Retirement “Goals”

If you’re a college sports fanatic like I am, this is one of the best times of the year.  March Madness (a.k.a. the NCAA Men’s Basketball Tournament) has been in full swing over the last couple of weeks – 72 of the nation’s top teams competing for the ultimate title of National Champions.

Watching game after game during the tournament and tracking the winners on the bracket I keep by my side, I can’t help but see a parallel here between the strategies these teams are using to reach their ultimate goal and the strategies we need to use to reach one of our ultimate goals…retirement.  That’s right, I’m saying the road to your retirement is like the road to the Final Four.  Stay with me as I draw a couple of parallels:

• It All Starts with a Plan –
  • Basketball.  Once the tournament brackets are in place, each team puts together their best strategy.  This includes putting together their strongest line-ups, putting in hours of preparation, and forming game plans to maximize their strengths and minimize the opposing team’s best assets.    
  • Retirement.  Once we choose a retirement goal (age we want to retire, income we will need in retirement, etc.), we work with our financial planner to put together our best strategy.  We work hard to maximize tools (income, savings vehicles, investment strategies) while minimizing the risks (rising interest rates, market volatility, changing tax laws, etc.).
• Make Adjustments –
  • Basketball.    The NCAA tournament is known for its upsets – the smaller or lower seeded teams that find a way to beat the bigger, top rated teams (like Lehigh beating Duke!).  If an upset occurs, teams may not be prepared for the team they will be forced to play.   Injuries and other unexpected obstacles quickly occur, forcing teams to quickly adapt their strategies to get their next win.
  • Retirement.  Life happens … sometimes causing our best-laid plans to go off course.  A family member gets sick and we have to take time off to care for them.  We lose a job, experience a pay freeze, or have major changes to the pension plan we had been counting on.  When these unexpected events occur, we need to work with our planner to make the required adjustments to keep us on course, whether it is to work longer, save more, or adjust our retirement income expectations.

The NCAA National Basketball Championship is a team effort…and so is your retirement.  Work with your planner to ensure that you have your best plan in place to reach your retirement goals.

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Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.

Why Age Matters with Michigan's New Pension Tax: Updated

Originally posted December 26, 2011

Michigan held out...they protected people collecting pensions for as long as possible. But the tax breaks are over, as Michigan follows suit with many other states in the nation by taxing pensions. It all begins January 1, 2012. Not all retirees with pension income are affected. However, if your pension income is subject to Michigan tax, under the new rules, you will need to withhold Michigan tax in the amount of 4.35%.

Here’s how the new law may affect you --

1.  IF YOU WERE BORN BEFORE 1946

No change in current law

• Social Security is exempt
• Senior citizen subtraction for interest, dividends and capital gains is unchanged
• Public pension is exempt
• For 2012 private pensions subtract up to $47,309 for single filers and $94,618 for joint filers.    

What will happen:  No Michigan tax is withheld from pension payments unless you request it. 

 2.   IF YOU WERE BORN BETWEEN 1946 AND 1952

Before the taxpayer reaches age 67

• Social Security is exempt
• Railroad and Military pensions are exempt
• Not eligible for the senior citizen subtraction for interest, dividends and capital gains.
• Public and private pension limited subtraction of $20,000 for single filers or $40,000 for joint filers. 

After the taxpayer reaches age 67 (**Will first occur in 2013**)

• Social Security is exempt
• Railroad and Military pensions are exempt (but see below)
• Not eligible for senior citizen subtraction for interest, dividends and capital gains
• Subtraction against all income of $20,000 for single filers and $40,000 for joint filers.
  • Not eligible for this income subtraction if choosing to claim a military or railroad pension exemption.

What will happen:  Michigan tax will be withheld from your January 2012 pension payment based on the number of exemptions you requested for your federal income tax. 

TAXPAYER EXAMPLE:

Tom and Nancy Jones are a married couple. Tom was born in 1947, is retired and collects social security and a pension.  Nancy was born in 1951, and is still working.

Tom’s Pension = $30,000

Tom’s Social Security = $20,000

Nancy’s wages = $40,000 

Will the Jones' be subject to pension tax in this scenario? 

Not under current tax law

• Pension subtraction = $30,000
• No withholding necessary on pension
• Social security is exempt   

3.  IF YOU WERE BORN AFTER 1952

Your pension will be subject to Michigan income tax until you reach age 67. 

Before the taxpayer reaches age 67

• Social Security is exempt
• Railroad and military pensions are exempt
• Not eligible for the senior citizen subtraction for interest, dividends and capital gains
• Not eligible for public or private pension subtraction

After taxpayer reaches age 67 (**Will first occur in 2020)

• Not eligible for senior citizen subtraction for interest, dividends and capital gains
• Not eligible for public or private pension subtraction
• Income exemption election:
  • ELECT exemption against all income of $20,000 for single filers or $40,000 for joint filers
    • No exemption for Social Security, military or railroad retirement
    • No personal exemptions

**OR**

•   ELECT to exempt Social Security, military and railroad pension.  May claim personal exemptions.

What will happen:  Michigan tax will be withheld from your January 2012 pension payment based on the number of exemptions you requested for your federal income tax. 

As always, our advice is to work with your professional advisors if you have any questions about the tax law changes and your pension income. Laurie.Renchik@Centerfinplan.com or Julie.Hall@Centerfinplan.com

Note:  Changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation.  While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors with RJFS, we are not qualified to render advice on tax matters.  You should discuss tax matters with the appropriate professional.

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Source:  www.michigan.gov

Three Legged Stool Strategy

Generating income in retirement is one of the most common financial goals for retirees and soon to be retirees.  The good news is that there are a variety of ways to “recreate your paycheck”. Retirement income might be visualized using a “Three Legged Stool”.  The first two sources or legs of retirement income are generally social security and pensions (although fewer and fewer retirees are covered by a pension these days). The third leg for most retirees will come from personal investments (there is a potential fourth leg – part time work – but that’s for another day).  It is this leg of the stool, the investment leg, that requires preparation, planning and analysis. The most effective plan for you depends on your individual circumstances, but here are some common methods for your consideration:  

1. Dividends and Interest
2. 3 – 5 Year Income Cushion or Bucket
3. The Annuity Cushion
4. Systematic Withdrawal or Total Return Approach 

Dividends & Interest:

Usually a balanced portfolio is constructed so your investment income – dividends and interest – is sufficient to meet your living expenses.  Principal is used only for major discretionary capital purchases.  This method is used only when there is sufficient investment capital available to meet your income need after social security and pension, if any. 

3-5   Year Income Cushion or Bucket Approach:

This method might be appropriate when your investment portfolio is not large enough to generate sufficient dividends and interest. Preferably 5 (but no less than 3) years of your income shortfall is held in lower risk fixed income investments and are available as needed. The balance of the portfolio is usually invested in a balanced portfolio. The Income Cushion or Bucket is replenished periodically.  For example, if the stock market is up, liquidate sufficient stock to maintain the 3-5 year cushion. If stock market is down, draw on the fixed income cushion while you anticipate the market to recover.  If fixed income is exhausted, review your income requirements, which may lead to at least a temporary reduction in income. 

The Annuity Cushion

This method is very similar to the 3-5 year income cushion. A portion of the fixed income portfolio is placed into a fixed-period immediate annuity with at least a 5-year income stream.  This method might work well when a bridge is needed to a future income stream such as social security or pension. 

Systematic Withdrawal or Total Return Approach

Consider this method again if your portfolio does not generate sufficient interest and dividends to meet your income shortfall. Generally speaking, a balanced or equity-tilted portfolio in which the income shortfall (after interest income) is met at least partially from equity withdrawals.  Lastly, set a reasonably conservative systematic withdrawal rate, which studies suggest near 4% of the initial portfolio value adjusted annually for inflation. 

After helping retirees for the last 27 years create workable retirement income, we have found that many times one of the above methods (and even a combination) works in re-creating your paycheck in retirement.  The key is to provide a strong foundation – or in this case – a sturdy stool. 

Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James. Investments mentioned may not be suitable for all investors.  Dividends are not guaranteed and must be authorized by the company’s board of directors.  There is an inverse relationship between interest rate movements and fixed income prices.  Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices generally rise.  Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Retiring Comfortably

According to the Employee Benefit Research Institute the past few years saw a sharp decline in Americans’ confidence about their ability to obtain a financially comfortable retirement.  The 2011 Retirement Confidence Survey finds that the percentage of workers reporting they are not at all confident in a comfortable retirement has climbed to a new high of 27% (up from 22% in 2010 and a recent low of 10% in 2007).

If you believe you are behind in preparing for retirement there is no need to make the fundamental tenants like saving money and repeating the process over and over more complex. Here’s how to get started today:

1.  Remember your investment time horizon is the rest of your life . . .  and not your retirement date.  This means if you are 45 today and live to age 90, you have 45 years for your money to be working for you.
2. Ramp up retirement savings by contributing the maximum amount to your 401k plan; ($17,000 for 2012 and if you are over 50 the extra “catch-up” amount is $5500).  IRA and Roth IRA limits for 2012 are $6000 and the extra catch-up amount for those 50 and older is $1000.
3. Avoid speculative investments to try and make up for lost time or money.  If you don’t already have a financial plan to help guide you to a comfortable retirement make it a goal to call a financial planner today.   

It’s fair to say that retirement in the 21st century will be quite different than generations before. But that doesn’t mean you aren’t in control. By focusing on your own behavior, you do have the ability to create a map for your own future.

Please watch for our next post where we discuss generating income in retirement. 

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material.  Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.

Where Did It Go?

Do you find that you ever have too much month at the end of your money? Be honest, in the blink of an eye, extra money seems to vanish. For those still in their earnings years, one of the keys to accumulating wealth, thus achieving your financial objectives, is to stop the disappearing act. Transfer dollars from your monthly cash flow to your net worth statement by adding funds to your savings accounts, taxable investment accounts, and retirement accounts (such as employer sponsored 401k and 403b accounts) and IRA’s (Traditional or ROTH).  Another smart move is to use funds from your monthly cash flow to pay down debt … also improving your net worth statement.

Saving money and improving your overall financial position is easier said than done.  The truth is that saving money is more than simply a function of dollars and cents; it requires discipline and perseverance.  You may have heard the strategy of “paying yourself first”.  The most effective way to pay yourself first is to set up automatic savings programs.  The 401k (or other employer plan) is the best way to do this – but you can also establish similar automated savings plans with brokerage companies and financial institutions such as banks or credit unions.

Just as important, be intentional with your 2012 spending.  Rather than thinking in terms of a budget (which sounds a lot like dieting) – think about establishing a “spending plan” instead. Planning your expenses as best you can will help ensure that you spend money on the things that add value to your life and should help keep your money from mysteriously vanishing at the end of the month.

For a free resource to help track your cash flow email: Timothy.Wyman@CenterFinPlan.com

Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.

This is Not Your Mother’s Retirement

Women are redefining the face of their retirement, especially when compared to generations before.  In 2010, the US Bureau of Labor Statistics reported that women comprised 47% of the total US labor force.  That figure is forecasted to grow to 51% by 2018.  Bye-bye glass ceiling. 

One result of this growing trend for women is that many are choosing to work outside the home longer than their mothers and actively pursue interests such as travel, volunteerism, and higher education.  Add increased longevity to the mix and it is not a stretch to understand that in addition to hopes and dreams for a healthy and happy life, living longer means retirement will cost more. 

Envisioning a future retirement and the costs associated with bringing your personal retirement story into focus can seem like a big task (not all that different from starting an exercise program, really).  As with any important goal the most important part is to write it down.  When you are ready to set goals and get results a financial plan is your “go to” document for all important financial decisions.  

The good news is that women are heeding the call for more active financial planning.  With more education and greater participation in management and professional occupations than ever before, women now also have more reason to learn about the value of personal finance and financial planning.   

Here are three important areas in the financial planning process that tie money to quality of life. 

1.  Don't Wait

• Follow your dreams -- they know the way
• Start now -- don't assume financial planning is for when you get older.

2.  Consolidate

• Even if the individual areas of your finances are under control, you gain an advantage when they are pulled together.
• By viewing each financial decision as part of a whole, you can consider its short and long-term effects on your life goals.

3.  Balance is Key

• Re-evaluate your financial plan periodically and adjust along the way.  Life events frequently interrupt an otherwise perfect plan.  Incremental adjustments along the way keep you headed in the right direction.

As you begin to dream and plan for your own future, I am reminded of a favorite quote:  Your imagination is the preview to life’s coming attractions.  Albert Einstein

Why Age Matters with Michigan's New Pension Tax

Michigan held out...they protected people collecting pensions for as long as possible. But the tax breaks are over, as Michigan follows suit with many other states in the nation by taxing pensions. It all begins January 1, 2012. Not all retirees with pension income are affected. However, if your pension income is subject to Michigan tax, under the new rules, you will need to withhold Michigan tax in the amount of 4.35%.

Here’s how the new law may affect you --

1.  IF YOU WERE BORN BEFORE 1946

The new State of Michigan income tax doesn’t apply to your pension.

What will happen:  No Michigan tax is withheld from pension payments unless you request it. 

2.   IF YOU WERE BORN BETWEEN 1946 AND 1952

Some of your pension income may be subject to Michigan income tax. 

• Up to $20,000 in pension income for single filers
• Up to $40,000 in pension income for joint filers

Once you turn 67, the subtraction allowance applies to all forms of income 

What will happen:  Michigan tax will be withheld from your January 2012 pension payment based on the number of exemptions you requested for your federal income tax. 

TAXPAYER EXAMPLE:

Tom and Nancy Jones are a married couple.  Tom was born in 1947, is retired and collects social security and a pension.  Nancy was born in 1951, and is still working.

Tom’s Pension = $30,000

Tom’s Social Security = $20,000

Nancy’s wages = $40,000 

Will the Jones' be subject to pension tax in this scenario? 

Not under current tax law. 

• Pension subtraction = $30,000
• No withholding necessary on pension
• Social security is exempt.   

3.  IF YOU WERE BORN AFTER 1952

Your pension will be subject to Michigan income tax until you reach age 67.  After you reach age 67, if the total income of all people in your household is less than $75,000 for single filers or $150,000 for joint filers, you can subtract the following pension amounts from taxable income on your Michigan income tax forms:

• Up to $20,000 in pension income for single filers
• Up to $40,000 in pension income for joint filers 

What will happen:  Michigan tax will be withheld from your January 2012 pension payment based on the number of exemptions you requested for your federal income tax. 

As always, work with your professional advisors if you have any questions about the tax law changes and your pension income.  

Note:  Changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation.  While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors with RJFS, we are not qualified to render advice on tax matters.  You should discuss tax matters with the appropriate professional.

Source:  www.michigan.gov

Don’t Leave Free Money on the 401(k) Table

In this economy (or in any economy, for that matter!), none of us can afford to leave “free” money on the table.  So why -- and how -- are so many Americans giving away free money?

According to an article in the November 2011 edition of Financial Planning magazine, FINRA recently issued an investor alert urging approximately 30% of American workers who are not contributing enough to their 401(k) plans to receive their full employer match.  Failing to take advantage of this match compromises these workers’ ability to step-up their contributions and to potentially increase their eventually retirement savings.  One of the most common employer 401(k) matches is a dollar-for-dollar match of up to 3% of an employee’s salary.

While most of us will need to save much more than the 3% that may be matched to fund a successful retirement, it makes sense for all of us to do at least the minimum amount needed to get the “free” matching funds.   

Make sure your 401(k) contributions are set-up for 2012!!  Once you’ve taken the first step to start saving (and getting a no cost boost from your employer), meet with a financial advisor to form a strategy for saving additional funds to meet your future retirement goals.

Pay Now or Pay Later?

As if you didn’t have enough to do around the holiday, add this to your list … start thinking about contributing to your retirement plan, if you haven’t already. You have until April 15^th to make a contribution for 2011, but first you need to figure out what kind of IRA to fund … a traditional or a Roth. Do you take the tax hit now with a Roth or do you pay later with a traditional IRA? First things first -- consider that most people will have somewhat less annual income later in life, when they are done working.  If working years are typically our high income years, then why choose a Roth or convert savings to a Roth when we are working? Why pay a higher tax on retirement dollars now than you will later? 

It may come as a surprise, but there are some situations when it makes sense to go ahead and bite the tax bullet now. If you happen to have a special situation where your income is considerably lower now (or during a working year), then consider a Roth or Roth conversion. Maybe you have excessive business expenses or losses that can be deducted in a year, or perhaps you've had a very low income year due to the slow economy or due to a job loss. Maybe you or your spouse went back to school or stayed home with a baby and the household income has been cut in half … all are good reasons to go with a Roth. 

There is another important consideration. If you believe that the tax brackets and/or tax system will be changed on us, your decision could be much different depending on your expectation. For example, if you feel that tax rates on your retirement dollars will be increased substantially between now and retirement, you might want to hedge your bets and implement a larger Roth allocation into your overall tax strategy. Even if it means you pay some unwanted taxes now, obviously this could help you from paying an even larger tax later. 

It's important to consider a diversified tax strategy as you would a diversified portfolio and to treat each year as a new decision for contributions and/or conversions.  It’s never a one-time solution.

Withdrawals on a traditional IRA are subject to income taxes and, if withdrawn prior to age 59 1/2, may also be subject to a 10% federal penalty.  Contributions to a traditional IRA may be tax-deductible depending on the taxpayer’s income, tax-filing status and other factors.  In a Roth IR, contributions are made after-tax.  The account grows tax-deferred and qualified distributions are tax-free.  Unless certain criteria are met, Roth IRA owners must be 59 ½ or older and have held the IRA for five years before tax-free withdrawals are permitted. 

In a Roth IRA conversion, each converted amount may be subject to its own five-year holding period.  Converting a traditional IRA into a Roth IRA has tax implications.  You should discuss any tax or legal matters with the appropriate professional.

The Newest Retirement Roadblock…KIPPERS

You have likely heard about some of the most common roadblocks to a successful retirement -- inflation, longevity, income taxes, and long term care expenses.  But have you heard about the newest addition to the list?  The newest threat to successful retirement is KIPPERS -- Kids Invading Parental Pockets and Eroding Retirement Savings. While not mainstream just yet, Tom Sedoric, a financial advisor in Portsmouth, N.H. has apparently coined the acronym KIPPERS in his Financial Planning magazine article titled “Full-Nest Syndrome”. 

The article refers to data that suggests, “A stunning 85% of this year's college graduates were planning to head back to live with mom and dad for at least a while.  A study in 2010 by researchers at Columbia University using the U.S. Current Population Survey found that 52.8% of 18- to 24-year-olds were living at home, up from 47.3% in 1970.” 

Is there a cure for KIPPERS?  The first step is to acknowledge that this might just have an affect on your own retirement plans.  Financial support of a child, right or wrong, may prevent those still working from saving as much as they otherwise could.  Or, worse yet, force a retired parent to increase their investment withdrawals to higher levels.  

The best advice: Talk with your little KIPPER and set financial boundaries as soon as they step foot into the childhood bedroom.  Help them develop sound financial habits so that their financial dependence does not threaten your retirement success.