, should they ever become necessary.

If you are nearing retirement or already in retirement, it’s time to give serious consideration to the “sequence-of-returns risk” and ask questions about how you can better manage your portfolio.

Is Retirement on your mind? Are you over 50 and have you saved at least $500k? Then you are invited to attend a one-night college course called Retirement 101 taught by me! You can attend this one-night popular course by calling now at 619.640.2622 with this offer you get your tuition waived for this one-night course.

Citations.

1 – https://www.kiplinger.com/article/retirement/T047-C032-S014-is-your-retirement-income-in-peril-of-this-risk.html [7/3/2018]
2 – https://quotefancy.com/quote/868218/Milton-Friedman-Never-try-to-walk-across-a-river-just-because-it-has-an-average-depth-of [2018]

What should you focus on as the transition approaches?

You can prepare for your retirement transition years before it occurs. In doing so, you can do your best to avoid the kind of financial surprises that tend to upset an unsuspecting new retiree.

How much monthly income will you need? Look at your monthly expenses and add them up. (Consider also the trips, adventures and pursuits you have in mind in the near term.) You may end up living on less; that may be acceptable, as your monthly expenses may decline. If your retirement income strategy was conceived a few years ago, revisit it to see if it needs adjusting. As a test, you can even try living on your projected monthly income for 2-3 months prior to retiring.

Should you downsize or relocate? Moving into a smaller home may reduce your monthly expenses. If you will still be paying off your home loan in retirement, realize that your monthly income might be lower as you do so.

How should your portfolio be constructed? In planning for retirement, the top priority is to build investments; within retirement, the top priority is generating consistent, sufficient income. With that in mind, portfolio assets may be adjusted or reallocated with respect to time, risk tolerance, and goals: it may be wise to have some risk-averse investments that can provide income in the next few years as well as growth investments geared to income or savings objectives on the long-term horizon.

How will you live? There are people who wrap up their careers without much idea of what their day-to-day life will be like once they retire. Some picture an endless Saturday. Others wonder if they will lose their sense of purpose (and self) away from work. Remember that retirement is a beginning. Ask yourself what you would like to begin doing. Think about how to structure your days to do it, and how your day-to-day life could change for the better with the gift of more free time.

How will you take care of yourself? What kind of health insurance do you have right now? If you retire prior to age 65, Medicare will not be there for you. Check and see if your group health plan will extend certain benefits to you when you retire; it may or may not. If you can stay enrolled in it, great; if not, you may have to find new coverage at presumably higher premiums.

Even if you retire at 65 or later, Medicare is no panacea. Your out-of-pocket health care expenses could still be substantial with Medicare in place. Extended care is another consideration – if you think you (or your spouse) will need it, should it be funded through existing assets or some form of LTC insurance?

Give your retirement strategy a second look as the transition approaches. Review it in the company of the financial professional who helped you create and refine it. An adjustment or two before retirement may be necessary due to life or financial events.

Is Retirement on your mind? Are you over 50 and have you saved at least $500k? Then you are invited to attend a one-night college course called Retirement 101 taught by me! You can attend this one-night popular course by calling now at 619.640.2622 with this offer you get your tuition waived for this one-night course.

It may seem like a tall order, but it can be accomplished.

Put yourself steps ahead of your peers. If you have a young, growing family, no doubt your to-do list is pretty long on any given day. Beyond today, you are probably working on another kind of to-do list for the long term. Where does “saving and investing” rank on that list?

For some families, it never quite ranks high enough – and it never becomes the priority it should become. Assorted financial pressures, sudden shifts in household needs, bad luck – they can all move “saving and investing” down the list. Even so, young families have strategized to build wealth in the face of such stresses. You can follow their example.

First step: put it into numbers. How much money will you need to save by 65 to promote enough retirement income and to live comfortably? Are you on pace to build a retirement nest egg that large? How much risk do you feel comfortable tolerating as you invest?

A financial professional can help you arrive at answers to these questions and others. They can help you define long-range retirement savings goals and project the amount of savings and income you may need to sustain your lifestyle as retirees. At that point, “the future” will seem more tangible, and your wealth-building effort, even more purposeful.

Second step: start today & never stop. If you have already started, congratulations! In getting an early start, you have taken advantage of a young investor’s greatest financial asset: time.

If you haven’t started saving and investing, you can do so now. It doesn’t take a huge lump sum to begin. Even if you defer $100 worth of salary into a retirement account per month, you are putting a foot forward. See if you can allocate much more. If you begin when you are young and keep at it, you may witness the awesome power of compounding as you build your retirement savings and net worth through the years.

Of course, this may not be enough, and you may find that you need to devote more than $100 per month to your effort. If you strategize and escalate your savings over time, you may very well generate enough money for a very comfortable retirement.

Merely socking away money may not be enough, either. There are a wide variety of choices you can make – perhaps alongside a trusted financial professional – that may help position you and your household for a comfortable future, provided you keep good financial habits along the way.

How do you find the balance? This is worth addressing – how do you balance saving and investing with attending to your family’s immediate financial needs? Bottom line, you should consider finding money to save and invest for your family’s near-term and long-term goals. Are you spending a lot of money on goods and services you want rather than need? Cut back on that kind of spending. Is credit card debt siphoning away dollars you should assign to saving and investing? Fix that financial leak and avoid paying with plastic whenever you can.

Vow to keep “paying yourself first” – maintain the consistency of your saving and investing effort. What is more important: saving for your child’s college education or buying those season tickets? Who comes first in your life: your family or your luxuries? You know the answer.

It has been done; it should be done. There are people who came to this country with little more than the clothes on their backs who have found prosperity. It all starts with belief – the belief that you can do it. Complement that belief with a strategy and regular saving and investing, and you may find yourself much better off much sooner than you think.

Are YOU Ready to Upgrade Your Relationship with Money?

I’ve created a free cheat sheet to help you discover the 7 hidden costs that are sabotaging your financial success—and what to do about them. Just give us a call now at 619.640.2622 and we will get you your complimentary copy of this cheat sheet.

The list of these options has grown.

An IRA, or Individual Retirement Account, is a tax-advantaged savings account that is subject to special rules regarding contributions and withdrawals. One of the central rules of IRAs is that withdrawals prior to age 59½ are generally subject to a tax penalty because policymakers sought to create a disincentive to use these savings for anything other than retirement.1

Yet, policymakers acknowledged that extenuating circumstances might require access to these savings prior to one’s second act. In appreciation of this, the list of exceptions for waiving this penalty has grown over the years.

Penalty-Free Withdrawals. Outlined below are the circumstances under which individuals may withdraw from an IRA prior to age 59½, without a tax penalty. Ordinary income tax, however, is generally due on such distributions.1

Death – If you die prior to age 59½, the beneficiary(ies) of your IRA may withdraw the assets without penalty. However, if your beneficiary decides to roll it over into their IRA, they will forfeit this exception.

Disability – Disability is defined as being unable to engage in any gainful employment because of a mental or physical disability, as determined by a physician.

Substantially Equal Periodic Payments – You are permitted to take a series of substantially equal periodic payments and avoid the tax penalty, provided they continue until you turn 59½ or for five years, whichever is later. The calculation of such payments is complicated, and individuals should consider speaking with a qualified tax professional.

Home Purchase – You may withdraw up to $10,000 toward the purchase of your first home ($20,000 for a married couple). You cannot have owned a home within the last two years.

Unreimbursed Medical Expenses – This exception covers medical expenses in excess of 10% of your adjusted gross income.

Health Insurance – After a job loss, there are rules in place that allow the purchasing of health insurance, penalty free.

Higher-Education Expenses – Funds may be used to cover higher-education expenses, such as tuition, student fees, textbooks, supplies, and equipment. Only certain institutions and associated expenses are permitted.

Active Duty Call-Up – Reservists who make an IRA withdrawal during a period of active duty of 180 days or longer do not have to pay a 10% early withdrawal penalty.2,3,4

As always, be sure to speak with a tax professional about your specific situation.

Is Retirement on your mind? If you are over the age of 50 and have saved at least $500,000 you may be able to retire and don’t even know it! Call us now at 619.640.2622 and get your complimentary income for Life Report to see how you can retire now!

Citations.

1 – https://www.marketwatch.com/story/gearing-up-for-retirement-make-sure-you-understand-your-tax-obligations-2018-06-14 [6/14/18]
2 – https://www.investopedia.com/articles/personal-finance/102815/rules-rmds-ira-beneficiaries.asp [2/21/18]
3 – https://money.usnews.com/money/retirement/slideshows/ways-to-avoid-the-ira-early-withdrawal-penalty [11/7/18]
4 – https://www.investopedia.com/articles/retirement/02/112602.asp [10/7/18]

What steps might help you sustain and grow your retirement savings?

“What is your greatest retirement fear?” If you ask any group of retirees and pre-retirees this question, “outliving my money” will likely be one of the top answers. In fact, 61% of investors surveyed for a 2018 AIG retirement study ranked outliving their money as their top anxiety.1

Retirees face greater “longevity risk” today. The Census Bureau says that Americans typically retire around age 63. Social Security projects that today’s 63-year-olds will live into their mid-eighties, on average. This is a mean life expectancy, so while some of these seniors may pass away earlier, others may live past 90 or 100.2,3

If your retirement lasts 20, 30, or even 40 years, how well do you think your retirement savings will hold up? What financial steps could you take in your retirement to try and prevent those savings from eroding? As you think ahead, consider the following possibilities and realities.

Realize that Social Security benefits might shrink in the future. In 2000, there were four workers funding Social Security for every retiree receiving benefits. By federal estimates, there will be only 2.2 workers funding Social Security for every retiree in 2035. This may not bode well for the health of the program.4

For decades, Social Security typically took in more dollars per year than it paid out. That ongoing surplus – also known as the Social Security Trust Fund – is now projected to dry up by 2034. Congress may act to address this financing issue before then, but the worry is that future retirees could get slightly less back from Social Security than they put in. It may be smart to investigate other potential retirement income sources now.4

Understand that you may need to work part time in your sixties and seventies. The income from part-time work can be an economic lifesaver for retirees. Suppose you walk away from your career with a hypothetical $500,000 in retirement savings. In your first year of retirement, you decide to withdraw $25,000 of that for some of your income. You keep doing that year after year. That money will be gone in 20 years. (Inflation might lead you to draw it down faster.) What if you worked part time and earned $20,000-30,000 a year? If you can do that for five or ten years, you effectively give those retirement savings five or ten more years to last and grow.

Retire with health insurance and prepare adequately for out-of-pocket costs. Financially speaking, this may be the most frustrating part of retirement. You can enroll in Medicare at age 65, but how do you handle the premiums for private health insurance if you retire before then? Striving to work until you are eligible for Medicare makes economic sense and so does building a personal health care account. According to Fidelity research, a typical 65-year-old couple retiring today will face out-of-pocket health care costs approaching $300,000 over the rest of their lives.5

Many people may retire unaware of these financial factors. With luck and a favorable investing climate, their retirement savings may last a long time. Luck is not a plan, however, and hope is not a strategy. Those who are retiring unaware of these factors may risk outliving their money.

Citations.

1 – cnbc.com/2018/10/26/retiring-in-a-down-market-can-mean-much-less-for-rest-of-your-life.html [10/26/18]

2 – thebalance.com/average-retirement-age-in-the-united-states-2388864 [1/27/19]

3 – ssa.gov/oact/population/longevity.html [3/6/19]

4 – forbes.com/sites/catherineschnaubelt/2018/05/30/social-security-past-present-and-future [5/30/18]

5 – fidelity.com/viewpoints/retirement/transition-to-medicare [4/24/18]

Countless liabilities accompany the duties for those who act as executor to an estate. The manner in which you carry out these responsibilities demonstrates both your character and capabilities. A systematic approach will be highly beneficial to ensuring your success in this important role. Here are the general steps that executors should take, both during the testator’s life and upon their passing.

Even before assuming your role as executor, there are some necessary duties you should address. Your first and most vital step is to simply communicate with the testator. Be certain you know where the will and other important documents are kept for when they pass. Although it may seem premature, ask them what type of funeral service they want and whether they prefer to be cremated or buried. Ensure that you have the correct contact information for any legal representatives, financial advisors, and other professionals tied to the trust. In addition, gather the contacts for relatives, business partners, and anyone else who is close to the testator.

There is good reason to be thorough in confirming intentions and double-checking details while carrying out your duties as executor. While it’s common for married people to leave most of their assets to their spouse, many don’t realize the appropriate accounts should be jointly titled in order to simplify the process. You should also confirm that the testator’s beneficiaries are up-to-date and no changes are needed. Compile an itemized list specifying what each person will receive, clearly outlining the distribution of both money and physical items. Ideally, the testator should keep all assets and accounts in a confidential and frequently updated record. Then, upon the death of the testator, the executor would open a sealed document containing confidential passwords and logins for all appropriate assets and accounts.1

Obviously, once a testator passes away there are several matters to address. Begin by determining if you need any help performing the duties of executor. Additional professionals may be needed if the deceased had significant legal or tax issues, large investments in real estate or business, or conflicts with any inheritors.

Depending upon the situation, you may or may not need to consult an attorney. If the testator had a simple trust, then legal advice may not be required and a probate court clerk may suffice to answer any questions. You could also refer to a handbook or consult a trusted online resource.2,3 However, if anyone challenges the validity of the will, hiring an attorney will be essential. The attorney can overtake the role of executor or simply provide legal guidance. They would be paid from the estate, usually either at an hourly rate, in a lump sum, or as a consulting fee.

Your next task is to determine the level of probate for the estate. Many types of assets do not require probate. The following assets are often exempt: jointly owned assets, assets within a trust, any payable on death (POD) account and assets with assigned beneficiaries.2

Probate may still be necessary, although it varies by state. You must file the will in probate court – if you’re in a state which requires it – to authenticate the will and close the estate. At that time, you should request the court confirm you as the executor. You will also need to contact all definite and possible beneficiaries. It is essential to notify all close relatives in case the court rules the will is legally invalid, rendering the stated beneficiaries unenforceable. In that case, the testator’s next of kin may receive the assets.

You should maintain a list of the total assets, whether they are subject to probate or not. Assets which are not subject to probate are permitted to be distributed prior to the conclusion of the court probate process. 2,3

Probate can become a lengthy process, extending over many months. As it progresses, your duties will continue. Managing the estate’s assets in compliance with the will or trust is important. You will be required to contact Medicare, Social Security, other necessary government agencies and perhaps even former employers.2

Costs will also need to be paid through the estate for expenses such as taxes, mortgage payments, insurance premiums and utilities for a primary residence. Check state laws in order to find out how to go about notifying the appropriate agencies in order to pay off any outstanding debt. As the executor, you will determine whether any claims for debt collection are legitimate. Creditors generally have up to 6 months to send notification of required debt payments.2

In addition to expenditures, income may be paid into the estate. By establishing a bank account in the estate’s name, you will have a place to hold any royalties, dividends and other potential income such as collected rent payments.2

Lastly, as the executor, you direct all estate distributions according to the testator’s will or trust documents. Once completed, you should request the probate court issue the legal estate settlement.2

The role of executor is an immense responsibility, especially for larger and more complicated estates. Appropriate planning and thorough preparation will aid in your future success.2

Ready to Upgrade Your Relationship with Money?

I’ve created a free cheat sheet to help you discover the 7 hidden costs that are sabotaging your financial success—and what to do about them.

Get your FREE cheat sheet here!

Citations.

1 – investopedia.com/articles/retirement/11/executors-checklist-7-things-before-they-die.asp [4/30/18]

2 – nolo.com/legal-encyclopedia/executor-estate-checklist-29458.html [12/12/18]

3 – info.legalzoom.com/assets-distributed-after-probate-will-3959.html [12/12/18]

m