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Should You Offer Your 401(k) Plan Participants an Annuity?

Many business owners offer retirement options, with 401(k) plans amongst the most popular. Traditional 401(k) plans offer a variety of investment options that business owners can provide, with more plans offering the purchase of an annuity. Read on to learn more about the benefits and drawbacks of annuities and whether you should include an annuity option for your 401(k) plan participants.

How Do Annuities Work in a 401(k) Plan?

Traditional 401(k) plans offer a variety of investment options. Including an annuity within your employer-sponsored plan allows plan participants to purchase an annuity using their 401(k).

An annuity could prove useful to someone who needs a reliable, non-fluctuating stream of income in retirement. There are certain limitations, however, that make it a less attractive option for some. Your participants will want to discuss this decision in detail with a financial planner before deciding whether or not to purchase an annuity.

As a business owner, here are some things to consider when determining whether or not to provide an annuity option for your plan participants.

Longevity

The average retirement age is 62 for women and 64 for men. This, combined with an increased life expectancy, means plenty of retirees will enjoy many years of retirement.1

Remember, however, that the more time spent in retirement, the more savings is needed. Individuals who have accumulated a significant amount of wealth may be able to make up for this gap. Others may be better off purchasing an annuity, providing them with guaranteed income.

Difficult to Transfer

When an employee leaves a company, the transfer of their retirement accounts is relatively easy – especially 401(k) accounts. However, since there are various types of annuity products, the transfer of an annuity can be more challenging. This will likely depend upon the type of annuity purchased.

Varying Annuity Types

There are two types of annuities fixed and variable.

Within those two types, there are income options that include immediate income or deferred income.

Amongst annuities, there are multiple products, but two types and two main payout methods to consider. These four types include:

  • Immediate annuities: These begin providing payment immediately after purchase.
  • Deferred annuities: These are given time to accumulate interest before distributing payments, giving the potential for a larger payment amount than immediate annuities.
  • Fixed annuities: A fixed annuity is a type of insurance contract that promises to pay the buyer a specific, guaranteed interest rate on their contributions to the contract.  – Investopedia
  • Variable annuities: A variable annuity pays the interest that can fluctuate based on the performance of an investment portfolio chosen by the account’s owner.  – Investopedia

It’s important to note that immediate and deferred annuities can be combined with fixed and variable.

Tax Obligations for Plan Participants

Annuities help establish consistent income, but one disadvantage business owners will want to make participants aware of is the potential tax obligation. Annuities are tax-deferred, similar to withdrawals from a traditional IRA or 401(k). But taxes must be paid once payments are received. Unlike some investments that are subject to being taxed based on capital gains, annuity payments are considered regular income for tax purposes.

If plan participants choose to access annuity payments before the age of 59 and a half, they may be subject to an additional 10 percent tax penalty unless certain conditions are met.2

Providing annuity options to your 401(k) plan participants could prove beneficial for their retirement. However, whether they will want or need an annuity will depend entirely on their personal situation. Those that need a consistent level of income over time and can pay the cost of an annuity may see the benefit in utilizing one. While those that can’t afford it, or have little in savings may consider an alternative. Keep the above considerations in mind as you work with your plan provider to discuss incorporating annuities into your retirement plan offerings.

Guarantees provided by annuities are subject to the financial strength of the issuing insurance company; not guaranteed by any bank or the FDIC.

Annuities are long-term products of the insurance industry designed for retirement income.  They contain some limitations, including possible withdrawal charges and a market value adjustment that could affect contract values.

  1. https://crr.bc.edu/briefs/what-is-the-average-retirement-age/
  2. https://www.irs.gov/taxtopics/tc410
  3. Investopedia – https://www.investopedia.com/
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.
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Understanding & Conquering the Bad Behavior That Affects Your Financial Wellness

 

Being financially literate means you have a good grasp on your finances, as well as what are considered positive financial habits. Maybe you contribute to your 401(k) regularly, keep an emergency savings fund on hand and work hard to pay down debt because you understand the consequences of accruing interest.

On the other hand, there are some common behaviors that may seem small, but can significantly impact financial wellness over your lifetime. From avoiding opening a bill to splurging on your nights out, most of us are guilty of a few bad financial habits.

Below, we’re discussing how you can identify your own costly hang-ups and work through them to create a strong foundation of positive financial decision-making now and through retirement.

4 Common Money Mistakes

There are a few common scenarios we tend to fall into time and time again with our money.

Mistake #1: You Play Victim to Your Debt

If you keep telling yourself you’ll never get out of debt, it can make it much harder to overcome. Convinced the task is impossible, likely means you’ll put less effort into trying to do anything about it.

Mistake #2: You Don’t Plan for the Future

The earlier you start saving, the harder your money will work for you in preparing for retirement. It can be tough to think (or care) about retirement in your 20s and 30s, but putting a small (but consistent) amount in retirement savings every month through your early adult years could mean thousands more you’ll have to withdraw in your 60s and 70s.

Mistake #3: You Aren’t Prioritizing Properly

One of the hardest things to do when it comes to improving financial wellness is to strike a balance between your needs and wants of today with the financial security of your future. When you’ve got your own retirement to think about, aging parents and kids headed off to college – how do you know what to spend and where?

Prioritizing your finances properly typically requires the help of a knowledgeable financial advisor who can help you stay focused and organized.

Mistake #4: You Don’t Have a Distribution Strategy

Saving enough for retirement is really half the battle. The other half? Distributing your retirement income in an effective and tax-efficient way. Heading toward retirement with no distribution strategy in place could create unnecessary tax burdens and financial distress.

Conquering Bad Behaviors

Conquering bad (or unproductive) financial behaviors takes persistence and self-discipline. There’s no quick fix, and you should expect changes to be gradual. Below are a few of our tips for conquering bad behaviors that may be affecting your financial wellness.

Tip #1: Be Mindful With Spending

With online shopping and contactless pay, buying is easier than ever. This, unfortunately, can make it easy to be impulsive and unintentional with your spending. Before a purchase, take a step back and determine whether or not this buy is in line with your greater financial goals.

Tip #2: Don’t Let Financial Paperwork Pile Up

Avoiding a bill or bank statement doesn’t make it go away – but it does increase the chance of incurring late fees and penalty charges. If you aren’t already, get organized with your statements and other financial paperwork. Work on conquering any anxiety you may have surrounding unpaid bills or bank balances and remember that ignoring them won’t make them go away.

Tip #3: Create an Emergency Fund

By creating and contributing to a savings account regularly, you can save your future self headache and financial worry. Remember to boost your emergency savings. In fact, adding to your savings account should be a top priority in your monthly budget.

Tip #4: Make a To-Do List

The truth is, there’s almost always something you could be working on when it comes to boosting your financial wellness. Reviewing insurance coverage, updating your will, outlining future goals, etc. – the list can continue on indefinitely. If it feels overwhelming, start writing down everything on your financial to-do list. From there, prioritize tasks that should be taken care of now and make a game plan for those you can work on later down the line. Breaking it down and crossing one thing off your list at a time can help make financial wellness much more manageable.

While it can be difficult to break old financial habits, it’s certainly not impossible. Finding financial wellness is a constant work in progress, but identifying your own areas for improvement and implementing small changes can yield impressive results. It’s important to ask your financial advisor for help as well. Tell them what bad behaviors you’d like to break, and they can help determine the most effective way to do it.

This content is developed from sources believed to be providing accurate information and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.
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What Makes a Great Leader? 10 Powerful Women Weigh in

What makes an effective visionary leader? Some of the most interesting insights and answers to this question come from those who are considered trail-blazing leaders in their own right.

However, many of the leaders that are most often quoted are men. Perhaps that is because (according to the Harvard Business Review), “fewer than 5% of CEOs of public companies in the United States today are women. In the Fortune 500, that number fell by 25% from 2017 to 2018, dipping from 32 (6.4%) to 24 (4.8%), before rising back in 2019”.1

However, “Women have outnumbered men on college campuses since 1988. They have earned at least one-third of law degrees since 1980 and accounted for one-third of medical school students by 1990. Yet, they have not moved up to positions of prominence and power in America at anywhere near the rate that should have followed”.2

Here are 10 quotes from powerful women on working hard, taking risks and learning from failure.

On working hard

“Whatever the problem, be part of the solution. Don’t just sit around raising questions and pointing out obstacles.” — Tina Fey

“Work harder than everybody. You’re not going to get it by whining, and you’re not going to get it by shouting, and you’re not going to get it by quitting. You’re going to get it by being there.”― Barbara Walters

On taking risks:

“Because what else are we going to do? Say no? Say no to an opportunity that may be slightly out of our comfort zone? Quiet our voice because we are worried it is not perfect? I believe great people do things before they are ready.” ― Amy Poehler

“I always did something I was a little not ready to do. I think that’s how you grow. When there’s that moment of ‘Wow, I’m not really sure I can do this,’ and you push through those moments, that’s when you have a breakthrough.” — Marissa Mayer

On learning from failure:

“Every problem, every dilemma, every dead end we find ourselves facing in life, only appears unsolvable inside a particular frame or point of view. Enlarge the box, or create another frame around the data, and problems vanish, while new opportunities appear.”— Rosamund Stone Zander

“Don’t be frightened: you can always change your mind. I know: I’ve had four careers and three husbands. You are not going to be you, fixed and immutable you, forever.”― Nora Ephron

“So often in life, things that you regard as an impediment turn out to be great good fortune.”― Ruth Bader Ginsburg

On managing a team:

“To handle yourself, use your head; to handle others, use your heart.” ― Eleanor Roosevelt

“It sounds so simple to say that bosses need to tell employees when they’re screwing up. But it very rarely happens… I would argue that criticizing your employees when they screw up is not just your job, it’s actually your moral obligation.” — Kim Scott

On finding balance:

“Don’t ever confuse the two, your life and your work. That’s what I have to say. The second is only a part of the first… There are thousands of people out there with the same degree you have; when you get a job, there will be thousands of people doing what you want to do for a living. But you are the only person alive who has sole custody of your life. Your particular life. Your entire life. Not just your life at a desk, or your life on the bus, or in the car, or at the computer. Not just the life of your mind, but the life of your heart. Not just your bank account, but your soul…People don’t talk about the soul very much anymore. It’s so much easier to write a résumé than to craft a spirit. But a résumé is cold comfort on a winter night, or when you’re sad, or broke, or lonely, or when you’ve gotten back the chest X ray and it doesn’t look so good, or when the doctor writes ‘prognosis, poor.’ ” — Anna Quindlen

  1. https://hbr.org/2019/07/research-board-experience-is-helping-more-women-get-ceo-jobs
  2. https://www.americanprogress.org/issues/women/reports/2018/11/20/461273/womens-leadership-gap-2/

 

This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.
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Have Your Cake & Eat it Too: New PPP Basics and Tax Savings

Good news. The new Paycheck Protection Program (PPP) law enacted with the stimulus package adds dollars to your pockets if you have or had PPP money.

Did you miss out on the first two opportunities to receive your tax-free Paycheck Protection Program (PPP) cash? Many did miss out. Why?

One reason: the word “loan.”  Who wants a loan? No one. Well, almost no one.  But who wants a cash gift, tax-free?  If you do, read on for the details. But first, you should know that the big picture works like this:

  1. You obtain your PPP tax-free monies from a lender (it’s called a “loan,” but watch that word disappear as you read this letter).
  2. You spend all the PPP money on yourself if you are self-employed or operate as a partnership; on payroll (including pay to you, if that applies); and on other covered expenses such as rent, interest, utilities, operations, property damage, suppliers, and worker protection.
  3. You apply for loan forgiveness and achieve 100 percent loan forgiveness, which is easy-peasy when you spend 60 percent or more of the money on payroll (and yourself if you are self-employed or a partner in a partnership).
  4. You deduct the expenses that you paid with the PPP loan monies that were forgiven.

New Money on the Table

The new COVID-19 stimulus act sets aside $35 billion for first-time PPP applicants, with $15 billion of that made in loans for first-time applicants with 10 employees or fewer or made in amounts less than $250,000 to businesses in low-income areas.

New Deadline

The new deadline of March 31, 2021, replaces the expired deadline of August 8, 2020. The monies available in this new round of PPP funding are on a first-come, first-served basis. Don’t procrastinate. Get your application for your first-time PPP monies in place now.

Before we go further, please note the PPP money comes to you in what appears to be a loan. We say “appears” because you typically pay back a loan. Done right, however, the PPP loan is 100 percent forgiven. The word “loan” makes some businesses leery of this arrangement. Don’t be. The PPP monetary arrangement is a true “have your cake and eat it too” deal.

And this remarkable deal applies to your past PPP loan, the PPP loan you have outstanding, and the PPP loan you are about to get if you have not had one before. Here are the details.

Loan Proceeds Are Not Taxable

The COVID-related Tax Relief Act of 2020 reiterates that your PPP loan forgiveness amount is not taxable income to you.

Expenses Paid with Forgiven Loan Money Are Tax-Deductible

As you may remember, the IRS took the position that expenses paid with PPP loan forgiveness monies were not deductible.

Lawmakers disagreed but were unable to get the IRS to change its position. The IRS essentially told lawmakers, “If you want the expenses paid with a PPP loan to be deductible, change the law.”

And that’s precisely what lawmakers did. The COVID-related Tax Relief Act of 2020 states that “no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income.”

In plain English, the expenses paid with monies from a forgiven PPP loan are now tax-deductible, and this change goes back to March 27, 2020, the date the Coronavirus Aid, Relief, and Economic Security (CARES) Act was enacted.

Good luck to all small business owners as they navigate this new PPP process.

Insurance Coverage and the Coronavirus

The coronavirus pandemic has caused many people to re-assess their need for life insurance, along with other types of insurance such as long term care insurance and the adequacy of their health insurance.

Life insurance ensures surviving family members are provided for financially after someone’s death. There have been some changes in the application process for life insurance policies, and the good news is it’s still possible to get a policy.

In some ways it may actually be an easier process. According to Bankrate, “Because many people (and insurance companies) are honoring the CDC’s social distancing guidelines, in-person blood or urine tests and weigh-ins aren’t possible now. That means insurance companies currently have fewer potential reasons to reject applicants for coverage.”

“To make it easier for consumers to apply for a policy under these unusual circumstances, more than a quarter of U.S. life insurers have expanded their automated underwriting practices,” says Catherine Theroux, director of public relations for LIMRA. “One in 5 U.S. companies have postponed or waived paramedical requirements.”

Folks applying for life insurance however, are still required to provide a complete health history, allowing the company to analyze the insurability of the individual.

Some insurance companies are changing their offerings and limiting their coverage options based on age or the term of the coverage sought. For example, Mutual of Omaha Insurance and Penn Mutual Life Insurance have temporarily suspended applications for individuals aged 70 or older. Some other insurers are also temporarily suspending life policy applications for people in their 60s who might previously have been approved for coverage despite health issues like diabetes and asthma.

We believe that now is actually a good time to apply for life insurance, because it might possibly be the easiest process from an underwriting standpoint. If you believe a life insurance policy will protect you and your family, there really isn’t any reason not to apply now. Our insurance experts can help find the company that best meets your needs.

What about an existing policy and coronavirus coverage?

For the most part, existing policies will cover a person if they were to die from COVID-19. As long as your policy is in good standing, it will provide a death benefit to your beneficiaries. Just be sure not to let your current policy lapse. However, here’s a few exceptions to keep in mind:

  • The life insurance industry has something called a “contestability period,” a window of one or two years during which an insurer can investigate and deny claims. If it’s determined that the insured lied on their application or otherwise misled the insurer to defraud them, coverage — in the case of life insurance, the death benefit paid to the family — may be denied.
  • Another exception to a payout due to the coronavirus is for those who have purchased an accidental death policy. Those policies generally don’t cover death by disease. There are some exceptions, though, like if an injury causes someone to be hospitalized and the disease results directly from that hospitalization. It’s wise to discuss the specifics with your insurance agent.

If you’ve been honest on your application and current on your premium payments, you shouldn’t have any worries.

If you’d like to read more FAQs about life insurance, long term care insurance, healthcare or more, check out this article from AARP.

If you’d like to chat with a life insurance expert to analyze your life insurance (or long term care insurance) needs, talk to a RetireMentor to discuss your specific needs.

Do’s & Don’ts of Finding the Right Retirement Advice

First off, I’m NOT an advisor. I’m a retirement researcher, writer and educator. I have a few Do’s and Don’ts to consider as you begin planning your retirement and finding the right person/people to help you go from Savings (401k, etc.) to Security (creating an income for life from your 401k).

  1. DON’T listen to a neighbor, a friend or even that friendly financial/investment advisor who’s probably not well versed in retirement planning and is biased toward investments. The insurance advisor is biased toward insurance. And the big companies in both camps spend a lot of money to spread their version of the truth. Looks for a “retirement advisor” who’s license in both investments and insurance and therefore, doesn’t have the bias of one vs. the other. They should be dedicated and taking the time to educate you about this retirement planning process and all the strategies they are recommending vs. just saying “it’s a good idea because I said so.” All professional service providers make money….they must be paid like everyone else. Just make sure they are 100% transparent in their fees.
  2. DO listen to retirement researchers, academics and economists who focus on retirement planning and there are plenty.
  3. DO base you decisions on research…always ask Why? and ask for the data to support an advisor’s/friend’s recommendation.
  4. The right answer can only be found by answering a number of questions about you and your goals, along with analyzing what you’ve got, what you’ll have, and what you’ll need. And then finding the best combination of strategies to make your money lasts throughout retirement.
  5. You’ll need to have an open mind as it relates to retirement/distribution strategies because they are completely different than the accumulation phase of life.
  6. The traditional 60/40 portfolio is dead. As you approach and enter retirement, you’ll need a portfolio strategy that reduces your risk, while also being positioned to take advantage of growth. You MUST mitigate volatility in retirement. There are a number of ways to do this. With the current low bond returns, you should seek alternatives. For some that may include Fixed Indexed Annuities. For others, it may be structured investments. Stocks will always be a part of your portfolio, albeit a smaller part.
  7. DON’T work with an advisor who knows nothing about tax planning for retirement…and most CPAs don’t know how to do pro-active retirement planning. A true retirement advisor knows how to integrate tax efficient withdrawal strategies into your income distribution plan so that you keep as much of your hard earned money as possible. This may be one of the most important strategies. Side note: ask them about Roth Conversions…2020 may be a perfect storm for Roths for many people.
  8. DO make sure your portfolio is stress tested and proven to last in ALL market environments.
  9. DON’T let anyone guess as to when you should take Social Security. This accounts for 33% of your income in retirement (in most cases) and must be incorporated into your overall income planning. The answer as to when depends on a lot of factors. Also, Social Security must be included in your tax picture as well. Since 85% of your benefit could be taxable without the right planning.
  10. DO find out if they are aware of MAGI and Medicare (and the impact on how much you’ll pay for Medicare). Make sure they have resources to help you navigate the Medicare maze.
  11. DO find out if they help you find ways to fund a Long Term Care policy, if needed?
  12. DO consider a reverse mortgage as an emergency income buffer…this is a perfect example of when having an open mind is important. Find out what the retirement academics say about reverse mortgages. And, no, they can’t take your house away if you follow some basic rules, like paying your taxes. And no, the bank doesn’t own your home. Take the time to find the facts vs. listening to hearsay.
  13. DO find out if the advisor you’re considering working with has a team of providers to help you with other ancillary needs.

I do believe it’s impossible for the layperson (and most of the 300,000 financial advisors in this country), to do ALL of the proper retirement planning that must be done to improve and secure your retirement outcome.

Fortunately or unfortunately, advisors, like many other for-profit companies have to make money. But, with the right advisor you won’t question their fees…their value will be evident in everything they do for you. DO make sure they are committed to spending whatever time you need to be 100% confident in your plan and are acting in your best interests. And there’s nothing wrong with checking their references.

Finally, most of us have good intuition when choosing our professionals. Get to know him/her. Ask about his/her family. Ask about their perspectives on finances and life. Ask why they do what they do. Find out a lot about this person personally, and then dig into their “retirement planning” experience.

It’s easy for an advisor to give you credentials and pretty reports and look good on the surface. But dig a little deeper and you might be able to discover if he or she is the real deal.

Click here to chat with a RetireMentor to help you connect with a retirement planner or other retirement professional (legal, healthcare, etc.):

Who’s the Right Advisor for Me?

 

“The research is unequivocal that a competent financial guide can both help you achieve the returns necessary to arrive at your financial destination while simultaneously improving the quality of your journey.”

-Behavioral Alpha: The True Power of Financial Advice, Daniel Crosby, Ph.D., Nocturne Capital, 2016

 

Finding the Right Advisor in a Sea of 300,000

There are more than 300,000 “financial advisors and planners” in the U.S. 80% of them are men and their average age is 60. The title financial planner or financial advisor is used to describe anyone from an insurance agent to a stockbroker to an investment advisor to a Certified Financial Planner (CFP). And there is no shortage of certifications and acronyms on advisor business cards. No wonder people are confused when trying to decipher who they should get financial or retirement advice from.

Many investors assume that any professional who refers to himself or herself as a “financial planner” has received some kind of certification. Unfortunately, there’s no rule governing who can go by the title of financial planner. Anyone can set up shop using that title, whether or not they know anything about finance or have any experience. You’re better off sticking with financial planners who have an actual certification by a governing agency, be it state or federal.

Financial advisors used to be hired predominantly by people with upwards of several hundred thousand dollars. No matter if you have $1 million of $1,000 to invest, you still have many options. That’s changed over the last decade as the financial landscape has changed. Among other changes are the self-funding of retirement plans vs. pensions. People are also living longer and the financial decisions that accompany are long life are more complicated. The financial industry and products are also much more complex with many more offerings. Not to mention the complexities around retirement, which are myriad.

Here’s a quick overview of the types of advisors and planners and their certifications:

Registered Investment Advisor (RIA): A person or firm who advises individuals on investments and manages their portfolios. RIAs have a fiduciary duty to their clients, which means they have a fundamental obligation to provide investment advice that always acts in their clients’ best interests. As the first word of their title indicates, RIAs are required to register either with the Securities and Exchange Commission (SEC) or state securities administrators. Registered investment advisors seek to offer more holistic financial plans and investing services. They offer very different fee schedules and are typically fee-based by assets under management.

Registered Representatives: Work for a brokerage company and are well versed in investment products including stocks, bonds, and mutual funds. Registered representatives are required to have passed their Series 6 and/or Series 7 exams. They must register with the Financial Industry Regulatory Authority (FINRA) and are governed by suitability standards (which means they ensure an investment is suitable given an investor’s investment profile. Registered representatives, also known as stockbrokers work on commission. Since reps are regulated by FINRA, you can check an advisor’s background on FINRA’s Central Registration Depository at www.finra.org.

Many financial advisors or planners attain other certifications (some of which are listed below). So, for example, you may meet with someone who is both an RIA and a CFP or an RIA and an insurance agent.

Certified financial planner (CFP): The CFP certification is offered by the CFP Board and is generally considered the gold-standard certification for financial planners. CFPs are always fiduciaries, meaning they are legally required to put their clients’ interests ahead of their own at all times.Chartered financial analyst (CFA): The CFA designation is granted only by the CFA Institute. To gain this certification, advisors must meet significant education and work experience requirements and pass a series of three exams. CFAs have expertise in investment analysis and portfolio management.

Chartered financial consultant (ChFC): A chartered financial consultant (ChFC) studies college-level insurance, estate planning, retirement funding, investments and others subjects in financial planning.

Retirement Income Certifications: There are three major retirement income planning certifications that many financial advisors choose to attain to demonstrate their expertise in retirement planning. These include: Retirement Income Certified Professional (RICP), Retirement Management Analyst (RMA), and Certified Retirement Counselor (CRC). While these don’t guarantee your retirement advisor will have a full command of retirement planning, they do indicate a level of education beyond the certifications above.  What’s more important than certifications, however, is the process and planning that a retirement advisor offers you. See page 4 for details on finding the right retirement advisor.

Read this entire paper on finding the right advisor for you

When you want some directions on getting connected with a retirement advisor in our network or other solution providers, talk to a RetireMentor.

De-Risking Your Portfolio

Planning for retirement can be confusing and a bit scary. How do you manage your money now so you can be well-prepared financially for retirement? And how do you ensure that your retirement income will last throughout your life? How can you de-risk your portfolio to avoid the volatile markets like we’re seeing now (and will definitely see again). With increased life expectancies, it’s critical that you weigh all your options and plan carefully. This paper will discuss traditional retirement strategies, as well as introduce you to a less conventional, but potentially more effective and efficient approach to help you reach your retirement goals.

The Problem

Often, “the way we’ve always done it” is no longer the best way to achieve something. In retirement planning, a traditional portfolio uses only conventional stock and bond investments. In this paper, we refer to this as the Traditional Asset Allocation 6040 Portfolio (TRAA 6040). The problem? Traditional stocks and bonds on their own are not efficient for 100% of a retirement income portfolio. They expose a retiree to lower return potential and higher risk.

The Solution

Historically, stocks and bonds have been the mainstay of a typical retirement portfolio. The Hybrid Income Portfolio (HIP) offers a change in product allocation to reduce portfolio risk and increase the rate of return potential. The HIP strategy uses a combination of Traditional Investments (stocks & bonds), Structured Investment Products (SIPs) and Fixed Indexed Annuities (FIAs).

In addition to adding SIPs and FIAs, other strategies should be incorporated to lead to a more efficient retirement outcome, including:

 

  • Social Security Timing: Using the proper strategy to maximize this guaranteed income source
  • Tax Planning: Reducing taxes in retirement to increase the net after-tax income annually
  • Prudent Use of Home Equity: Incorporating HECM loans as a tax-free income source or portfolio safety net
  • Alpha Portfolio Management: Using active and passive portfolio management in the proper asset classes to add Manager Alpha to potentially increase returns. Manager Alpha is the rate of return an investment manager creates above or below the respective benchmark or index.

Read more in our white paper, A Portfolio for a Changing Economy

The CARES Act Explained

The Coronavirus pandemic has affected virtually every facet of American life and severely impacted the markets and economy. Congress and the federal government have acted to help individuals and businesses get through this difficult time.

Most recently, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act on March 27, 2020. The House passed the bill by voice vote earlier that day, and the Senate unanimously passed it on March 25. The $2.2 trillion bipartisan bill, the most expensive legislation ever enacted, resulted from negotiations between Treasury Security Steven Mnuchin and Congressional leaders on both sides of the aisle. The following are highlights of many of the federal relief opportunities created thus far which may benefit you.

 

Tax Relief for Individuals:

  • Extension of federal tax filing due date. The IRS postponed to July 15, 2020 the due date for both filing an income tax return and for making income tax payments originally due April 15, 2020. The postponement is automatic. Payments that may be postponed are limited to federal income tax payments in respect of a taxpayer’s 2019 taxable year and federal estimated income tax payments due on April 15, 2020 for a taxpayer’s 2020 taxable year. The extension is available to all taxpayers, including individuals, trusts and estates, corporations and other non-corporate entities, including those who pay self-employment tax. As a result of the extension, any interest, penalty, or addition to tax for failure to file or pay tax will not begin to accrue until July 16, 2020.

 

  • IRA contribution deadline extended. The deadline for making 2019 IRA contributions has also been extended until July 15, 2020.

 

  • HSA and MSA contribution deadline extended. The deadline for making 2019 contributions to health savings accounts (HSAs) and Archer medical savings accounts (MSAs) has been extended until July 15, 2020.

 

  • Recovery rebates. Cash payments called “recovery rebates” are available to U.S. residents with income below certain levels who cannot be claimed as a dependent of another taxpayer and who have a Social Security Number. Technically, the rebates are advance refunds of credits against 2020 taxes. The rebate amounts are $1,200 for individuals and $2,400 for married joint filers, with an additional $500 for each qualifying child under age 17. The amount of each rebate phases out by $5 for each $100 of adjusted gross income (AGI) greater than $75,000 (single filers) or $150,000 (married joint filers), based upon AGI as reported on the 2018 federal tax return (or 2019 tax return, if filed). Thus, rebates are fully phased out at $99,000 (single filers) and $198,000 (married joint filers). Individuals do not need to do anything to receive the rebate; the IRS will make payments electronically, if possible, and will send a notice (to the taxpayer’s last known address) within 15 days of payment stating the payment amount and method.

 

  • Required minimum distributions (RMDs). All 2020 RMDs from IRAs and retirement plans are waived, including RMDs from inherited IRAs (both traditional and Roth). The RMD waiver includes 2019 RMDs that were previously due by April 1, 2020.

 

  • Tax-favored early distributions from retirement plans. The CARES Act waives the 10% penalty applicable to early distributions for coronavirus related distributions up to $100,000 from IRAs and qualified defined contribution retirement plans such as 401(k), 403(b), and governmental 457(b) plans. A coronavirus related distribution is a distribution made during calendar year 2020 to an individual (or spouse) diagnosed with COVID-19 by a CDC-approved test, or to one who experiences adverse financial consequences as a result of quarantine, business closure, layoff, or reduced hours due to the coronavirus. In addition, any income attributable to an early withdrawal is subject to income tax over a 3-year period unless the individual elects to have it all included in their 2020 income. Finally, individuals may recontribute the withdrawn amounts back into an IRA or plan within 3 years without violating the 60-day rollover rule or annual contribution limits.

 

  • Retirement Plan Loans. Before the CARES Act, a participant could borrow from a retirement plan the lesser of 50% of the vested account balance or $50,000 (reduced by other outstanding loans). Beginning March 27, 2020 through 180 days thereafter, the maximum loan amount increases to the lesser of 100% of the vested account balance or $100,000 (reduced by other outstanding loans). In addition, participants who had outstanding loans as of March 27, 2020 may defer for one year any payments normally due from March 27 through December 31, 2020.

 

  • Charitable Contributions. Individuals who claim the standard deduction may also claim a new above-the-line deduction up to $300 for cash contributions made in 2020 to certain charities. Individuals who itemize deductions and make cash contributions in 2020 to certain charities may claim an itemized deduction up to 100% of AGI (increased from 60%). Eligible charities are those described in Section 170(b)(1)(A) of the Internal Revenue Code (for instance churches, educational organizations, and organizations providing medical or hospital care or research) and do not include donor advised funds or Section 509(a)(3) supporting organizations.

 

  • Student Loans. Payments (principal and interest) on federal student loans are suspended through September 30, 2020 without penalty. Interest will not accrue on these loans during this suspension period. In addition, from March 27 through December 31, 2020, an employer may contribute up to $5,250 annually toward an employee’s student loans, and such payment will be excluded from the employee’s income.

 

  • Unemployment Benefits. Unemployment benefits have been expanded to assist those who have lost their job during the current economic crisis. Because unemployment benefits are administered by the states (although each state follows the same guidelines established by federal law), check with your state program to determine eligibility requirements and how to file a claim.

 

Tax Relief for Businesses:

  • Employer Payroll Taxes. Employers and self-employed individuals may delay the payment of the employer portion of payroll taxes due between March 27 and December 31, 2020. 50% of any payroll taxes deferred under this provision must be paid by December 31, 2021, with the remaining 50% paid by December 31, 2022.

 

  • Employee Retention Credit. Employers whose operations were fully or partially suspended due to a coronavirus-related shut-down order or whose gross receipts declined by more than 50% (compared to the same quarter in the prior year) have a new tax benefit if they continue to pay employees. The above employers will receive a refundable quarterly payroll tax credit equal to 50% of qualified wages paid to an employee from March 13 through December 31, 2020. For purposes of the credit, up to $10,000 of qualified wages paid per employee during this period is taken into account. Excess credits are refundable.

 

  • Retirement Plan Funding & Documentation. The deadline for employers to make contributions to certain workplace-based retirement plans has been extended. In addition, employers sponsoring retirement plans may immediately adopt provisions allowing coronavirus related distributions and plan loans based on the CARES Act but formally amend the plan at a later date.

 

  • Net operating losses (NOLs). Generally, a NOL means deductions (for expenses from operating a business) are greater than the income generated from operating a business. A NOL incurred in one tax year generally may be used to reduce taxable income in a future tax year. The Tax Cuts and Jobs Act of 2017 significantly pared back the ability of businesses to carry forward/carry back NOLs, but the CARES Act substantially liberalizes the NOL rules – please consult a tax professional to learn more.

 

  • Business Interest Deduction. The CARES Act temporarily increases the amount of interest expense businesses are allowed to deduct on their tax returns, by increasing the 30-percent limitation to 50 percent of taxable income (with adjustments) for 2019 and 2020.

 

  • Small Business Administration (SBA) loans. To assist small businesses, the CARES Act greatly expands the availability and features of loans under the SBA’s Section 7(a) loan program. Businesses with 500 or fewer employees are eligible for the expanded loan program, as are sole proprietors, independent contractors, and self-employed individuals. There are many important details and benefits, including potential forgiveness. To learn more, please visit the SBA website at sba.gov or U.S. Chamber of Commerce website at www.uschamber.com.

 

As you can see, the federal government has created many ways individuals and businesses may receive assistance to get through current financial difficulties. Additionally, most states have provided their own relief such as a delay of the state income tax filing deadline or a temporary grace period for making mortgage payments. Here at Her Retirement we can connect you with a retirement specialist to answer any questions on the above relief or if you would like to discuss the effect of the current economic crisis on your portfolio or financial situation. Her Retirement is here to continue to help you pursue your financial goals during these unprecedented times.

This communication is designed to provide accurate and authoritative information on the subjects covered. It is not, however, intended to provide specific legal, tax, or other professional advice. For specific professional assistance, the services of an appropriate professional should be sought.

Talk to a Retirement Specialist today

Volatility: What’s the Best Defense?

Thoughts and ideas on the recent market losses and volatility due to the Coronavirus scare, and general economic and political uncertainty. Recent panic caused by the spread of the Coronavirus (COVID-19) has led to a stock market decline and has many investors feeling anxious. While portfolios will see ups and downs and this is a normal part of investing, the recent sell-off was sharp. It is in times like these that our team can best serve you by providing perspective on how we see these issues playing out.

The Best Defense is a Strong Offense
Nobody knows where the market is heading. Therefore, we believe that research and pro-actively planning, and implementing strategies that factor in potential significant drops in the market is critical. This is a strong offensive play in the world of portfolio planning (especially for those closing in on retirement). And what we consider to be the best defense to market volatility.

When the market heads up, and we get by this event-driven volatility, having a portfolio that has allocations to global equities to take advantage of market growth is critical. And if the market continues to fall, it’s critical to protect your principal with allocations to Fixed Indexed Annuities.

Either way, this “Hybrid Income Portfolio” strategy balances protection and growth, regardless of where the market heads. This is especially significant now, as equity prices are coming off all-time highs and bond prices are also high, as their yields have fallen to all-time lows. As we have seen recently, market conditions can change quickly in both directions.

For these reasons and more, we believe a Hybrid Income Portfolio to be a powerful alternative to other portfolio strategies. It’s also backed by academic research and has proven itself time and time again.*

The Impact on the Global Economy
Though the impact on human life is at the forefront of everyone’s concerns, there are many uncertainties surrounding the potential impact of the virus to the global economy. The global economy was already fragile from the nearly two-year-long U.S.-China trade war and the spreading virus will likely impact economic growth. While more equity market weakness is possible as the virus continues to grow globally, the downside could be limited as governments and global central banks have possible tools to combat the potential death toll and economic impact.

From the human life perspective, China took severe steps to limit the spread of the virus including forced quarantines, limited social contact, and significant population testing. We expect other inflicted nations to follow suit. From an economic perspective, global central banks including the People’s Bank of China and the Bank of Korea have already increased monetary stimulus or plan to do so. As we have seen in the U.S., and, specifically the U.S. housing market, over the past year, easing monetary policy can provide a potential economic stopgap. Furthermore, in the U.S., given unemployment levels near 50-year lows, the consumer, the driver of the current economic expansion, remains in good shape. We do expect market uncertainty to continue but downside may be limited. We also think the impact to markets will vary by sector. Sectors related to travel, such as cruise lines, airlines, and hotels are already taking a hit. Online entertainment companies and streaming services are performing better.

The team here at Retire Smart Network will continue to monitor and update information about our nation’s financial and physical health. If you’d like to discuss your portfolio strategy with a retirement planner or have a question about any retirement/financial topic, simply reach out and we’ll make it happen.

P.S. Don’t forget the Best Defense is a Strong Offense when it comes to protecting your health too…proper hand washing, eating right, getting enough sleep, avoiding sick people, stocking up on meds, food, water and household supplies, and having an attitude of positivity and gratefulness. Worrying about health or finances isn’t a productive use of time. Embrace optimism and reach out to us at any time.

*Sources:

  1. Morningstar Analysis, June 23, 2017, Snapshot Report.
  2. Roger G. Ibbotson, PhD Chairman & Chief Investment Officer, Zebra Capital Management, LLC Professor Emeritus of Finance, Yale School of Management Email: ZebraEdge@Zebracapital.com, Fixed Indexed Annuities: Consider the Alternative, January 2018.
  3. Shift Away from Potential Risk and Toward Potential Return, Nationwide (Morningstar), 06/16.