How Long Will Your Retirement Nest Egg Last? (You’ll Be Surprised)

As you may know, the average person has not saved very much for retirement.

For this newsletter however, we are going to assume that those who read it have diligently saved and will have $500,000 in savings by the time they retire.

This is meant to get you thinking about how long a saved-up retirement nest egg will last. Here’s a hint: not as long as you think.

If you are 65-years old and have saved $500,000, and you want to withdraw $30,000 a year from the account, how long will it last?

With NO Growth and a $30,000 withdrawal, you run out of money at age 79.

With a 3% rate of return and a $30,000 withdrawal, you run out of money at age 82.

With a 6% rate of return, and a $30,000 withdrawal, you run out of money at age 90.

This should scare you. A 65 year-old couple has a 45 percent chance -- almost 50-50 -- that one of them will survive to age 90.* There’s a 25% chance that a 65-year-old man will live to 93; a 25% chance that a 65-year-old woman will live to 96; and for a couple 65 years old, there’s a 25% chance that the surviving spouse lives to age 98.**

Do you know what kind of investment risk historically you’d have to take in order to generate a 6% average rate of return over time?

If we look back only 12 years, you’d have to risk a stock market loss in excess of 20%.

What happens if the year you retire you sustain a 20% loss instead of a 6% gain? Then you’d run out of money at age 83 (assuming all future years generated a 6% rate of return).

What is a guaranteed income for life worth?

The age-old debate in the financial services industry is whether it’s better to have clients invest their money in a properly balanced mix of stocks, bonds, mutual funds, etc. while in retirement, or they should be using “guaranteed income for life” annuities for some or a good portion of their money.

It’s a difficult discussion. When you use fixed annuities, you get a “guaranteethat you will never run out of money.

Using my example, if you put $500,000 in the best guaranteed income annuity for the life of both spouses (meaning it will pay until both spouses die), the couple could receive an annual income of about $28,000 for the rest of their lives.

When you invest in stocks/bonds/mutual funds, etc. the upside growth potential is much higher, but the chances of a stock market crash are very real.

When you couple the danger of a stock market crash with the chances that you or a spouse will live well into your 90s, it makes for a very compelling reason to strongly consider looking at guaranteed income for life payments when planning for retirement.

You give up potential for growth, but you get to sleep at night knowing that you will never run out of money no matter how long you live.

So, I’ll ask the question again, what is a guaranteed income for life worth?

If you would like to discuss fixed products that will guarantee you an income for life and whether they may fit into your retirement plan, please feel free to email us at info@twpfinancial.com

* https://www.cbsnews.com/news/living-too-long-is-a-risk/
** https://www.usatoday.com/story/money/columnist/powell/2016/10/05/life-expectancy-actuaries-live-die-retire-retirement/89407296/
Past performance is no guarantee of future results.

Oscar Announcement

Oscar continues to be a viable health insurance carrier in Los Angeles, with a strong network that includes UCLA, Providence St. John's and USC hospitals.  We recently received this news from them:

We are thrilled to announce that Google’s parent company, Alphabet, is planning to invest $375 million in Oscar.

Alphabet has been a supporter of Oscar for years and this reflects an incredible vote of confidence in Oscar’s unique ability to deliver a consumer-focused, tech-driven member experience in health care. This investment will allow Oscar to continue to invest in and bring Oscar’s unique product to more people, markets, and business lines. For more details, check out our CEO Mario’s interview in the Wired story: Health Care is Broken. Google Thinks Oscar Health Can Fix It.

Should You Avoid Fee-Only Advisors?

What is a “fee-only” advisor? A fee-only financial advisor is one who is compensated solely by the client with neither the advisor nor any related party receiving compensation that is contingent on the purchase or sale of a financial product. Fee-only advisors may not receive commissions, rebates, awards, finder’s fees, bonuses or other forms of compensation from others as a result of a client’s implementation of the advisor’s planning recommendations.

FREE CHAPTER—Roccy DeFrancesco, JD, wrote a very compelling book called Bad Advisors: How to Identify Them; How to Avoid Them. He has allowed us to give away the chapter in his book on “fee-only” advisors. If you would like to read that chapter (recommended!), please click this link.

The sales pitch—the sales pitch of using a “fee-only” advisor at first blush sounds like it makes sense. Wouldn’t it be better to use an advisor who isn’t “biased” because they CAN’T make money from commissions or other types of fees paid when a client invests money somewhere?

I mean, if an advisor could choose between a loaded mutual fund or one that’s not, wouldn’t the advisor always choose the loaded fund because he/she can make more money? Wouldn’t it be better to work with an advisor who uses no-load mutual funds as well as no-load life insurance or annuities instead of ones that pay commissions?

The problem with “fee-only” advisors (while in theory the concept of an unbiased advisor makes sense), “fee-only” advisors are unfortunately far from unbiased. Just about every “fee-only” advisor is, in fact, extremely biased against commission-based products.

Let’s use Fixed Indexed Annuities with guaranteed income benefit riders as an example. In the market today, you can find Fixed Indexed Annuities that will guarantee a roll-up rate of return of between 6%-7% for up to 10 years coupled with a guaranteed income for life of 5.5% for someone kicking in income at age 70.

Here's an important question: Should anyone giving financial planning advice be familiar with Fixed Indexed Annuities with Guaranteed Income Benefit riders? Answer: Absolutely. To give retirement advice without knowing these products inside and out would be an outrage.

And here is the million-dollar question for this article: Will a “fee-only” advisor recommend an Fixed Indexed Annuity to a client? Answer: Doubtful.

Why is it highly doubtful? Because “fee-only” advisors have no reason to learn about Fixed Indexed Annuities.

Why? Because they really can’t recommend them because Fixed Indexed Annuities pay commissions.

While “fee-only” advisors could recommend Fixed Indexed Annuities, they’d have to charge the client a fee to give the advice. Why is that bad? Because, if the client would have purchased the Fixed Income Annuity from an advisor who could earn commissions, there would be no additional fee (and the chances that the insurance licensed advisors actually understands the product and will recommend the best one is much greater than the “fee-only” advisor).

Summary

While in theory the concept of using a “fee-only” advisor make sense (because they do not make money from commissions or sales loads), in reality, a “fee-only” advisor is one of the most biased advisors you can use (biased against commission-based products as well as ignorant of them).

Because virtually all of the best fixed annuities and life insurance policies in the market pay commissions, the chances of receiving the “best advice” on such products (which can be an integral part to a balanced and protected wealth-building platform) from a “fee-only” advisor is slim to none.

You can use a “fee-only” advisor at your own peril, but now at least you are forewarned.

Tax Traps to Avoid in Retirement

By Charles Sherry, M.Sc.

“Our new Constitution is now established, and has an appearance that promises permanency; but in this world, nothing can be said to be certain, except death and taxes.”
 
It’s a quote that comes down to us from Benjamin Franklin, who uttered the phrase in 1789.
 
Taxes–federal, state, local, sales tax, property tax, gasoline tax, payroll tax, tolls, fees, taxes on capital gains, dividends and interest, gift tax, inheritance tax, and taxes cigarettes and alcohol. There has even been a rising chorus that is calling for a special tax on junk food.
 
Yes, Ben Franklin nailed it. We can’t escape taxes.
 
If you have already retired, you are aware that taxes don’t end when retirement begins. For those who are nearing retirement, it is important to recognize, plan for, and minimize the tax bite that awaits.
 
Before we jump in, we want to point out that this is a high-level summary. It’s designed to educate and avert surprises. Planning for tax outlays doesn’t reduce the discomfort that goes with paying Uncle Sam. But preparation can reduce the tax bite and eliminate unexpected surprises.
 
As we always emphasize, feel free to reach out to us with specific questions, or consult with your tax advisor.
 
That said, let’s get started.

1. Estimated quarterly tax payments may be required

If you have never been self-employed, you are accustomed to having federal, state (if your state has an income tax), and payroll taxes withheld from each paycheck.
 
When you stop working, there are no more W-4s to complete and no one is withholding taxes for you. But that doesn’t absolve you of your year-end tax liability.
 
You can make estimated payments each quarter. You can also have taxes withheld from your pension, social security, or IRA distribution.
 
If you have yet to file for social security, you may choose to have Social Security withhold 7%, 10%, 12% or 22% of your monthly benefit for taxes. Or you may decide not to have anything withheld.
 
But make sure enough is withheld or your estimated quarterly payments are sufficient. Otherwise, you may face a penalty.
 
Does it sound complicated? You don’t have to go it alone. Tax planning is a part of retirement income planning. If you have any concerns or questions, please reach out to us.

2. Social security may be taxed
 
If you file as an individual and your combined income (adjusted gross income + nontaxable interest + half of your Social Security benefits) is between $25,000 and $34,000, you may have to pay income tax on up to 50% of your benefits.
 
If the total is more than $34,000, up to 85% of your benefits may be taxable.
 
If you file a joint return and you and your spouse have a combined income that is
between $32,000 and $44,000, you may have to pay income tax on up to 50% of your benefits. If combined income is more than $44,000, up to 85% of your benefits may be taxable. (Ref: SSA.gov Benefits Planner: Income Taxes and Your Social Security Benefits). 
 
3. Beware of the required IRA minimum distribution
 
Let's put this right up front: Failure to take the required distribution could subject you to a steep penalty.
 
Required minimum distributions (RMDs) are minimum amounts that retirement plan account owners must withdraw annually starting with the year they reach 70½ years of age or, if later, the year in which they retire.
 
However, if the retirement plan account is an IRA or the account owner is a 5% owner of the business sponsoring the retirement plan, Required Minimum Distributions must begin once the account holder is 70½, regardless of whether he or she is retired (Ref: IRS: Retirement Plan and IRA Required Minimum Distributions FAQs).
 
Distributions are not required from a Roth IRA.
 
The first payment can be delayed until April 1 of the year following the year in which you turn 70½. For all subsequent years, including the year in which you were paid the first Required Minimum Distribution by April 1, you must take the Required Minimum Distribution by December 31 of the year.
 
The Required Minimum Distribution rules also apply to SEP IRAs and Simple IRAs, 401(k), profit-sharing, 403(b), 457(b), profit sharing plans, and other defined contribution plans.
 
If you expect to have large Required Minimum Distributions that could push you into a higher tax bracket, it may be beneficial to begin taking distributions prior to 70½. Or, you could convert some of your IRA into a Roth, which will help shelter gains and future distributions from taxes. You pay a tax upfront, but it’s one strategy that can help minimize taxes long-term.
 
4. The hidden cost of selling your primary residence
 
Downsizing can generate cash and reduce your daily expenses. But beware that it may also trigger a tax liability.
 
If you’ve lived in your primary residence for at least two of the last five years prior to selling, you can exempt up to $250,000 of the profit from taxes if you are single and up to $500,000 if you are married. If you are widowed, you may still qualify for the $500,000 exemption (Ref: IRS Publication 523 (2017), Selling Your Home).
 
The sale may also trigger the 3.8% tax on investment income. It’s a complex calculation that can ensnare single filers who have net investment income and modified adjusted gross income above $200,000 and $250,000 for married filers. (Ref: IRS: Questions and Answers on the Net Investment Income Tax).
 
The decision to sell shouldn’t be strictly governed by the tax code. However, it’s important to understand the tax ramifications. Timing income streams might be beneficial if a sale will trigger a taxable event.
 
There are other methods to lower your taxes, including charitable donations. How we structure retirement income, your investments, and distributions from retirement accounts can help to reduce the tax burden. If you need assistance on any of the points shared here, we are happy to assist. Please email us at info@twpfinancial.com or call us at 424-288-4254 and we can talk.

Market Crosscurrents

Shorter term, we believe the market is trying to push higher. The tech-heavy NASDAQ Composite, and key measures of mid-sized and small companies touched new highs in June (Ref: MarketWatch data).
 
Much of the underlying momentum can be traced to faster economic growth, rising corporate profits, and still-low interest rates.
 
Another factor that lends support–S&P 500 companies repurchased a record $189.1 billion of their own shares in the first quarter, according to S&P Dow Jones Indexes Senior Analyst Howard Silverblatt. He expects buybacks to remain strong through the rest of 2018.
 
But the Dow Jones Industrials and the S&P 500 Index failed to recapture their January highs. These indexes are made up of the nation’s largest companies, some of which derive a significant share of sales from overseas.
 
Though not far from the January highs, a strong dollar may be putting modest pressure on these stocks. Moderation in overseas growth may also be a factor.
 
We believe much of the uncertainty stems from escalating trade tensions between the U.S. and its major trading partners.
 
Free trade/fair trade–it’s a very complex issue that’s being fought with simple soundbites. The President believes America has not been treated fairly, and he is using his authority to selectively levy tariffs against offending nations.
 
It’s a risky strategy that may eventually break down barriers. Or, it could escalate into a series of retaliatory measures that impede the U.S. and global economy.
 
But a quick review of the economic data strongly suggests the noise from the trade headlines isn’t affecting the U.S. economy, and GDP growth in the second quarter appears poised to surpass 4%.
 
You may agree or disagree with the President’s actions. But the market, which is collectively made up of millions of large and small investors, hates heightened uncertainty. Tit-for-tat levies increase short-term economic uncertainty.
 
Currently, it has injected volatility and uncertainty into the headline-grabbing major averages. Like many obstacles that will crop up, we believe this will eventually pass.

If you have any concerns or questions, please feel free to reach out to us at 424-288-4254 or info@twpfinancial.com.

Should You be Using Target Date Funds for Retirement?

Target date retirement funds seem to be getting a lot of press these days and as such, investors are pouring billions of dollars into them.

The question is, should they?

What are target date funds? It's a mutual fund seeking to grow assets for a future target date. For example, someone who wants to retire in 12 years might use a 2030 target date fund.

Most investors would agree that assets are "supposed to" be managed in the fund to maximize growth and minimize loss in a manner that is prudent given the years left until the target is reached. A target date fund's risk tolerance is "supposed to" become more conservative through reallocation as it approaches its target date.

Target date funds are essentially asset allocated funds. Depending on the age of the investor and the target date, the mix might be 60/40, 70/30, 50/50, etc. stocks to bonds.

Target date funds are the epitome of K-I-S-S (Keep It Super Simple).

Target date funds are pure genius from a marketing perspective. The sales pitch is...investor, if you give us your money and keep it with us for 15, 20, 35+ years, we will:

  1. Help you achieve your retirement goal
  2. Generate good returns in up years and provide some protection in down years             
  3. Reallocate to lessen your risk of loss as you age.

And if the client uses Vanguard's target date funds, the cost per year will be very small.

But will target date funds fulfill as promised? We don't think so.

Using examples is usually the best way to get the point across in newsletters. Let's look at Vanguard's target date funds ending in 2030, 2025, and 2020. That means the current age of each investor would retire in 12, 7, and 2 years respectively. I chose these examples to show how risky each fund is and why we do NOT find them suitable investments.

We used our OnPointe Investment Risk program to run the numbers to score each mutual fund and calculate the maximum drawdown risk going back to the last crash as well as the compound annual growth rate (CAGR) going back 10 years.

June2018-graph2.jpg

What is wrong with these numbers?

Keep in mind that the three examples we are using are clients who are 53, 58, and 63 years old, if their target retirement age is 65. To us, this means these clients should NOT be in an investment mix that will risk a big stock market loss.

All three have a risk score on the OnPointe 1-100 scale of more than 50. Click here to find your risk score.

The maximum drawdown is huge for all three (-38%, -42%, -46%).

The compound annual growth rate (CAGR) over time is not suitable for the risk taken.

A classic 60/40 mix of stock/bond yielded a higher CAGR and had lower drawdown risk.

While the S&P 500 had slightly more risk than two of the target date funds, at least it generates a much higher CAGR.

If you just looked at the numbers above would you use a target date fund for your retirement?

We wouldn't. As the numbers indicate, target date funds have not performed well historically and, in our opinion, have far too much risk for the returns generated.

If you would like to discuss your retirement goals and the best way to reach those goals, please feel free to email us at tim@twpfinancial.com or give us a call 424-288-4254.

  "There's always an element of risk. No one has a crystal ball. OK, I have one, but no one knows how it works."   Cartoonstock.com

"There's always an element of risk. No one has a crystal ball. OK, I have one, but no one knows how it works."

Cartoonstock.com

The Rock of Gibraltar It Ain’t

More recently cracks in the European financial system have taken a backseat to firmer growth on the continent. But problems are simmering just below the surface.

Since the beginning of the decade, problems in Europe have occasionally drifted across the Atlantic. If it’s not Greece, it’s Portugal. If not Portugal, it might be Italy or Spain. And if not Italy or Spain, Brexit briefly created turbulence in 2016.


Enter the dysfunctional nature of Italian politics and the two anti-establishment parties that took top honors in an early March election.

A coalition was eventually formed between the two groups, but the president of Italy rejected a finance minister who has expressed doubt about the euro, which unites much of Europe.

Concerns the government might ditch the common currency led to a massive spike in Italy bond yields and a global sell-off in stocks the day after the Memorial Day weekend.

We could see new twists and turns, but for now cooler heads have prevailed.  Yields came off highs as government officials salvaged the coalition and staved off new elections later this year.

This synopsis is simply a thumbnail sketch of events, but you may be asking, “Why the overview of what is only the latest in decades of dysfunctional Italian politics? Why should I care?”

First, it’s a reminder that Europe’s ongoing financial problems haven’t been solved, and what happens in Europe can sometimes trigger uncertainty among U.S. investors…at least temporarily.

Should you be concerned?

Italians aren’t clamoring to get rid of the euro. If it were to happen, it would have enormous consequences for Italy, which would then reverberate throughout Europe.

We’d likely see a run on Italian banks, as citizens moved cash to safer shores. The collapse of Italian banks would roil the European financial system, and its impact would likely be felt around the globe.

Yes, we are interconnected today. But odds of a “Quitaly” or “Italexit”–financial commentators are once again trying to coin a new term–remain low. Yet now it’s on the radar.

If nothing else, the drama in Italy is simply a reminder that Europe hasn’t solved its financial problems.

Medicare Special Enrollment Period for those affected by the California Wildfires

If you were affected by the California Wildfires, you are offered a special open enrollment period for your Medicare plan. Please see below and get in touch with Phyllis if you would like to review your drug or supplement plan. Special Open Enrollment (SEP) period is through March 31, 2018.

  • Individuals will be considered “affected” and eligible for this SEP if they reside, or resided at the start of the incident period, in the FEMA declared emergency or major disaster area related to the recent wildfires in California. 
  • These SEPs are also available to those individuals who don’t live in the affected areas but rely on help making health care decisions from friends or family members who live in the affected areas. Plan sponsors may ask for proof of residence to determine if an individual resided in an affected area (e.g., driver’s license, utility bills, etc.) at the start of the incident period, but must accept an attestation if an applicant states that his or her documents were destroyed or are inaccessible.

I Am a Life Insurance Policy

Life Insurance is a True Selfless Act
When it comes to financial planning, Life Insurance is truly done for the benefit of others. Unless you are using it as an investment, you are not going to be there to receive any of the money.  Therefore, life insurance is an act of love for your family. Here is an anonymous poem, most likely from the 1950's, about what life insurance actually is:

I Am a Life Insurance Policy
I am a piece of paper, a drop of ink and a few pennies of premium.
I am a promise to pay. 
I help people see visions, dream dreams, and achieve economic immortality.
I am education for the children.
I am savings.
I am property that increases in value from year to year.
I lend money when you need it most, with no questions asked.
I pay off mortgages, so that the family can remain together in their own homes.
I assure people the daring to live and the moral right to die.
I create money where none existed before.
I am the great emancipator from want.
I guarantee the continuity of business.
I conserve the employer's investment.
I am tangible evidence that a man is a good husband and father, and a woman a good wife and mother.
I am a declaration of financial independence and economic freedom.
I am the difference between an old man or woman and an elderly gentleman or lady.
I provide cash if illness, injury, old age, or death cuts off the breadwinner's income.
I am the only thing that you can buy on the installment plan that your family doesn't have to finish paying for.
I am protected by laws that prevent creditors from assessing the money  
I give to your loved ones.
I bring dignity, peace of mind and security to your family.
I supply investment capital that makes the wheels turn and the motors hum.
I guarantee the financial ability to have happy holidays and the laughter of children - even though father or mother is not there.
I am the guardian angel of the home.
I am life insurance.

The New Tax Law: How Does It Affect You?

First of all, the new tax law does not affect your upcoming taxes for 2017.   It affects the year 2018 and forward, so you will be dealing with the new laws and brackets in April 2019.

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Changes to the Individual Income Tax

  • Lowers most individual income tax rates, including the top marginal rate from 39.6 percent to 37 percent. Retains the current seven-bracket structure, but bracket widths are modified. (Table 1 and Table 2)
  •  
  • Increases the standard deduction to $12,000 for single filers, $18,000 for heads of household, and $24,000 for joint filers in 2018 (compared to $6,500, $9,550, and $13,000 respectively under current law).
  •  
  • Eliminates the personal exemption.
  •  
  • Retains the charitable contribution deduction, and limits the mortgage interest deduction to the first $750,000 in principal value. Limits the state and local tax deduction to a combined $10,000 for income, sales, and property taxes. Taxes paid or accrued in carrying on a trade or business are not limited.
  •  
  • Expands the child tax credit from $1,000 to $2,000, while increasing the phaseout from $110,000 in current law to $400,000 married couples. The first $1,400 would be refundable.
  •  
  • Effectively repeals the individual mandate penalty, by lowering the penalty amount to $0, effective January 1, 2019.
  •  
  • Raises the exemption on the alternative minimum tax from $86,200 to $109,400 for married filers, and increases the phase-out threshold to $1 million.
  •  
  • The majority of individual income tax changes would be temporary, expiring on December 31, 2025. Several, such as the adoption of chained CPI and functional repeal of the individual mandate, would be permanent.
  •  
  • The majority of individual income tax changes would be temporary, expiring on December 31, 2025. Several, such as the adoption of chained CPI and functional repeal of the individual mandate, would be permanent.

 

Changes to Business Tax

  • Lowers the corporate income tax rate permanently to 21 percent, starting in 2018.
  •  
  • Establishes a 20 percent deduction of qualified business income from certain pass-through businesses. Specific service industries, such as health, law, and professional services, are excluded. However, joint filers with income below $315,000 and other filers with income below $157,500 can claim the deduction fully on income from service industries. This provision would expire December 31, 2025.

Other Changes

  • Doubles the estate tax exemption from $5.6 million to $11.2 million, which expires on December 31, 2025. The exemption will increase with inflation.

Middle Class Tax Bracket Chart: https://www.nytimes.com/interactive/2017/11/28/upshot/what-the-tax-bill-would-look-like-for-25000-middle-class-families.html