pexels-mikhail-nilov-8296981

Episode 49: The True Costs of Retirement Are More Than You Think (Part 2)

 

Hi there, and welcome to the Her Retirement podcast. This is episode 49, part 2 of the True Costs of Retirement. Last week I covered cost mistakes 1-8. This week I’m going to cover 9-16. These are the 16 most devastating mistakes you can make when estimating your costs in retirement.

As a review, here’s all 16:

  1. Opportunity cost: you don’t start saving AND investing soon enough
  2. Lack of a Long Term Care plan
  3. Not estimating life expectancy correctly
  4. A realistic estimate of healthcare costs
  5. Not accounting for inflation
  6. Forgetting about some big-ticket expenses you’ll likely have
  7. Changing spending habits
  8. Being in the sandwich generation: loaning money to your kids or parents, or taking time off from work to care for parents
  9. Spoiling the grandkids
  10. Not understanding or factoring in taxes (there’s a huge opportunity to make your money last longer with smart tax planning)
  11.  Forgetting about fees
  12.  Getting divorced
  13.  Take on too much or new debt prior to retirement
  14.  Taking too much money from your nest egg each year
  15.  Underestimating the impact of market fluctuations

 

16. And I’m going to add a 16th mistake: not getting educating and wasting time not doing anything or planning with the wrong team.

 

If you didn’t catch last week’s episode 48, go back and take a listen before or after listening to this episode.

Let’s start with number 9…

 

9. But they are so cute…the grandkids, that is.

So easy to spend way too much on the adorable little grandkiddos. This is another area where you need to set some boundaries for yourself and be disciplined. If you give too much, you may risk your own retirement needs.

How to Better Prepare?

Have a plan for what you’re willing to pay for before any grandchildren are born. And make it equitable for all the grandchildren. Also, make sure your children know what expenses you’re willing to cover. This is especially important when it comes to education costs. This conversation is important, so your children understand what they need to make the appropriate plans.

 

10. Taxes

Many people have no clue how much taxes can take out your retirement. And they also do not indicate that there are legal strategies to avoid paying too much in taxes.

One example is that you WILL have to pay taxes on your retirement savings plan withdrawals, and the government forces you to start taking withdrawals at age 72 if you haven’t yet started taking your withdrawals.

How to Better Prepare?

Number one: find a tax-smart financial or retirement advisor ASAP. There are many things you can do well before retirement to make yourself much more tax-efficient in retirement (i.e., Roth IRAs, which I talked about in last week’s podcast).

Number two: make sure you (and your advisor) create a combination tax strategy that leverages taxable, tax-deferred, and tax-free accounts. Make sure to ask the advisor about Roth conversions and also for them to show you your tax-efficient withdrawal strategy in retirement. If they don’t know how to do this, find another advisor. Not all financial advisors, planners or investment advisors, or the guy at Fidelity or Vanguard know anything about tax planning or retirement planning, for that matter. Who you work with matters…a lot.

 

11. The Fee Factor

According to research, retirement can cost more than expected because of people’s high fees on investments and retirement accounts. Somebody with $100,000 in a retirement account and terms of 2.5% over 30 years, for example, would pay about $40,000 more in fees over that time than if the fees on their account had been just 1.5%.

That’s a lot of money.

How to Better Prepare?

Check your retirement account statements to see what fees are being charged. If the investments you have chosen have high fees, it might be time to switch.

If your retirement account offers low-cost index or target-date funds, consider those. An index fund is a mutual fund that tracks the performance of a major index, such as the S&P 500. A target-date fund reduces the risk in your portfolio by shifting from stocks to bonds as you near retirement.

If you have an advisor, make sure you get full disclosure of all the fees you are paying, the advisor, and the fund fees. If everything isn’t 100% transparent, find another advisor.

 

12. Divorce Can Do You In

Divorce can be devastating, but gray divorce is on the rise. According to the Pew Research Center, the divorce rate has doubled since the 1990s for American adults ages 50 and older. Marriages are failing as people near retirement age.

How to Better Prepare?

This podcast isn’t about marriage counseling, so I can’t give you any advice on avoiding gray divorce other than don’t get married. LOL. But seriously, one way to avoid some of the financial fallout from a divorce in retirement is to have a prenuptial agreement. However, that might not be an option if you’re already married. Focusing on your marriage and your relationship could be an essential investment in your monetary future. If this isn’t in the cards, there are some things you can do to avoid as much financial fallout from a divorce as possible.

  1. Make sure you know everything about your financial situation. Not only your own money but your spouses as well.
  2. Make sure you have a copy of all the essential documents for your shared assets and liabilities, as well as legal documents.

 

13. Ditching Debt

Ideally, you’ll have paid off all debts — including your mortgage — before you retire. But taking on new debt in retirement by living beyond your means is a recipe for disaster, according to every expert. Bad debt is to be avoided at all costs in retirement.

How to Better Prepare?

If you take on new debt in retirement, be sure you are taking proactive steps to pay it down as soon as possible. One option is to refinance if lower interest rates are available. Another option is debt consolidation, which can be helpful if you have multiple high-interest-rate debts. You should also try cutting down on spending to have more money to dedicate to paying down debt and consider taking on a side hustle to bring in income in retirement that can be explicitly used to pay off your debts.

 

14. Withdrawing Too Much Money in Retirement

Conventional wisdom says you should plan to withdraw 4% from your nest egg each year (this is known as the safe withdrawal rate), but this might be too much. A Morningstar study found that with a 4% withdrawal rate, there was only a 50% chance that funds would last for 30 years in retirement. The amount you should withdraw will depend on the size of your nest egg and economic circumstances, so don’t just follow blanket rules of thumb such as the dated 4% rule. In today’s market environment and traditional 60/40 stock/bond portfolios, the safe withdrawal rate is 2-3%. That’s a big difference in income. On a million-dollar portfolio that’s $20,000 or $30,000 vs. $40,000.  There are some unique outside-the-box strategies for increasing your safe withdrawal rate. In past podcast episodes, blog posts, and my masterclass, I’ve talked about these. If you’d like to review them with me, shoot me an email at: lynnt@herretirement.com.

How to Better Prepare?

The Morningstar study found that the ideal withdrawal rate is closer to 2.8%, but this will vary based on your circumstances. It’s best to meet with a retirement advisor (like to folks at Your Retirement Advisor) to come up with a withdrawal strategy that will allow you to live comfortably without worrying about running out of money in retirement.

 

15. Market Fluctuations

A lousy market or ups and downs of the market can ruin the best-laid plans, even if you have a safe withdrawal rate all figured out. The need is one thing we can’t control, but not planning around a lousy market can cost you dearly.

How to Better Prepare?

Imperfect markets make people misbehave (i.e., pulling their money out as a knee-jerk reaction vs. staying the course).  Due to the inevitable volatility of the market throughout your retirement, Forbes recommends assessing your withdrawal and return rates each year to determine if your withdrawal rate needs to be raised or lowered.

Also, if you’re nearing retirement, you need to market-proof your portfolio, and you need a bucket of money to get you through a downturn so that you don’t have to raid your investment accounts.

Making a portfolio projection in all market environments is critical. You need to know how your portfolio will fair in a down market.

A retirement advisor can help ensure your retirement strategy and portfolio are aligned with your retirement goals and protected from market fluctuations as much as possible.


I will add a 16
th mistake:

16. Not getting educated and wasting time not doing anything or planning with the wrong team.

 

I hope this episode of my podcast has given you some insight into actual retirement costs.  There are many ways to better plan for these costs, avoid mistakes and retire with more. If you’d like to chat about your situation, as always, email me at: lynnt@herretirement.com. I can also connect you with whatever planning and advice resources you need.  Here’s to knowing more and having more, and getting her done.

 

 

 

 

 

Episode 48 v2

Episode 48: The True Costs of Retirement Are More Than You Think (Part I)

Most of us, if not all of us women, fear running out of money and becoming a bag lady in retirement.

One of the biggest mistakes is underestimating the true costs of retirement and not having a plan to address these costs. There’s a myriad of reasons your projected budget might not be enough to see you through a blissful retirement.  Listen in to this week’s episode to hear about 8 of 16 costs that are more than you probably think. Next week, tune in to hear the rest. You won’t want to miss either episode.

Click here to listen to more episodes!

Click here to read the transcript of this episode!

pay-bills-pexels1001763-600w

Episode 48: The True Costs of Retirement Are More Than You Think (Part I)

Most of us, if not all of us women, fear running out of money and becoming a bag lady in retirement. My mother has drilled this fear into my head my entire life. Even so, I’ve made some mistakes along the way. Heck, I’m still making mistakes even though I teach people about how not to make mistakes.

One of the biggest mistakes is under-estimating the true costs of retirement and not having a plan to address these costs. There’s a myriad of reasons your projected budget might not be enough to see you through a blissful retirement. 

I got to thinking about this a couple weeks ago as I was moving into my new downsized “pre-retirement” home and then I saw an article in Yahoo Finance about key signs you may run of out of money in retirement. Cueing off of that I decided to record this episode, number 48 and next week’s episode 49 to shed some light on these costs and help you avoid being blindsided. Even if you think you have all your bases covered, I encourage you to take a listen and take some notes. You can never be too prepared.

I want all women to avoid as many surprises as possible. Retirement planning is extra challenging for us anyway. We don’t need to pile on even more challenges. It’s all about knowing more and having more. Fortune does indeed favor the smart, the bold and the prepared. 

Let’s take a look at some of the bigger mistakes when planning our retirement costs and then commit to making some extra preparations to address the true cost of retirement. Worst case, you have extra money at the end of life and leave more of a legacy than you planned. Isn’t this better than running out of money?

Let’s look at 15 mistakes many of us make when estimating the true costs of retirement:

 

  1. Opportunity cost: you don’t start saving AND investing soon enough
  2. Lack of a Long Term Care plan
  3. Not estimating life expectancy correctly
  4. A realistic estimate of healthcare costs
  5. Not accounting for inflation
  6. Forgetting about some big ticket expenses you’ll likely have
  7. Changing spending habits
  8. Being in the sandwich generation: loaning money to your kids or parents, or taking time off from work to care for parents
  9. Spoiling the grandkids
  10. Not understanding or factoring in taxes (there’s a huge opportunity to make your money last longer with smart tax planning)
  11. Forgetting about fees
  12. Getting divorced
  13. Take on too much or new debt prior to retirement
  14. Taking too much money from your nest egg each year
  15. Underestimating the impact of market fluctuations

And I’m going to add a 16th mistake: not getting educated and wasting time not doing anything or planning with the wrong team.

 

In this week’s episode, I’m going to talk about 1-8 and then in next week’s episode, I’ll cover 9-16.

  • Opportunity Costs

Opportunity costs represent the potential benefits that an individual, investor, or business misses out on when choosing one alternative over another. Because opportunity costs are unseen by definition, they can be easily overlooked. Understanding the potential missed opportunities when a business or individual chooses one investment over another allows for better decision making. In addition, when you don’t start saving and investing early, you lose out on all the opportunity of compounding interest over that time period.

How to Better Prepare?

Every time you need to make a decision, you need to consider the opportunity cost. And if you haven’t yet started consistently saving and investing you need to adjust your budget so that you can start ASAP.

  • Long-Term Care Costs

More than half of adults turning 65 today will need long-term care and about 1 in 7 will need care for more than five years, according to the Department of Health and Human Services.

If you receive care in an assisted living facility or nursing home, you’ll have to shell out big bucks. According to a National Center for Assisted Living report, the median cost for assisted living in the United States is about $4,300 per month or $51,600 annually. Over 800,000 Americans currently reside in assisted living facilities, with just over half of residents being 85+ years old.

According to Genworth’s Cost of Care Survey,1 a private room in a nursing home costs $290 per day, or $8,821 per month or $105,852 a year.

Even the wealthy could be at risk if they incur long term care needs.

How to Better Prepare?

Sign up for a long-term-care insurance policy or hybrid life insurance policy that will pay out if you have a long-term-care event. Another option is a longevity annuity.

This is an insurance product that requires a lump-sum investment and will provide a steady stream of retirement income. But, you have to wait several years or until a certain age to start receiving your payout. You should meet with a retirement advisor who can help you devise your strategy. At Her Retirement, we have access to a pretty cool software that can help you estimate your changes of having a long term care need, as well as your longevity projections.

  • Life Expectancy

Retirement will cost much more if you live a good long life. It’s kind of a double-edged sword. About 1 in 4 65-year-olds today will live to age 90, according to the Social Security Administration.

If you plan for say 20 years of expenses in retirement but end up living for 30 or even 40 years in retirement, you’ll need to figure out how to make your nest egg last. 

How to Better Prepare?

Rather than just projecting 20 years after your retirement date, a better option is to project out to age 100 just to be on the safe side. You may decide you have to work longer in retirement. If you’re not happy with your job or career, consider a new work path that can be done in retirement and allows you to make an income. Be cautious however because more than three quarters of today’s workers (77%) expect to work for pay even after they retire, according to a new Pew Research Center survey. However, these expectations are dramatically out of step with the experiences of people who are already retired – just 12% of whom are currently working for pay (either part or full time), according to the Pew survey.

In addition to the software available through Her Retirement for longevity and long term care needs calculations that I mentioned a few minutes ago, you can check out the life expectancy calculator at Livingto100.com. Here you can get an estimate of how long you may live based on your health and family history. 

One way to better prepare is with something I call a longevity insurance plan. In this plan, you rely on withdrawals from your diversified investment accounts earlier in retirement and then Social Security after age 70 (allowing it to accumulate to its full benefit).  Additionally, you should consider a Personal Pension plan that offers a source of lifetime income such as an annuity if you won’t have a pension or Social Security. 

  • Healthcare Costs

According to the Fidelity Retiree Health Care Cost Estimate, an average retired couple age 65 in 2021 may need approximately $300,000 saved (after tax) to cover health care expenses in retirement.

 

Of course, the amount you’ll need will depend on when and where you retire, how healthy you are, and how long you live. The amount you need will also depend on which accounts you use to pay for health care—e.g., 401(k), HSA, IRA, or taxable accounts; your tax rates in retirement (see chart); and potentially even your gross income.

 

How to Better Prepare?

Costs for healthcare could be significantly higher in retirement. While some things like mortgages will go down, healthcare will likely go up. In addition to Medicare costs and out of pocket costs, don’t forget about prescription co-pays.

Make sure to compare your Medicare options to choose the right plan for you. Experts say, It can be worth spending more on the premium for a comprehensive Medicare Advantage plan or supplemental Medicare plans to get better coverage and reduce out-of-pocket costs. At Her Retirement we can connect you with Medicare planning specialists. It’s certainly a big maze that many people opt to get help figuring out.

Another tip, if you’re still working and your employer offers an HSA-eligible health plan (or you can get one through your own small business), consider enrolling and contributing to a health savings account (HSA). An HSA can help you save tax-efficiently for health care costs in retirement. You can save pretax dollars (and possibly collect employer contributions), which have the potential to grow and be withdraw tax-free for federal and state tax purposes if used for qualified medical expenses.

  • The Cost of Inflation 

Historically inflation has been about 3%. While we’re working we don’t often notice it because our pay typically increases as well. However, in retirement you may not see inflationary increases. Social Security does offer an annual Cost of Living Increase. Here’s an example of how inflation can impact your retirement costs: over 20 years, your $100,000 of retirement savings will be likely worth 60% less in buying power. That’s a big hit if you don’t account for it.

How to Better Prepare

You (or your advisor/planner) MUST factor inflation into your retirement calculations. Many online calculators or simple spreadsheets don’t factor in inflation. This is a BIG mistake.

On way to protect against the impact of inflation would be to consider delaying Social Security benefits. You can maximize your Social Security benefit by waiting to claim it until age 70. Not only will your monthly check be bigger, but the Social Security Administration’s cost-of-living adjustment — which helps benefits keep up with inflation — will be applied to that bigger payout. 

One of the greatest hedges against inflation is investing in the stock market. One of the worst mistakes is leaving your money in the bank.

  • Big-Ticket Items

When doing retirement income planning, you will estimate your income sources and your expenses. You cannot forget about the big ticket items that most of us have during retirement.

How to Better Prepare?

Whether is a car or home repair or unexpected medical needs, there’s always a big ticket item that comes along. Make a list of possible ones you could face and then build in a big ticket line item in your budget.

  • Changing Spending Habits

Sometimes in retirement spending habits change by choice or by happenstance. Your fun money spending habits are likely to change, especially if you’re planning some travel and vacations, shopping, eating out and other entertainment. This cost will come down to really thinking about how you want to spend your time in retirement and how this will affect your money.

How to Better Prepare?

With your extra time, find ways to spend less on these new spending categories. Shop around for the best deals. Also, find entertainment and travel that might not require as much money, but still gives you a good and healthy quality of life.

There are plenty of other free ways to stay busy after retirement. Check out your local community for many great programs for senior and retirees. Also, consider where to retire to. There are more affordable places than others that cater to retirees and their budgets.

  • Money and Care to Kids or Parents

You could end up spending a lot more in retirement than expected if you lend money to your children or your parents or take time out of work to care for aging parents.  This is often way under-estimated by pre-retirees. 

How to Better Prepare?

By creating a plan and having a help the kids or parents fund can definitely help. But, of course, you need to have the discipline to say no when you can’t help any longer.

Your retirement security depends on the balance you create between your retirement income, assets and spending. If you spend down your assets by making loans to the kids and parents and other people you could risk not having the income you need in retirement. A plan helps you establish those tough boundaries.

I hope this part 1 episode on the True Costs of Retirement has given you some new insight and things to think about and start planning for.  There are many ways to better plan for these costs, avoid mistakes and retire with more. Next week, in episode 49, I’ll cover costs 9 through 16. Please make sure to listen in.

If you’d like to chat about your situation, as always, email me at: lynnt@herretirement.com. I can also connect you with whatever planning and advice resources you need.  Here’s to knowing more and having more, and getting her done.

Click here to listen to the audio of this episode!

pexels-cottonbro-5486004

Will Power

Only one-third of adults have a will in place, which may not be entirely surprising. No one wants to be reminded of their own mortality or spend too much time thinking about what might happen once they’re gone.1

But a will is an instrument of power. Creating one gives you control over the distribution of your assets. If you die without one, the state decides what becomes of your property without regard to your priorities.

A will is a legal document by which an individual or a couple (known as “testator”) identifies their wishes regarding the distribution of their assets after death. A will can typically be broken down into four main parts.

1. Executors – Most wills begin by naming an executor. Executors are responsible for carrying out the wishes outlined in a will. This involves assessing the value of the estate, gathering the assets, paying inheritance tax and other debts (if necessary), and distributing assets among beneficiaries. It’s recommended that you name at least two executors, in case your first choice is unable to fulfill the obligation.

2. Guardians – A will allows you to designate a guardian for your minor children. Whomever you appoint, you will want to make sure beforehand that the individual is able and willing to assume the responsibility. For many people, this is the most important part of a will since, if you die without naming a guardian, the court will decide who takes care of your children.

3. Gifts – This section enables you to identify people or organizations to whom you wish to give gifts of money or specific possessions, such as jewelry or a car. You can also specify conditional gifts, such as a sum of money to a young daughter, but only when she reaches a certain age.

4. Estate – Your estate encompasses everything you own, including real property, financial investments, cash, and personal possessions. Once you have identified specific gifts you would like to distribute, you can apportion the rest of your estate in equal shares among your heirs, or you can split it into percentages. For example, you may decide to give 45 percent each to two children and the remaining 10 percent to a sibling.

The law does not require that a will be drawn up by a professional, and some people choose to create their own wills at home. But where wills are concerned, there is little room for error. You will not be around when the will is read to correct technical errors or clear up confusion. When you draft a will, consider enlisting the help of a legal or financial professional, especially if you have a large estate or complex family situation.

Preparing for the eventual distribution of your assets may not sound enticing. But remember, a will puts the power in your hands. You have worked hard to create a legacy for your loved ones. You deserve to decide what becomes of it.

1. Caring.com, 2021

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. 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. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. 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. Copyright 2022 FMG Suite.

Episode 47 (1)

Episode 47: Roth IRA & Roth Conversions

Determining when, or if, you should convert your investments to a Roth IRA is an individual decision based on factors such as your financial situation, age, tax bracket, current investments, and alternate sources of retirement income.

Join Lynn in this week’s episode as she answers some important questions for you.

What is a Roth IRA?

What is the difference between a traditional IRA and a Roth IRA?

What accounts are eligible to be converted to a Roth IRA?

How can a Roth IRA conversion help protect me from future income-tax-rate increases?

What are the tax consequences of a Roth IRA conversion?

How can a Roth IRA conversion help provide a greater financial legacy for my beneficiaries?

Listen to more episodes here!

Read the episode transcript here

pay-bills-pexels1001763-600w

Episode 47: Roth IRA & Roth Conversions

Determining when, or if, you should convert your investments to a Roth IRA is an individual decision based on factors such as your financial situation, age, tax bracket, current investments, and alternate sources of retirement income.

Are you confident with your answers to these important questions?
• What is a Roth IRA?
• What is the difference between a traditional IRA and a Roth IRA?
• What accounts are eligible to be converted to a Roth IRA?
• How can a Roth IRA conversion help protect me from future income-tax-rate increases?
• What are the tax consequences of a Roth IRA conversion?
• How can a Roth IRA conversion help provide a greater financial legacy for my beneficiaries?

What is a Roth IRA?
A Roth IRA is an individual retirement account from which you can withdraw your earnings completely tax-free any time after you reach age 59 1⁄2, provided your account has been open for at least five years.1

What’s the difference between a traditional IRA and a Roth IRA?
Traditional IRA contributions are tax-deductible when certain requirements are met. With a Roth, contributions are not tax-deductible, but earnings can be withdrawn income-tax-free if you’re at least 59 1⁄2 years old and have had the Roth account at least five years. You also don’t have to take required minimum distributions (RMDs) starting at age 70 1⁄2, as you do with a traditional IRA. It’s important to note distributions from Roth IRAs cannot be used to fulfill the RMD from a traditional IRA.2

Here are four steps to help you understand Roth IRA conversion opportunities:

1. Know the Basics

What accounts are eligible to convert to a Roth IRA?
Because income limits were removed as of January 1, 2010, anyone is eligible to convert a Roth IRA. You might consider using this opportunity to convert one or more of your qualified retirement savings accounts to a Roth IRA for its tax benefits at retirement.3

Convertible accounts include (but are not limited to):
• Traditional IRAs.
• Old 401(k) plans.
• SEP IRAs.
• Old 403(b) plans.
• Old 457 plans.

How can a Roth IRA conversion help protect me from future income tax rate increases?
The future is not always certain, especially when it comes to income taxes. However, a Roth IRA can be used as an option to protect against future tax-rate increases because the account grows tax-free and qualified distributions from the account are also tax- free. This means you will have tax-free growth of hard- earned money and tax-free income at retirement.

What are the tax consequences (if any) of a Roth IRA conversion?
A conversion from a traditional IRA to a Roth IRA is taxable. The converted amount is treated as ordinary income, even if some, or all, of the growth in value of the traditional IRA was from an increase in the value of stocks or mutual funds. If all of your contributions to your traditional IRAs have been tax-deductible, then the full amount of your conversion is taxable.4

Can I contribute current income to a Roth IRA?
To qualify to contribute to a Roth IRA, your income must be less than the level set by Congress (for 2016, it is less than $117,000 for single filers and less than $184,000 for joint filers).5

Can I convert my traditional IRA to a Roth IRA?
In 2010, people with incomes of more than $100,000 became eligible to convert a traditional IRA (or any other convertible accounts) into a Roth IRA, regardless of their income. Those married and filing separately can also convert their investments into a Roth IRA.6

How can a Roth IRA conversion help provide a greater financial legacy for my beneficiaries?
A Roth IRA can be an effective estate-planning tool. Pre-retirees and retirees who convert a traditional IRA into a Roth IRA can reduce or eliminate the income tax their beneficiaries would otherwise have to pay on withdrawals taken from the inherited traditional IRA.

After you die, your beneficiaries won’t owe any income tax on withdrawals from the inherited Roth IRA. However, in this case, the account now falls under the same minimum-withdrawal rules as traditional IRAs. Nevertheless, if your beneficiaries don’t need the Roth IRA money right away, they can spread out those withdrawals over their lifetime while continuing to earn tax-free income on the remaining account balance.

Of course, you will have to pay tax on any accumulated earnings and tax-deductible contributions when you make the Roth conversion. But this may not be a bad thing, as long as you can pay the tax out of non-IRA assets. When you pay the taxes due upon conversion, you effectively prepay income taxes for your beneficiaries without owing any gift tax or using up any of your valuable estate-tax exemption, assuming you are susceptible to an estate tax. Plus, prepaying the income taxes reduces the size of your taxable estate.

Can I withdraw from a converted Roth IRA without penalty?
Roth IRA conversion dollars may be withdrawn at any time without penalty as long as you’re age 59 1⁄2 and have held the account for at least five years. There are other exceptions to distribution rules for penalty-free, pre-59 1⁄2 distributions including disability, death and in some cases, the purchase of a first home.

To Roth or not to Roth?
Is a Roth IRA right for you or should you stick with a traditional IRA? Roth IRA conversions aren’t for everyone. It’s important to thoroughly understand your specific situation before you make any decisions. There are several tax- and estate-planning considerations to be evaluated when deciding whether to convert to a Roth IRA. Possible factors to consider are next.

2. Understand Your Conversion Options

• Generally, you shouldn’t convert to a Roth IRA if you can’t pay the tax on the conversion from a source outside of the IRA. By paying the conversion taxes with income from the investments, you not only reduce the amount of the conversion, thus resulting in less tax- free money, but you can also cause an early distribution penalty if not over age 59 1⁄2.

• A partial conversion may be an option. A partial conversion to a Roth IRA allows you to convert a portion of an existing IRA while avoiding the shift to a higher tax bracket during the conversion year.

• When do you retire? Usually, the older you are (or closer you are to retirement), the less sense it makes to convert a traditional IRA to a Roth. This is because you’ll have less time for the tax-free growth to make up for what you paid in taxes on the conversion.

• Do you anticipate your tax bracket increasing or decreasing in the future? If you expect to drop into a much lower income tax bracket after you retire, a conversion may not make sense. You will have to pay income tax on the conversion at your current high rate. Instead, let the money compound in your regular IRA and pay taxes at your lower rate in retirement. However, if your tax rate is only expected to drop after retirement, conversion might be the right move.

It’s important to understand these are merely rules of thumb. In most cases, these conversion options give the right results, but your particular situation may call for a different option. Consult with a qualified tax advisor to understand what’s best for your situation.

3. Recognize the Advantages of Converting

The benefits of converting assets to a Roth IRA vary by individual. A Roth conversion may not be beneficial to some, while it may benefit others greatly. Next, we summarize some of the key benefits of converting a traditional IRA to a Roth IRA.

Potential for Greater Net Income and Withdrawals
A Roth IRA offers you the potential for greater net income than a traditional IRA. Because the withdrawals, subject to requirements, are income- tax-free on a Roth IRA, you receive more dollars in your pocket as opposed to a portion of your withdrawal being taxed, as with a traditional IRA. Suppose you have a Roth IRA with a $10,000 balance. If you meet all the rules, you won’t pay tax when you withdraw that $10,000, or on any of the earnings it generates. Compare a traditional IRA with the same balance. When you withdraw that $10,000, you’ll pay a percentage of that amount and its earnings to the IRS.

No Required Minimum Distributions (RMDs)
This is another benefit that can permit you to accumulate much greater wealth in your later years. Rules for the traditional IRA require you to begin receiving RMDs when you turn 701⁄2. Even if you don’t need those distributions, they still require an annual (and taxable) distribution. The RMD rules don’t apply to a Roth IRA until after the owner dies. A Roth IRA owner who survives well past age 701⁄2 may leave a much greater amount of wealth to children or other beneficiaries as a result of this rule. For this reason, a Roth IRA conversion could pay off handsomely.

Income-Tax-Free Inheritance for Beneficiaries
If your beneficiaries receive a traditional IRA, they’ll have to pay income tax on the amounts withdrawn. The value of what you transfer to them is reduced by the amount of the taxes. Your beneficiaries get to keep 100 percent of the amounts they withdraw with a Roth IRA, which can be a significant financial advantage to them in the long run.

In addition, the conversion to a Roth will reduce your taxable estate by the amount of income tax you pay to convert, which may reduce estate taxes for your heirs.

4. Take Action

To better understand your retirement needs, it is important to work with a qualified financial or insurance professional—someone you trust, someone who will listen to your needs and answer your questions. Your retirement well-being depends on making the right decisions today to create a more stable future for tomorrow.

1 IRS Publication 590 (http://www.irs.gov/pub/irs-pdf/ p590.pdf)
2 http://www.rothira.com/traditional-ira-vs-roth-ira
3 http://www.aaii.com/financial-planning/article/new-rules- for-converting-to-a-roth-ira?adv=yes 
4 http://planit.cuna.org/14953/article.php?doc_ id=4557&print=y
5 https://www.irs.gov/Retirement-Plans/Plan-Participant,- Employee/Amount-of-Roth-IRA-Contributions-That-You- Can-Make-for-2016
6 https://www.ussfcu.org/calculators/roth_conver_ira.php

pexels-pixabay-356319

INVESTING WITH YOUR HEART

Some individuals believe that return on investment shouldn’t be the only criterion for how they invest their money. For them, the social impact of investing is just as important – perhaps more important.

The history of socially responsible investing stretches as far back as the mid-18th century, but its more-modern form began taking shape in the 1960s, amidst the fight for civil rights and the emerging Vietnam War protests.

More than $17 trillion is managed under sustainable and responsible investing principles. This includes mutual funds, endowments, and even venture capital funds. It should be noted that amounts in mutual funds are subject to fluctuation in value and market risk. Shares, when redeemed, may be worth more or less than their original cost. Mutual funds are sold only by prospectus. Please consider the charges, risks, expenses, and investment objectives carefully before investing. A prospectus containing this and other information about the investment company can be obtained from your financial professional. Read it carefully before you invest or send money.1

What Is “Socially Responsible Investing?”

The definition of socially responsible investing has evolved. And it may be referred to by different names, such as “sustainable and responsible investing” or “values-based investing.”

Whatever term is used, this investment discipline is usually characterized by a set of principles that govern how investments are selected. One widely used framework includes environmental, social, and corporate governance criteria (ESG).

What’s ESG?

ESG criteria of good corporate governance, positive environmental impact, and responsible community involvement are a guide for making investment selections, akin to other investment-related criteria, such as price-to-earnings ratio or revenue growth.

The underlying belief is that good corporate practices may lead to better long-term corporate performance.

Investor experience with socially responsible investing will vary. As with any mutual fund or exchange-traded fund, socially responsible investments are subject to fluctuation in value and market risk. Shares, when redeemed, may be worth more or less than their original cost.

Individuals should also recognize that each investment approach may operate under a different set of principles, so you should be careful that your selection mirrors your personal values and beliefs.

1. USSIF.org, 2020 (most recent data available)

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. 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. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. 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. Copyright 2022 FMG Suite.

Episode 46

Episode 46: Investors and Financial Advice

How can a financial advisor help today’s investors? A financial professional can provide guidance about today’s financial climate, determine objectives, and assess progress toward those goals. Alone, an investor may find it difficult to do any of these tasks. Moreover, an investor may make self-defeating decisions. Listen in to this week’s episode to hear more about how a financial advisor can help investors stay the course and retire with more.

Listen to more episodes here!

Read this episode transcription here

Episode 46

Investors and Financial Advice

SEPARATING THE SIGNAL FROM THE NOISE

What kind of role can a financial professional play for an investor?

The answer: an important one. While the value of such a relationship is hard to quantify, the intangible benefits may be long-lasting.

There are certain investors who turn to a financial professional with one goal in mind: the “alpha” objective of beating the market. But even Wall Street’s brightest money managers can come up short.

At some point, these investors realize that their financial professional has no control over what happens in the financial markets. They come to understand the real value of the relationship, which is about strategycoaching, and understanding.

A financial professional can provide guidance about today’s financial climate, determine objectives, and assess progress toward those goals. Alone, an investor may find it difficult to do any of these tasks. Moreover, an investor may make self-defeating decisions. Today’s steady stream of information can prompt emotional behavior and may lead to blunders.

No investor is infallible.

Investors can feel that way during a great year when every decision seems to work out well. But overconfidence may set in, and the reality that the markets have challenging years can be forgotten.

A financial professional can help an investor commit to staying on track.

Through subtle or overt coaching, the investor can learn to take short-term market volatility in stride and focus on the long term. A strategy is put in place based on the investor’s goals, risk tolerance, and time horizon.

As the investor-professional relationship unfolds, the investor begins to notice the intangible ways the professional provides value. The professional may help explain the subtleties of investment trends and how potential risk often relates to potential reward.

Perhaps most importantly, the professional helps the client get past the “noise” and “buzz” of the financial markets to see what is really important to their financial life.

The investor gains a new level of understanding, a context for all the investing and saving. The effort to build wealth and retire well is not merely focused on success but also significance.

A financial advisor, or better yet, a retirement advisor can help pre-retirees really focus in on an investment strategy that will yield the most sustainable and efficient income in retirement. The traditional 60/40 stock/bond portfolio, or a portfolio that’s too heavily weighted towards stocks like an 80/20 portfolio may not be in your best interests. If you’ll be relying on this portfolio to give you an income for life, you may need an advisor who can help you de-risk your portfolio and perhaps help you create a personal pension plan (i.e. a guaranteed income stream that’s protect from market volatility) as well. A personal pension plan protects you from market losses, while also providing some growth.

But finding an advisor who knows what he or she is doing with investments and retirement planning can be a challenge as so many of the 300,000 advisors out there have been focused on growing people’s portfolios. there aren’t nearly enough advisors who help people start distributing income from their portfolios. For us women, it’s a known challenge to find an advisor who provides a judgement free zone and allows us to ask a lot of seemingly silly questions about our money and our retirement. For many of us women, we have a lot of shame about our money or lack thereof and our lack of knowledge about investments and portfolios. There are many good advisors out there who have patience, knowledge and empathy for the unique challenges we women face.

I’m going to be running an investing workshop to help women understand the basics of investing and how to invest for retirement. I’ll also be providing some direction on how to find the right advisor. This will be an education only event. I do not provide investment or tax advice. Please email me at lynnt@herretirement.com if you’d like to be informed when this workshop will take place.

In the meantime, if you have immediate worries or needs about your portfolio and the current markets, I can connect you with my significant other, Brian Saranovitz at Your Retirement Advisor. He knows investing and retirement and has helped many women feel more confident and comfortable about their portfolio and their income in retirement.

Finally, I know many people are stressed about the ups and downs of the market, inflation and the economy. However, now is not the time to panic or pull all of your money out of your 401k. Stay calm and stay the course. This too shall pass.

Thanks for listening and remember you can know more and have more. Her Retirement is here to help. Also, remember procrastinating on your plan for retirement or burying your head in the sand is not in your best interests. Make a plan, take action and Get Her Done.

Listen to this podcast episode here