Retirement

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Retirement Behavior Zone

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Contributed by: Timothy Wyman, CFP®, JD Tim Wyman

Let’s face it; market volatility isn’t a whole lot of fun for any investor—unless that volatility is on the upside, of course. When investments experience downward volatility it can be hard on the psyche. In my experience, however, there is one group that is hit especially emotionally hard: those clients that are on either side of two years from their retirement date. While those with long term horizons feel some pain, it is generally muted because the funds are needed in the distant future and it doesn’t seem to bother them as much. Similarly, those that have been in retirement for a while seem to have the “been there – done that” mentality. They have been through volatility before, hopefully have weathered past storms, and understand volatility is part of the process to potentially get fair returns over time.

But how about those within two years, either side, of retirement? Often times, these clients are the most concerned, and rightfully so. The time that folks switch from being a net saver for so many years to a net spender is emotionally challenging in many cases. As former partner Dan Boyce used to say, it feels like you are eating your seed corn. (Full disclosure – this city boy never really understood it but many a client nodded as if to confirm the saying!).

According to research underwritten by Prudential Securities, “economic researchers have found that emotions play a significant role in how people make financial decisions.” At first, my response was a yawn and a hope that Prudential didn’t pay too much for such a conclusion. Fortunately there was more to the study, something with a little more meat on the bone. The study suggests that the five years before and after retirement is critical. That understanding this behavioral risk becomes even more important. Two specific risks cited in the study include sequence risk and behavioral risk.

At the risk of downplaying behavior risk, it is one that we have some control of, after all. Poor investor behavior during this two year of period within retirement can be hazardous to your financial health, for a long time if not forever. What’s the prescription? Yes this is self-serving, but working with a third party professional can help improve investor behavior. Vanguard suggests that behavioral coaching may bring about as much as 150 basis points (or 1.5%) of value add by advisors.

The second risk, sequence risk, is very real and much less controllable. Large negative returns early in retirement can indeed impact one’s retirement years. Fortunately, for many, one large loss year usually isn’t enough to derail years of proper planning. Again, what’s the prescription? In general, utilizing multiple asset classes, multiple investment styles, and multiple managers (aka asset allocation & diversification) provides enough risk parameters to lessen the potential sequence risk. 

If recent volatility has hit you especially hard (emotionally or in dollars) give us a call. If you are a current client we welcome the opportunity to review your portfolio and your plan, and if you are not a current client we welcome the opportunity to provide another opinion.

Timothy Wyman, CFP®, JD is the Managing Partner and Financial Planner at Center for Financial Planning, Inc. and is a contributor to national media and publications such as Forbes and The Wall Street Journal and has appeared on Good Morning America Weekend Edition and WDIV Channel 4. A leader in his profession, Tim served on the National Board of Directors for the 28,000 member Financial Planning Association™ (FPA®), mentored many CFP® practitioners and is a frequent speaker to organizations and businesses on various financial planning topics.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Timothy Wyman and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Past performance is not a guarantee of future results. Investing involves risk and investors may incur a profit or a loss regardless of strategy selected. Raymond James is not affiliated with and does not endorse the opinions or services of Vanguard or Prudential Securities. Diversification and asset allocation do not ensure a profit or protect against a loss. There is no guarantee that using an advisor will produce favorable investment results.

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Social Security: Calculating your Benefit in 7 Steps

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Contributed by: Matt Trujillo, CFP® Matt Trujillo

When Social Security is concerned, you may find yourself wondering: “How is my benefit calculated?”

To help you understand, I’ve laid out the 7 steps it takes to calculate your Social Security benefit:

  • Step 1: Enter earnings from each year into the chart below into Column B. Only enter earnings up to the “maximum earnings” figure from column A. So for instance in 2001 if you earned $200,000 you would only enter $80,400 into column B because that is the maximum credit you can earn for that year. All earnings after $80,400 didn’t pay into social security for that year. For the years you didn’t have earnings or didn’t pay into social security enter $0 into Column B.

  • Step 2: Multiply the amounts in Column B by the index factors in Column C and enter the total in Column D. This gives you an estimated value of your past earnings in current dollars. 

  • Step 3: From Column D, pick 35 years with the highest amounts and add these amounts together.

  • Step 4: Divide the total from Step 3 by 420 (this is the number of months in 35 years); be sure to round down to the nearest whole dollar figure with whatever total you come up with. This figure is your average indexed monthly earnings

  • Step 5: Multiply the first $856 from Step 4 by .90; from $857 to $5,157 multiply by .32; and from $5,158 and up multiple by .15

    • This is probably the most confusing part so let me give an example:
      Step 4 average indexed monthly earnings = $8,000; 
      $856 * .9 = $770.40
      $5,157-$857= $4,300 * .32 = $1,376
      $8,000-$5,157= $2,843 * .15 = $426.45

  • Step 6: Add all the figures up from Step 5 and round down; if we use our previous example this would be $770.40 + $1,376 + $426.45 = $2,572.85 rounded down would be $2,572.

  • Step 7: Multiply the amount in Step 6 by 75%. Whatever figure you get is your estimated monthly retirement benefit if you retire at age 62.

I hope you find these 7 steps useful and easy to navigate. When it comes to retirement planning and Social Security benefits, if you have questions or concerns any of the planners here at The Center are willing and able to help you!  

Matthew Trujillo, CFP®, is a Certified Financial Planner™ at Center for Financial Planning, Inc. Matt currently assists Center planners and clients, and is a contributor to Money Centered.

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Reinventing Retirement

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Contributed by: Sandra Adams, CFP® Sandy Adams

The definition of reinvention is to bring back or to revive. Retirement to most clients is less about the ending of a past life or career and more about the beginning of a new life. Our planning and conversations center around how we can make the most of the next segment or our clients’ lives – how can they “reinvent” themselves.

Gone are the days of retirement spent in rocking chairs on the porch or in front of the television set. Today’s retirees are younger (at least at heart) and focused on staying healthy, active, and engaged. They are finding opportunities to travel, to volunteer, to take personal development classes, and even to go back to work in a second career.

I recently had the opportunity to watch a wonderfully refreshing movie that illustrated retirement reinvention in a most interesting way. The Intern, starring Robert De Niro and Anne Hathaway, tells the story of Ben Whittaker (Robert De Niro), a 70-year-old retired widower who takes the opportunity to become a senior intern at an online start up fashion site. Ben soon becomes popular with his younger co-workers, including Jules Ostin (Anne Hathaway) who’s the boss and founder of the company. Whittaker's charm, wisdom, and sense of humor help him develop a special bond and growing friendship with Jules. Ben proves to himself and to everyone else that he encounters that work ethic, strength of character, and experience never go out of style. 

Retirement is a time to redefine and reinvent yourself – use the next segment of your life to do things you never had time to do, to learn something new, or to use your years of experience and knowledge to add value in different areas, like Ben Whittaker did in The Intern. As you plan for the financial transition into retirement, work with your financial planner to make sure that you also plan for your retirement reinvention. To have a successful “retirement,” it is important that while you feel financially confident, you also continue to feel emotionally and socially fulfilled and valued. When you retire, your life is not over—Ben Whittaker said it best: “I still have music in me, absolutely positive about that!”

Sandra Adams, CFP® is a Partner and Financial Planner at Center for Financial Planning, Inc. Sandy specializes in Elder Care Financial Planning and is a frequent speaker on related topics. In addition to her frequent contributions to Money Centered, she is regularly quoted in national media publications such as The Wall Street Journal, Research Magazine and Journal of Financial Planning.

Any opinions are those of Sandy Adams and not necessarily those of Raymond James.

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Social Security Cost-of-Living Adjustment in 2016

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Contributed by: James Smiertka James Smiertka

You may have already heard, but there will be no Social Security cost-of-living adjustment (COLA) in 2016. This doesn’t happen incredibly often—it’s only the third instance in the past 40 years. Over the past 8 years, the total of annual social security COLA has been only 14.3%, compared to 69.6% in the period from 1975 to 1982. Yearly Social Security COLA depends on the Consumer Price Index as the Social Security Administration states, “monthly Social Security and Supplemental Security Income (SSI) benefits will not automatically increase in 2016 as there was no increase in the Consumer Price Index (CPI-W) from the third quarter of 2014 to the third quarter of 2015”.

The CPI-W value was affected by the significant decrease in the price of gasoline and fluctuations in other areas as well, but as the prices of housing and medical care continue to rise, critics argue that the CPI-W does not accurately reflect the spending of older, retired individuals. Experts argue that the actual cost-of-living for a Social Security beneficiary is increasing as many costs to retirees have increased at a higher rate than the 2.2% average COLA increase since 2000.

It’s known that the lack of a 2016 COLA will impact nearly 70 million people, including retirees, disabled workers, spouses, and children who receive benefits. Some retirees may actually see a drop in their Social Security benefit for 2016 due to the 0% COLA and the potential increase in Medicare Part B premiums (see Matt Trujillo’s blog on Medicare Part B increases for more information).

Everyone’s retirement scenario is unique, and although the 2016 COLA is not likely to have a huge impact, you can contact your financial planner at Center for Financial Planning, Inc. with any questions or concerns about your specific plan.

James Smiertka is a Client Service Associate at Center for Financial Planning, Inc.

This material is being provided for information purposes only. Any opinions are those of James Smiertka and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete.

Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members.

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Don’t Let the Gender Pay Gap Derail Your Retirement

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Women hold a tremendous amount of financial power and are an active part of the workforce and economy as a whole. At a time when women are assuming added responsibility for their families and finances, the gender pay gap that is a reality for many has the potential to derail security in retirement.  

Recently, Ellevate Network surveyed thousands of professional women and found that 26% of respondents worry that they are not making enough money today and 30% worry that they are not planning well enough for retirement.

If you have these concerns, here are some steps you can take: 

  1. Do your homework about salary ranges for your given position and your growth prospects for the industry. Then be prepared to negotiate.

  2. Leverage benefits provided by your employer.  Medical, dental, life insurance and disability are just some of the benefits that may be part of your compensation package.  Pay attention to when you become eligible.

  3. Prioritize your own retirement and begin saving as soon as economically feasible. On average women live longer than men and accumulate less in retirement accounts. Don’t forget to increase your contribution every time you receive a raise.

  4. Understand how your lifetime earnings directly impact your Social Security benefit. Benefits are calculated on the highest 35 years of earnings.  If there are fewer than 35 years, then zeros go into the calculation.

Shining some much needed light on the gender wage gap can make a difference for all women. In the meantime, women can adopt good financial habits early in life, set their own goals, and garner the support they need to stick to those habits over the long run. We can help you pull together the details you need to put your plan in place.

Laurie Renchik, CFP®, MBA is a Partner and Senior Financial Planner at Center for Financial Planning, Inc. In addition to working with women who are in the midst of a transition (career change, receiving an inheritance, losing a life partner, divorce or remarriage), Laurie works with clients who are planning for retirement. Laurie was named to the 2013 Five Star Wealth Managers list in Detroit Hour magazine, is a member of the Leadership Oakland Alumni Association and in addition to her frequent contributions to Money Centered, she manages and is a frequent contributor to Center Connections at The Center.

Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Laurie Renchik and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Investing involves risk and investors may incur a profit or a loss.

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Beyond Retirement: An End of Life Planning Lesson

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Contributed by: Sandra Adams, CFP® Sandy Adams

As we work with clients at The Center, we talk about how to “live your plan.” To us, that means focusing and achieving your financial goals so that you can you can live those goals that you have been envisioning within your planning.  To be honest, this phrase often arises in the context of conversations about living out dream retirement wishes, like traveling the world, writing that book you always dreamed of writing, or owning a second home on the beach – not in the context of end of life planning.

I recently witnessed a client “live” her end of life plan.  While you might not think this to be a very significant or exciting accomplishment, it brings me to tears and smiles (all at the same time) every time I think of it.

Communicating Your Wishes

“Ann” was in her early 90’s and quite a strong character. Although she suffered from a chronic disease, she was relatively active early on in our planning.  She needed to update her estate planning because she had outlived all of her blood relatives and needed to put plans in place for when she knew she might not be able to handle her own affairs.  What she did know was that she would NEVER want to go to a nursing home – she wanted to be cared for her in her own home and we needed to find to a way to make that happen.  Ann put her wishes in writing and communicated those wishes to everyone involved along the way.

Outlining Your Plan

Over the next several years, Ann’s health worsened and she needed to hire a geriatric care manager and caregivers. Toward the end, there were caregivers at her home nearly 24 hours a day with some Hospice care provided. With careful planning, Ann was able to support this with her financial resources. I do not tell you that this was easy. There were many times over the years when Ann became anxious, claimed she was living too long, and wasn’t sure what to do. But she was never willing to compromise on moving from her home.  Ann had specifically outlined how she wanted to live (and how she didn’t want to live – in a nursing home).  On one of her last days, Ann said, “I am happy.” To me, this confirmed that she had carried out her plan for her end of life to her satisfaction.  These are the types of situations that I help my clients with often.

End of Life Reading

Being Mortal by Atul Gawande is a book that I read recently on end of life issues.  It brings to light that most of us do a very poor job of planning for or thinking about our end of life, and we certainly don’t communicate our wishes to our families. We do a lot to plan for our ideal lives, our ideal retirements, so why not end our lives right?  By taking the next steps and planning for the end of our lives, as well, we can make this happen (even though it is not always the most pleasant topic to discuss).  My favorite takeaway from the book is this:

            “All we ask is to be allowed to remain the writers of our own story.  That story is ever changing. Over the course of our lives, we may encounter unimaginable difficulties. Our concerns and desires may shift.  But whatever happens, we want to retain the freedom to shape our lives in ways consistent with our character and loyalties.”  -Atul Gawande

Sandra Adams, CFP® is a Partner and Financial Planner at Center for Financial Planning, Inc. Sandy specializes in Elder Care Financial Planning and is a frequent speaker on related topics. In 2012-2014 Sandy has been named to the Five Star Wealth Managers list in Detroit Hour magazine. In addition to her frequent contributions to Money Centered, she is regularly quoted in national media publications such as The Wall Street Journal, Research Magazine and Journal of Financial Planning.

Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Sandra D. Adams, CFP®, and not necessarily those of Raymond James. Raymond James is not affiliated with and does not endorse the opinions of Atul Gawande. You should discuss any legal matters with the appropriate professional. The experience described here may not be representative of any future experience of our clients. Past performance is not indicative of future results.

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“My Social Security” Online Account Access

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Contributed by: James Smiertka James Smiertka

Did you know you can now take advantage of the My Social Security benefits site? When you visit, you simply sign up for an account. It is a free service, and as of May 29, 2015 more than 19 million accounts have been opened.

The Benefits

If you are currently receiving benefits and/or have Medicare, you are able to:

  • Get your benefit verification letter if you need proof of income, Medicare coverage, retirement status, disability, or age
  • Check your benefit & payment information and view your earnings record
  • Change your address and/or phone number
  • Start direct deposit of your benefit or change your direct deposit info
  • Get a replacement Medicare card
  • Get a replacement SSA-1099 or SSA-1042S for taxes

If you do not currently receive benefits, you are able to:

  • Review your Social Security Statement including estimates of your future retirement, disability, and survivor benefits
  • Review your earnings once annually to verify the amounts are correct
  • Review the estimated amounts of social security and Medicare taxes you have paid
  • Receive a benefit verification letter if you need proof that you have never received Social security, Supplemental Security Income (SSI) or Medicare

How to Create an Account

Below is a screenshot of what you can expect to see when you visit the website:

When you select “Create an Account” you will be re-directed to the following page:

Since you are a new user, click on the blue  “Create An Account” and enter your personal information:

On the following page you will confirm some information that is provided, such as your mortgage company, auto loan company, license plate, and current vehicle, etc. The confirmation of this information is used to verify your identity.

Next you will create your username & password as well as choose your password security questions:

Now you are ready to sign in to your My Social Security account. Below you’ll see an example of the information you can access when you sign in (included are the Overview & Estimated Benefits pages):

Keeping Your Information Secure

It is always important to keep your information safe and secure. Here are some important things to keep in mind:

  • Emails about “My Social Security” and other government agencies always come from a “.gov” email address. Use extreme caution if the email you received is not from a “.gov” sender.
  • Links, logos, & pictures will always direct you to an official Social Security website
  • DO NOT respond or click any links when dealing with a phishing scam email message
  •  Look for poor grammar, wording, phrasing, and/or spelling in all email correspondence
  •  Look for outlandish claims that could not possibly be true
    • If a “foreign prince” emails your from overseas offering to share his gold bullion reserves in exchange for you wiring him a few hundred dollars now for safe border passage between war-torn countries, it’s probably not a legit email
    •  If an email includes the name of a business and/or contact information, such as telephone number or website link, you can attempt to verify the legitimacy via a search engine like Google
  • Speak to friends and family members if you are questioning the validity of a strange email
  • DO NOT respond with any of your personal information if you believe the email may be a scam

I hope this information will be useful for signing up and realizing the benefits of a “My Social Security” account, as well as keeping your information safe. If you have any further questions, you can utilize the www.ssa.gov website or contact your local Social Security office directly.

James Smiertka is a Client Service Associate at Center for Financial Planning, Inc.

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members.

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Why Age Matters with Michigan’s Pension Tax: 2015 Update

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In the three years since Michigan’s Pension Tax was enacted, many more baby boomers have reached retirement age and started to tap into their pensions. It’s no secret that tax law is complex and we are not surprised that Michigan retirees have plenty of questions when it comes to the MI pension tax rules.  Even though the pension tax for Michigan retirees was enacted back in 2012, the subject continues to generate interest from retirees and pre-retirees alike. 

The rules for retirees vary based on age:

  • Tier 1:  You were born before 1946

  • Tier 2:  You were born between 1946 and 1952

  • Tier 3:  You were born after 1952

Special Note:  For joint returns, the age of the oldest spouse determines the age category that will apply to the pension and retirement benefits of both spouses, regardless of the age of the younger spouse. 

Taxpayers born before 1946

If you were born before 1946, there is no change in the income taxes for your pension income.  This means your social security income is exempt and so is income from public pensions.  You don’t pay taxes on the first $49,027 ($98,054 if you’re married and filing jointly) from private pensions.  You also get a senior citizen (over age 69) subtraction for interest, dividends and capital gains.

Taxpayers born between 1946 and 1952

 If you were born between 1946 and 1952, your social security income is exempt and so is income from railroad and military pensions.  You don’t get a senior citizen subtraction for interest, dividends and capital gains.  Before age 67, you don’t pay taxes on the first $20,000 ($40,000 if you’re married and filing jointly) from private or public pensions.  After age 67, you can subtract $20,000 ($40,000 if you’re married and filing jointly) from the amount you’ll pay taxes on unless you take the income tax exemption on military or railroad pensions. 

Taxpayers born after 1952

 If you were born after 1952, your social security income is exempt and so is income from railroad and military pensions.  You don’t get a senior citizen subtraction for interest, dividends and capital gains.  Before age 67, you are not eligible for any subtractions from your income from private or public pensions.  After age 67, you can choose to continue to have social security and railroad or military income exempt or you can choose to subtract $20,000 ($40,000 if married and filing jointly) from the amount you’ll pay taxes on. If you choose to keep your social security and railroad or military income exempt, then you can claim a personal exemption.

If you need help sorting through the pension guidelines, please give us a call or email me at laurie.renchik@centerfinplan.com.

Laurie Renchik, CFP®, MBA is a Partner and Senior Financial Planner at Center for Financial Planning, Inc. In addition to working with women who are in the midst of a transition (career change, receiving an inheritance, losing a life partner, divorce or remarriage), Laurie works with clients who are planning for retirement. Laurie was named to the 2013 Five Star Wealth Managers list in Detroit Hour magazine, is a member of the Leadership Oakland Alumni Association and in addition to her frequent contributions to Money Centered, she manages and is a frequent contributor to Center Connections at The Center.

Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Laurie Renchik, CFP® and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. 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 of RJFS, we are not qualified to render advice on tax matters. You should discuss tax matters with the appropriate professional.

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Making the Most of Your Empty Nest Years – Part 2

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The kids have gone to college or moved away and now you enter the Empty Nest Years. Will your empty nest years resemble “empty nest syndrome” (complete with a sense of loss, perhaps depression, alcoholism, identity crisis and marital conflicts)? Back in July 2014, I shared a conversation with a client in my first Empty Nest blog. They described their empty nest like this: “It’s Like being in college, only with money!” Working with clients whom have transitioned into the empty nest years successfully, the first common thread has been that they make time to plan.

Making time to Plan

It seems like such a simple statement, but it is often overlooked.  Like most successful folks, those empty nesters made a plan to live with intention. They examined their values, decided what was truly important in their lives, and then aligned their decisions with their intentions.

One of the most profound ways to examine values is through the work of George Kinder of the Kinder Institute.  My wife Jen and I have gone through the process with one of our firm’s partners and it has been quite helpful in leading an intentional life.  George Kinder takes a unique approach to financial planning – what he terms “life planning”.  My personal take is that at the core life planning is “financial planning done right”.  Many of life’s most important goals have a financial component. Like life planning, our comprehensive financial planning is designed to move beyond the numbers (not just dollars and cents) and address your goals and values.

3 Steps to Setting Financial Intentions

How can you discover or clarify the deeper values in your life and live with [more] intention? Here are two exercises that you might find helpful.  If they resonate, we’d love to help you.

To help clients discover the deeper values in their lives, Kinder poses three questions:

  1. Imagine you are financially secure, that you have enough money to take care of your needs, now and in the future. How would you live your life? Would you change anything? Let yourself go. Don’t hold back on your dreams. Describe a life that is complete and richly yours.

  2. Now imagine that you visit your doctor, who tells you that you have only 5-10 years to live. You won’t ever feel sick, but you will have no notice of the moment of your death. What will you do in the time you have remaining? Will you change your life and how will you do it? (Note that this question does not assume unlimited funds.)

  3. Finally, imagine that your doctor shocks you with the news that you only have 24 hours to live. Notice what feelings arise as you confront your very real mortality. Ask yourself: What did you miss? Who did you not get to be? What did you not get to do?

When you understand what you want to do with your life, you can make financial choices that reflect your values as you plan for your empty nest years.

Taking Stock of Life

Here is a second exercise to consider that can help lead to clarity and intention. Take a piece of paper and at the top write “Goals for My Life – Taking stock”. Below that, across the top write “One month, 3 months, one year, 3 years, 5 years, 10 years, 20 years, and lifetime”.  Next, down the left hand side write “Work, Family, Relationships, Spirit, Community, Creativity, Health, Finances” and any other category for your personal circumstances.

Consider each time frame and category and the things you would like to accomplish.  Perhaps in 5 years under Family you would like to take the entire family on a holiday trip.  Or perhaps in 3 months under Work you want to reduce your hours.  Write it down – don’t underestimate the power of the pen or pencil.  Dr. Gail Matthews, a psychology professor at Dominican University in California, found that you are 42 percent more likely to achieve your goals just by writing them down. My experience suggests it’s even higher – write them down!

The empty nest years are an important transition.  I hope yours are “It’s Like being in college, only with money!”

Timothy Wyman, CFP®, JD is the Managing Partner and Financial Planner at Center for Financial Planning, Inc. and is a frequent contributor to national media including appearances on Good Morning America Weekend Edition and WDIV Channel 4 News and published articles including Forbes and The Wall Street Journal. A leader in his profession, Tim served on the National Board of Directors for the 28,000 member Financial Planning Association™ (FPA®), trained and mentored hundreds of CFP® practitioners and is a frequent speaker to organizations and businesses on various financial planning topics.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members. C15-001184

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IMO - In My Opinion: A take on mortgages, Roths, pensions & more

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My wife, Jen, and I have been speed watching The Good Wife thanks to Netflix. In The Good Wife, one of the judges (apparently the legal system makes for good TV) constantly requires the lawyers in her courtroom to end their arguments with, “In my opinion.”  The attorneys look bewildered each time as if to say…well of course it’s only my opinion, just like every other statement I make, and everyone knows that except for you, apparently.  A recent consultation reminded me of the “in my opinion” skit (“IMO” for short). 

Professionals Offer Differing Opinions

In our field of professional financial planning (not to be confused with the majority of firms and advisors in the financial SALES industry) there are many rules of thumb, but very few technical standards of care that you might find in the medical or legal field.

As a Certified Financial Planner® practitioner, there are some guiding principles and general statements that CFP® practitioners are expected to display in their professional activities, but they are hardly a technical standard of care. The CFP Board states that “Allowance can be made for innocent error and legitimate differences of opinion, but integrity cannot co-exist with deceit or subordination of one’s principles.” Those legitimate differences of opinion are what I’m talking about.

Differenceofopinion-adisagreementorargumentaboutsomethingimportant

Reasonable minds can and will differ just as in everyday life it is not uncommon to hear reasonable folks say, “Let’s agree to disagree.”  Professional differences of opinion do not render the other professional a crook or even wrong if they are acting from a place of integrity – IMO.  Moreover, it is perfectly appropriate to express a difference of opinion with another financial professional when done in a professional and non disparaging manner – IMO.

Back to my recent consultation – as I listened to the recommendations of another professional, I realized I had several different opinions on what was best for this particular situation and needed to share:

ROTH Conversions: As my colleagues here at The Center can attest, I hold a pretty strong opinion that most people have gotten the Roth Conversion issue “incorrect”.  I believe that many folks have accelerated income taxes at a higher rate than they will pay in the future.  Most workers have a higher income, which usually translates into a higher marginal tax bracket, during their working years than they do in retirement.  But wait; there is no Required Minimum Distribution from a ROTH. True, but this is still only relevant as to what bracket the money comes out.  Don’t get me wrong, this is not an absolutist opinion, there are plenty of correct situations where ROTH’s makes sense (IMO) – look for an upcoming post about converting after tax 401k contributions to a ROTH as an example. There are other limited situations where a ROTH makes sense, IMO.  For example, if you are a high net worth person and reasonably expect that you will always be in the highest marginal bracket, then converting and paying at 35% vs the new 39.6% marginal rate seems to make sense. 

Mortgage vs no mortgage:  A firm attempting to become a national financial planning firm recently counseled a young retiree looking to relocate to another state to, “Get the biggest mortgage possible.” Call us old school – but we think that most retirees are best served entering their retirement years debt free. And this client has substantial taxable funds to complete the purchase.  Our suggestion was to actually RENT initially.  Once they are comfortable and they have found a location that suits them for at least the next 5 years, we think they should consider a cash purchase. Rates are low, which does make obtaining a mortgage more attractive, however in retirement (at age 50) the rate is going to be much higher than any suggested distribution rate (1-3%?).

Pension Lump Sum: Our recommendation is for the client to take a monthly pension at age 55 in the form of a 100% survivor benefit even though her husband is older. The other advisor suggested that even assuming a low return, investing the lump sum will produce more money.  The client suggests that age 94 mortality was very reasonable given her family history.  Under these assumptions, the “low return” needed from the investment portfolio turned out to be 6%; hardly a “low” return IMO. Assuming only a 1% annual difference in return (5%) the lump sum lasts only to age 86.  One of the advantages to taking the lump sum is flexibility or access to a lump sum if needed.  Fortunately, the client’s other assets are substantial. Other more confident professionals might find the hurdle rate low; not me.

401k Rollover:  We both recommended a 401k rollover to an IRA managed by our respective firms.  The client left the employ of a major corporation with what I would categorize as containing a competitive 401k, in terms of investment options and expenses.  My sense is that the client will be better served by rolling the account to either professional.  Successful investment management is more about behavior than selecting the best allocation or underlying securities to complete the allocation – IMO.

Asset Allocation: The other professional recommended a 70% equity and 30% fixed income allocation versus our 60/40 allocation.  My thinking is at this time of their life, less risk is a bit more important.  I do, however, appreciate that because they are so young (hedging against inflation), and their expected withdrawal rate is under 3%, that a higher equity allocation may be reasonable. The other adviser apparently pointed out that their allocation was “optimized” (directly on the efficient frontier) because their mid cap exposure was higher than our recommendation in addition to our international equity allocation being 12% vs their 10% recommendation.  Due to current valuations, we have reduced our allocation to mid and small cap equities from a neutral weighting of 10% down to 8.5% and our international (large developed) is at our target weighting of 12%.  The other professional suggests 14% and 10% respectively.  Only time will tell which portfolio was more successful.  I do feel pretty strongly that in the end our client’s behavior will be more determinative of their investment success versus the subtle differences in portfolio recommendation – IMO.

Annuities:  Do you remember when some advisors called anyone recommending an annuity a crook?  Fast forward a few years and some of the profession’s highly regarded practitioners recommend annuities in many situations.  I still believe that they are way oversold, but that doesn’t mean there are not appropriate situations - IMO.

Everyone has an opinion and I give my clients mine. So, what’s your opinion?

Everything we hear is an opinion, not a fact. Everything we see is a perspective, not the truth.  ~Marcus Aurelius

Timothy Wyman, CFP®, JD is the Managing Partner and Financial Planner at Center for Financial Planning, Inc. and is a frequent contributor to national media including appearances on Good Morning America Weekend Edition and WDIV Channel 4 News and published articles including Forbes and The Wall Street Journal. A leader in his profession, Tim served on the National Board of Directors for the 28,000 member Financial Planning Association™ (FPA®), trained and mentored hundreds of CFP® practitioners and is a frequent speaker to organizations and businesses on various financial planning topics.

Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The forgoing is not a recommendation to buy or sell any individual security or any combination of   securities. Be sure to contact a qualified professional regarding your particular situation before making any investment or withdrawal decision.

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