Should I Change My Investment Approach In Retirement?

While accumulating assets for retirement, many people utilize an employer retirement plan that allows consistent contributions while investing in a growth model. Their approach is to maximize the matching contribution from their employer and, perhaps, assume more risk than they would otherwise assume because of continued contributions. Let’s review the process of investing during retirement and the differences one will encounter throughout the distribution phase of the portfolio.

The most prevalent concern of any retiree is running out of money. To confront this fear, most retirees make the most critical mistakes with their investments. First, to seek safety in the portfolio, the retiree will change from a balanced portfolio of equities and bonds to a bond-dominant portfolio. Thinking the cash balance approach secures their cash during the contraction of the markets, the larger peril to the portfolio is the lack of participation in the expansion phase of the market cycle. In layman’s terms, the rate of return on most bonds will not be sufficient to maintain the retiree’s purchasing power during retirement. Rising costs of living expenses such as medical care, housing, food and other basic needs will preclude the portfolio from providing excess cash flow to the retiree unless the total portfolio is significant.

To resolve the concern of running out of money, we work with our clients to develop a sound investment approach that addresses inflationary pressure, periodic cash distribution requirements and market risk. One of the most effective tools to combat risk is to diversify. At the time of retirement, many of our clients will participate in an economics lesson. Albeit a short lesson, we simply ask, “how would you feel to be out of money and healthy?” This question is one that causes their face to wrinkle and the eyebrows to furrow. Typically, the answer given us is “I would not feel comfortable at all!” 

Obviously, we knew their answer but the exercise is one that makes them confront what risk truly is in their lives. So many people believe risk to be simply the loss of principal in their account. However, the greatest risk is outliving your means of support to where your longevity is not rewarded with peace and tranquility but rather anxiety. Our independent research has proven that most retirees sleep better at night knowing they will not be subjected to the need for family or state support. Independence is the reward for investing properly.

Seek out the advice of an independent financial advisor that specializes in retirement planning. You deserve a specialist for this phase of life just like your cardiovascular surgeon if you have health issues with your heart. If you have questions regarding your financial future, why not gain assurance that you are making the right decisions for your family? A visit with a Certified Financial Planner™ practitioner may give you the confidence you need to live your life in a manner you desire instead of simply existing. 

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Post-Retirement Considerations

Nursing home costs in the United States can easily top $70,000 per year! Assisted living centers may cost as much as $4,000 per month for a one-bedroom private-pay facility. We discuss these lifestyle changes as part of our planning process for retirees. It is not always a popular subject to broach with newly-retiring people because they think of it as a negative. However, as specialists in retirement planning, we believe in educating our clients about all facets of the future that they might control.

Let’s think about the options and find a few methods of mitigating these possible future costs. For one, by maintaining an active lifestyle and sensible diet, one may escape these options or, at least, delay them. Many of our clients have seen the impact on their families’ and friends’ budgets from admissions to a nursing home. These facilities are of great assistance when transitioning our loved ones that experience a period of life in which continual support is warranted. 

Another option to utilizing these types of facilities is to accumulate sufficient funds that will allow you to remain in your own home with assistance provided by nurses’ aides and other medical providers. This option appeals to most of our clients that may simply have mobility issues and cannot provide for all aspects of their daily lives. We evaluate each client’s capabilities to accomplish their activities of daily living (ADL) and assist them in analyzing the impact of potential nursing care in their future financial planning budgets.

The six routine activities of daily living are: eating, bathing, getting dressed, toileting, transferring and continence. Each of us participate in these activities daily. To lose your capability to perform one of these activities may not be the deciding factor to start searching for an alternative to remaining in your home. However, when you lose the ability to conduct three or more of these activities, it is critical that the family consider nursing providers in the home of the individual or seek a nursing home.

To determine the appropriate level of support for a loved one, it is critical that the level of care replaces the daily activities that are not being performed by the individual. It may mean that you simply require an aide in your home for twelve hours per day. As the person’s abilities become more impaired, additional support and possible relocation may be needed.

One of the greatest ramifications of assigning a loved one to a nursing home is the emotional effect on the person. Too often this process is decided without input from the impaired person and the children simply need some relief from the care being required of them. Those of us deciding the fate of any person must consider the infirmed person’s wishes and desires. These decisions are some of the most difficult to make. By keeping the person informed of each step and soliciting their acceptance with the process, you may experience a better transition.

These types of decisions can have a significant impact on your retirement plans. Seek out a Certified Financial Planner™ practitioner who understands all aspects of retirement. It is too important of a decision to simply guess.

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Retiring On Your Own Terms

“I want to live by the beach,” said his wife. “I want to live in the mountains,” said the husband. Differences of retirement plans typically exist within the same family. One person may wish to retire in a different environment than the other. Many of our clients come to their complimentary initial consultation without a complete understanding of their spouse’s desires for retirement. Simply because someone is married to another person for many years does not translate to an understanding of that person’s long-term goals and dreams. Communication is critical in all relationships, in a couple pondering retirement plans it is vital.

To help our clients resolve differences of opinion, and desires about retirement, we developed an approach that addresses the three “E’s”: Environmental, Economic and Emotional. To fittingly address the needs of each of the partners, these three “E’s” provide a comprehensive background for each to gain a deeper understanding of the other. This article will provide you considerations for each of the three components of retirement planning.

Environmental considerations are critical due to the impact your surroundings play in the overall happiness and health of a person. For example, scientists have proven that environment affects a person’s overall satisfaction in life attributed to their surroundings. Some people are happier in sunny, warm climates while others enjoy the cold, harsh tundra. By understanding your partner’s thoughts on environment, each of you will gain knowledge about the type of surroundings desired by the other. We work with a client who enjoys mild weather and sandy beaches. To compromise, we divided the year into quarters and accommodated her wish for salty water in the winter and his mountainous terrain for game hunting in the fall of each year. They remain content at their primary residence for six months of the year during seasons that are not extreme. Compromise is the key and extending understanding with a mindset of flexibility helps with the creation of a joyful retirement.

Economic factors contribute to the retirement quality of all of us. Considering that you have accumulated more than a sufficient amount of assets to live anywhere you wish, economic factors play less of a role in the retirement decision process. However, lets assume you have saved but may have some cash flow difficulty in the future. It is necessary to consider all means of support and the term in which that support will be available. As presented in our last article, the location of your retirement home will be a considerable outcome based on your economic means.

After considering environmental and economic factors, the most influential of these three factors, emotional, must be broached. To illustrate the power of emotions in decision making, we will share this short story. Tom and Linda decided to retire. Tom had his mind made up that he would retire in the mountains with a cabin and enjoy the land around him for his ideal retirement. Linda, often submitting to Tom’s decisions, was in misery in the mountains. Her asthma, allergies and other minor health conditions only worsened in the humid, hot summers in the mountains. She tolerated the first couple of years in the mountains and simply decided to make her wishes known to Tom. After a deep discussion of all the desires for her retirement, it was decided that they would share their time in retirement between the mountains and her beachfront condo she had been dreaming about for many years.

Compromise and consideration of the environmental, economic and emotional factors of retirement will yield the most effective choice for couples. The transition time to retirement is difficult for many people. Seek out someone who understands the needs and desires of retirees as well as possesses the expertise to help design and execute a plan that is pleasing to both partners. Life is short. Focus on these three factors and live life on your own terms!

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How To Avoid Common IRA Mistakes

Most retirees have heard the word “IRA” and may not fully understand this retirement savings plan. An IRA, or Individual Retirement Account, is merely a type of account that allows for the owner to grow, tax-deferred, the underlying investments within the account. I often hear people say that “I have an IRA for each year to diversify my investments.” It is often misunderstood that the IRA owner can own one IRA and maintain many different investments within the account. This article will help you avoid some of the common mistakes made by IRA owners.

Mistake Number 1: Avoid ineligible rollovers.

Under the current federal tax code, owners of IRA may rollover the IRA once-per-year. The confusion, and resulting taxable event, occurs when the owner interprets, incorrectly, the “once-per-year” requirement. This descriptor of time means literally one year from the date of the last rollover, not the calendar year. For example, if you performed a rollover on March 1, 2018, and performed another rollover on February 28, 2019, you would be subject to a penalty. 

Mistake Number 2: Missing the 60-day deadline.

A gentleman came to our office recently with a concern about his IRA. After much discussion, we provided him several alternatives to resolve his issue. His concern was due to advice he received from a friend that he could withdraw money from his IRA to purchase a piece of property and then seek financing from his bank to return the withdrawn funds. However, the friend, not a licensed financial adviser, failed to mention the strict timeline for such transactions. The Internal Revenue Code allows 60 days to accomplish the rollover to prevent taxation of the event. In this instance, the man was informed by his bank the process of underwriting the loan would take longer than 60 days. To illustrate the tax cost of this transaction, the man had withdrawn $200,000. The penalty of 10% assessed to the distribution, the man was under 59½ years of age, and the income taxes due now cost the man approximately $80,000! We quickly worked with his local bank to structure a lending arrangement that would allow him to return the withdrawn funds to his IRA within the 60-day mandatory deadline. We solved the problem but the stress it created was unbearable for the gentleman.

There is no IRS relief for missing the 60-day rollover deadline unless you file for a Private Letter Ruling with the IRS which will cost thousands in filing fees and you may not receive relief if your facts do not warrant such. The simple mitigation strategy is to not use your IRA as a lending source. Congress meant for these accounts to be long-term in nature and for retirement purposes.

Mistake Number 3: Failing to Meet a Hardship Exception.

One of the greatest contentions of angst to individuals is when hardship is being experienced by the family and funds in the IRA can’t be utilized for the particular relief needed. Unless the IRA owner experienced a natural disaster that is described in the Internal Revenue Code, the hardship distribution received from the IRA will be taxable and subject to a possible penalty for early withdrawal if the owner is less than 59½ years of age.

The confusion that causes this mistake to occur is that employer plans generally provide for a hardship distribution. IRAs do not. By statutory language, few exceptions to the penalty application to the distribution apply. Two of the primary exceptions we have seen are higher education expenses for a dependent and a first-time home purchase by the IRA owner.

This area of the U.S. tax laws is very complex. It is vital you seek appropriate guidance before potentially committing the mistake. If you are concerned about your investments and/or your IRA account, you may qualify for a Complimentary Stress-Test. Seek out a Certified Financial Planner™ practitioner and CPA to give you the confidence you are in compliance and meeting your retirement objectives.

For additional, free information about investing and tax planning, go to compasscapitalmgt.com where you will find a wealth of information to help you navigate life!

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Simplifying Tax Filing Status

Every year taxpayers that experience marital change, during the year, are confused about their proper filing status. The Internal Revenue Code (IRC) provides guidance on the qualifications of each of the individual taxpayer filing statuses.

Confusion arises when there has been a marriage or divorce during the tax year. Dependents are no longer allowed as a personal exemption but are utilized for certain credits of the tax code. Who is a dependent for tax filing purposes? What status do I use if my spouse dies during the tax year? How long can I claim a certain filing status? To say the IRC is complex is to say the Mona Lisa is simply another painting! 

The basic guidelines for filing status for an unmarried individual will be one of the following: Single or Head of Household. You are considered unmarried for the whole year if, on the last day of the tax year, you are either unmarried or legally separated from your spouse under a divorce decree. State law, not the IRS, governs whether you are married or legally separated under a divorce decree.

Some nuances in the IRC, and its regulations, regarding divorced taxpayers create additional challenges to those individuals attempting to avoid taxation through the legal means of divorce. For example, if you obtain a divorce for the sole purpose of filing tax returns as unmarried individuals, and at the time of divorce you intend to remarry and do so in the next tax year, you and your spouse must file as married individuals for both tax years.

If you are considered unmarried on the last day of the year, paid more than half the cost of maintaining a home and a qualified child lived with you more than half of the tax year, you may file as Head of Household. This filing status will allow a greater standard deduction than that available to an unmarried taxpayer.

Life sometimes creates difficulty for us. For example, if you were married for only one day of the tax year and your spouse dies, you may continue to file as a Married Filing Joint taxpayer for the year. Further, if your spouse dies in 2019, you may file as a joint tax filer for 2019 and use qualified widow(er) status for the succeeding two years. To claim qualified widow(er) filing status you must have a dependent, child or stepchild, you can claim during the tax year.

Don’t allow life to cause you confusion and distress. Seek out a Certified Financial Planner™ practitioner and CPA that can help guide you through the maze of laws and regulations. You will be glad you did! 

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Want Less Stress at Tax Time? Do This!

Are you one of those people who lose sleep at night, suffer anxiety and, generally, feel miserable when it is time to file your individual income tax returns? One of the best methods of experiencing a better way of life is to take charge of the activity. Don’t allow yourself to procrastinate on this important task and create stress in your life.

By performing the following three steps, you will find the upcoming filing season to be less of a burden and, dare I say, even enjoyable. First, start collecting your tax reporting information before January 1, 2020. Gather all receipts, bank statements, investment statements, paystubs, etc. that may be required for the complete and accurate filing of your returns. Organize the expense receipts by topic and total the topics to make it easier for you (or your paid preparer) to complete your filings. We recommend performing this same procedure each month. You will find the process takes very little time and saves a tremendous amount of stress when January rolls around.

The second step is to review your investment statements to see if any of your positions should be sold to capture losses and offset your investment gains. This is the process for accounts that are not IRAs known as nonqualified accounts. The act of reviewing your accounts to perform this task is known as tax harvesting. Your goal is to simply sell enough positions with losses to allow you to sell an equal amount of positions with gains and no tax effect. As a side note, this would be a great time of year to review your retirement plans and other holdings with a Certified Financial Planner practitioner to confirm you are on track with your goals.

This third step is very helpful to reduce your taxable income. Review your itemized deductions for 2019 thus far. If you are needing additional deductions, you should consider charitable contributions, payment of your state income tax estimated tax payment, donation of non-cash goods to a qualified charity and other means of accelerating deductions into 2019. With the changes in standard deduction because of the Tax Cuts and Jobs Act of 2017, it may be beneficial to “bunch” deductions every other year to allow yourself a larger deduction on your returns. 

As a bonus, contact your tax preparer and inform them that you are bringing your information to them earlier this tax season. If you want to make them smile, tell them you have burned the paper sack you usually bring and will be dropping off an organized list of income, deductions and other pertinent information.

For additional, free information about preparing for your tax preparation appointment, go to the Compass Capital Management Website. You will find a wealth of information to help you navigate life!

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Time is Running Out

As a calendar-year, cash-basis taxpayer, you will have fewer opportunities to reduce your 2019 income tax burden once the calendar rolls over to 2020. By taking a few simple steps today, you will see a better result when you file your income tax return in April, 2020.

If you participate in a Flexible Spending Health Plan, referred to as a “cafeteria plan”, through your employer, it is critical that you utilize (spend) your elected deferral amount for 2019. The IRS has liberalized the rules regarding the ability to claim qualified medical expenses and you may carry over a small portion of your elected deferral amount to a following year. Discuss your options with your company’s Human Resource Officer for your particular plan.

Consider paying your total advalorem tax assessment in full prior to December 31, 2019. The Tax Cuts and Jobs Act of 2017 increased the amount of standard deductions to such levels that most individuals will not incur sufficient qualified itemized deductions to file a Schedule A – Itemized Deductions Form – with their returns. Analyze your current level of qualified deductions to determine if you exceed your standard deduction of $12,200 for individuals or $24,400 for married filing joint taxpayers. A lowered state tax may be an added incentive to itemize deductions on your federal return. 

What if you could take a deduction on your tax return for something that doesn’t require your current cash? You may receive an increased benefit by donating appreciated stocks to qualified charities. The process requires that a donor (you) physically donate the certificate of the shares to the charity instead of selling the stock and donating the proceeds. You will receive a tax deduction based on the fair market value of the stock on the date of the donation (transfer). Since the charity is generally exempt from federal and state income taxes, the charity will sell the stock and receive the much needed cash it desires to run its programs. For example, you may have basis in the stock of $1,000 and the fair market value has risen to $10,000. Your charitable deduction is $10,000 (your deduction is limited to 30% of your adjusted gross income). You do not realize the $9,000 capital gain that would be taxed if you sold the stock. It is a win-win situation!

Lastly, review any employee benefit elections for 2020 that are required this month. Most employer-provided retirement plans utilize an enrollment period in November or December of the current year to elect the amount of contributions for the next year. One of the most effective and efficient tax deductions is the contribution to your retirement. Maximizing this election will save federal and state income taxes as well as receives growth via the employer matching contribution. We advise clients to defer at least the matching percentage provided by the employer so that you literally “double” your money notwithstanding market conditions.

Be proactive in your finances and retain more discretionary income for your family. If you want additional information on the above tax strategies and other financial planning methods to help your family reach its goals, go to the Compass Capital Management Website. You will find a wealth of information to help you navigate life!

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3 Mistakes Most People Make With Their Retirement

During my thirty year career of guiding individuals to realizing their retirement goals, I have reduced the most critical of mistakes people commit when accumulating retirement assets in their employer’s plan. These mistakes can be overcome and people have a higher probability of reaching their intended goals.

Mistake #1: Making Decisions through Fear

Investing should be performed with a clear mind and thoughtful research being the driver for change. Too often people accumulating for retirement commit the mistake of making changes to their retirement plan account after the negative impact has occurred. This is the equivalent of turning on the hydrant and spraying water on your house after the structure has completely burned to the ground.

We believe everyone should self-assess their goals for retirement. These goals should be attainable. For example, everyone uses the same phrase when thinking about investments: “High return on my investments with no risk.” This, of course, is a fantasy. Risk is present in every facet of life including your employer-provided retirement plan.

To correct for this mistake, learn to keep calm during temporary market disruptions. With the volatility of our current markets, you would be buying and selling all the time and miss the opportunities to meet your goals for long-term growth.

Mistake #2 – Timing the Market

One of our clients informed us that a former colleague of his was constantly buying and selling in his Thrift Savings Plan. His friend thought this approach would prevail for better growth in his account. However, just the opposite has been proven true by economists and researchers of behavioral finance. To believe a long-term perspective can be maintained with such a short-term approach to finances is not a valid one.

To overcome this mistake, each investor should realize he doesn’t possess all of the knowledge of the market and may turn his retirement plan assets into a speculative investment. This does not have to be the case. We firmly believe proper allocation and diversification of your portfolio will keep risk at acceptable levels while obtaining long-term potential for your assets.

Mistake #3 – Borrowing from Your Retirement Savings

As individuals it becomes difficult for us to look at this bucket of money and experience struggle in our lives. Instead of adjusting our lifestyle and budgeting within our means, we use loans from our retirement plans with the understanding that we are “borrowing from ourselves so it isn’t hurting my account”. The fallacy of this statement is that you’re, in fact, providing for a shortfall in your retirement account during possible peak earnings or growth seasons. 

Your plan will require interest to be paid on your “loan”. The rate of interest is usually lower than your market returns and the smaller payments returned to your account may grow but your overall compounding effect will be diminished.

The overall solution to these critical mistakes is to ask for advice from someone that can hold you accountable to a plan that you design for your future. We serve as an advisor as well as life coach for our clients. To be that calming voice of assurance when you are making progress or the soft correction needed when you attempt to deviate from your plan allows us to help you achieve success on your terms.

If you are concerned about your current ability to reach your retirement goals in your TSP, IRA, 401(k) or other employer plan, contact a CPA/PFS or Certified Financial Planner™ practitioner for a complimentary consultation. You may find the answers you need.

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Simplify Your Life, Consolidate Your IRAs

Diversification is a common term heard by most investors. However, its true meaning is sometimes lost. Recently, we were meeting with a new client of ours that is retired. When the woman brought her giant, purple, three-ring binder to the first meeting, we were somewhat puzzled. Near the end of our first meeting, she opened up the binder to reveal that she owned six, yes six, different IRAs with a total of three advisors!

She must have noticed the look of shock on my face and responded with a phrase we hear, although erroneously, that this is a form of diversifying her portfolio. We examined her statements for the different custodians and asked if we could provide her a “second opinion” as to the state of her investments according to her goals. She quickly responded affirmatively and we set the next meeting.

After much review of the statements, we noticed a trend among the various advisors. Each advisor had taken a similar strategy to helping the client meet her lifetime income goals! Further analysis explained what we previously thought about her approach to diversification – the client had not truly diversified her portfolio but had concentrated her portfolio, inadvertently, by never informing the advisors of her use of multiple advisors. In other words, she was highly concentrated in certain assets classes within her total holdings that exposed her to significant risk. We use the term “overlap” to describe the result of using several advisors that essentially invest in the same assets classes.

During the second meeting we verified her goals, risk tolerance and cash flow needs to confirm our understanding. We provided her a consolidated report of all six IRA statements and she was alarmed at the problem she created with so many accounts. After explaining our recommendation of diversification in many different forms – asset classes, geographically, market sectors, etc. – she was ready to simplify her life. 

By combining all of her IRAs into one account, she reduced the amount of paperwork necessary to be maintained for tax purposes and monitoring of her investment positions. Additional diversification was achieved by including asset classes not previously in the portfolio that would reduce her exposure to risk while maintaining her need for immediate cash flow each month. Her smile was all we needed to see to know that we had provided her the highest level of response and service as well as a resolution to a worry she had been carrying for some time. She also through away the giant, purple binder!

If you have multiple accounts with multiple advisors, you should consider a simpler approach to achieve your desired result with a consolidated account of truly diversified investments. We have a saying in our company, “To make things complex is simple. To make things simple is complex.” In other words, let us help you make life simple that you can enjoy retirement on your own terms. Stress? We don’t think it’s necessary when you work with a retirement planning specialist. 

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It’s All Taxable, Unless…

All of your income is taxable! This is the premise of the United States Government. However, provisions are addressed through tax legislation that allows certain types of income to be partially taxable or fully exempt from taxation. How do you know which income is tax-free? Is it unpatriotic to pay the least amount of income taxes you lawfully owe? 

Well, lets get one thought out of your mind. Judge Learned Hand, U.S. Court of Appeals in the early 20th century, is credited with stating “nobody owes any public duty to pay more [taxes] than the law demands.” What is fair in our system? The U.S. tax system is based on the honor of its citizens and their willingness to remit taxes timely for the efficient function of the government.

The Internal Revenue Code of 1986, as amended, provides us guidance in the treatment of assets and monies received during the course of the year. For those of us employed, the compensation received from our employers is taxable. However, what about the gift received from Aunt Sally? Is there a limit to what she can give you? Good news! As a beneficiary, or donee, of a gift, of any size, you owe no federal or state income taxes. That means, you could receive a gift of $10,000,000 and owe no income tax. Wow! If that is true, why do we pay tax on other income that is not “earned” during employment?

Section 61 of the Internal Revenue Code states, “… gross income means all income from whatever source derived…” For an item of income to be exempt from taxation, the item must meet specific criteria within the Internal Revenue Code. How does anyone make sense of all of this legal speak? It is critical to understand your tax situation since this expenditure is one of the largest allocations of most individual’s annual budget.

Does this mean your Social Security Benefits are taxable? The answer is maybe. If your income from sources, other than the Social Security Administration, exceeds $25,000 as a single filer or $32,000 as a joint filer, you may have to pay tax on a portion of your benefits. To illustrate the changes in tax laws, the process used by Congress to create revenue for the federal government, in tax years prior to 1987, individuals were not taxed on their Social Security Benefits. Tax laws change, literally, daily.

The solution to this income tax conundrum is to seek a tax adviser that not only understands the tax laws but specializes in planning. Our role as wealth advisors, for our clients, is to provide guidance on the critical areas of their finances that may impair the clients’ abilities to live a life by design. Don’t simply sign your returns each year and send them off hoping for the best. To gain more confidence in your tax responsibilities, seek out a CPA and Certified Financial Planner practitioner that understands the interaction between your planning for the future and the impact of taxation on your investments and income. You can truly take control of your taxes. In the words of Nike, JUST DO IT!

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