The news is filled with celebrity passings this last week. Ed McMahon lived a long and good life. The other three Michael Jackson, Farrah Fawcett and Billy Mays had not reached conventional “old age”.  This demonstrates the importance of estate planning before a health crisis hits or something sudden happens. By estate planning I mean a short list of items:

  • Do you have a valid, updated will and/or trust for your estate that expresses your wishes? (Moving states, divorce, inheritance are reasons to update.)
  • Do you have sufficient life insurance for your family to continue your current lifestyle? (new baby or life change may call for more insurance)
  • Have you protected your estate financially with Long Term Care Insurance?

Without estate planning you are setting your family up for:

  • Leaving your family without the financial resources necessary to carry on without you.
  • Longer time to settle your estate.
  • More expense in settling estate and less money for your family.
  • Family conflict if your wishes were not in a will or trust. This destroys the family left behind.

Move estate planning to the top of your to-do list so you can live without regret. Also check-in with your parents and siblings to make sure they have taken care of the three questions above. Families are complex and if another member of your family hasn’t taken care of their affairs you may end up dealing with the aftermath.

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Yes, it is ok to look. As the end of the second financial quarter hits Wall Street it is time to see where things are at in your portfolio.  I am frequently asked “Should I even look at my investments, 401k, IRA, 529 savings plan or brokerage account?” In general, my advice has been if you don’t need it tomorrow, don’t obsess and look all the time. Instead take action where you can. This may be cutting back spending, changing investments to adjust for your new risk tolerance or saving more to makeup the gap in your account balances.  Here are my Top 10 Reasons to Sneak a Peak.

10. Admit it, you look everyday so why would today be any different?

9. Your mom told you not to look.

8. Finally you’ve made the appointment with a financial advisor and need to know where your 401(k) and IRAs are to prepare.

7. You can’t move forward with your financial plan unless you know where you are today.

6. How else will you know what to complain or brag about at the next BBQ? (Up or down, everyone is talking about the stock market.)

5. It may be time to rebalance your investment portfolio.

4. Good excuse to open that bottle of tequila or wine that you’ve been eyeing to get through the pain.

3. If your risk tolerance has changed because of the market turmoil your retirement investments need to be adjusted accordingly.

2. Relieve stress by printing out your 401(k) or IRA statements and tying them to a bottlerocket on the 4th.

1. You want to retire, it’s time for a new gameplan. Sneak a peak and start today!

Maybe it will and maybe it won’t. Let’s consider why organizations eliminated or reduced 401(k) matching contributions.

A poor economic climate reduced revenues, which led to a reduction in expenses. To your company the 401(k) match is an expense. As companies learn to run leaner it will be difficult to bring back an expense. Until employers are competing for employees again, I do not believe this will be an area of focus for most organizations.

I truly believe that companies will have all intended to bring back the 401(k) match. In reality, my prediction is many will bring it back when the economy has full recovered, but it will be smaller than before. While the match may seem small, how your company deals with employee retirement plans has a huge impact on your overall financial plan.

Here is how one Fortune 50 company has evolved it’s employee retirement options over the last decade. Imagine that 10 years ago your employer had a defined benefit pension plan when you joined. You knew then it was a great retirement benefit. Then they switched to a cash balance plan with a full 6% match on the 401(k). You are disappointed, but the full 6% match is one of the best out there, so you are still feeling pretty good. Tough times this year and the company has gone to a variable match up to 4%, dependent on company performance. Bad year, you get 0%. The challenge a number of people within 15 years of retirement face is that the pension they thought they would have is gone and if you knew that 10 years ago you might have saved differently.

You could be in a place where retirement savings need to be ramped up to hit your goals. Action Item: Sit and figure out how the changes in your employer sponsored retirement plans impact your financial plan and retirement goals. Make savings adjustments now so you get there faster.

New rule moving forward – Save more and expect less from your company.

Advisory Services offered through Axiom Advisors, LLC. A registered Investment Advisor Securities offered through Cambridge Investment Research, Inc. a Broker/Dealer member FINRA/SIPC Axiom Advisors, LLC and Cambridge Investment Research, Inc. are not affiliated

Your 401k match is gone. Now What?
 
Did you receive a company wide email lately that went something like this:
 
In these tough economic we are looking to remain as efficient and lean an organization as possible, without elimination of additional positions. The company’s 401(k) matching contribution will be suspended until business improves…
 
As an employee what are you going to say? Of course you’ll be thankful to have your job vs. 401(k)match.
 
It is no secret companies are cutting expenses drastically to stay open and keep employees. The 401(k) match is a big target. The wave of reductions and eliminations in matching contributions started as a domino effect. Small companies it has happened more quickly. Once one large company took a swipe at the matching contribution, it was easier for other’s to follow. Shareholders like the message that everyone in the company is making a sacrifice in order to save talented employees and reduce expenses.
 
While this may seem like a minor change, it should be addressed as part of your financial plan. Questions to ask yourself:
  • Do you need your 401(k) to be your automatic savings mechanism? (Are you a disciplined saver or would you spend it?)
  • If your putting less than $6,000 into your 401(k) is it your best option?
  • What is your tax benefit? Do you need the income tax savings?
  • How close are you to reaching retirement/financial independence?
 First, if you are not a disciplined saver keep the 401(k) so you keep up the automatic saving. To slowly increasing your savings put a reminder on your calendar to increase your contribution 1% on your birthday. (Stop reading now if you are not a good saver.)
 
If you are putting away less than $6,000 and don’t see this amount increasing much, then a regular IRA may be a better option for several reasons.
  • More investment options. Most 401(k) programs have a set number of funds to which you are limited. An IRA significantly expands your pool of available investments and mutual funds. This provides better access to great money managers, potentially giving you a significant advantage over your 401(k).
  • IRA contributors have 15 1/2 months to make a contribution for the calendar year. For example in 2009, you can make contributions to an IRA from January 1, 2009 – April 15, 2010.
  • You will have the same income tax benefit in your IRA as your 401(k) if you contribute less than $6,000, as your contribution is not taxable income. (Your withdrawals will be taxable.)
Let’s not forget about the Roth IRA. If you are not a fan of taxes and believe that when you retire either your tax bracket will be higher and/or in general taxes will be higher this may be another option. The Roth IRA is paid with after-tax dollars today and all withdrawals are tax free, as you will not be taxed on the growth of the account upon withdrawal.
 
First check if you qualify for a Roth IRA account in 2009.
 
Married combined modified adjusted gross income (MAGI) must be below $166,000. This phases out between $166,000 and $176,000. $176,000 or more and you are ineligible.
 
Individual MAGI must be below $105,000. This phases out between $105,000 and $120,000. More than $120,000 is ineligible.
 
If your eligible for the Roth IRA you have a few options.
  • Save in your 401(k) or IRA to receive a tax benefit today and fully fund a Roth IRA account for $5,000 (50+ $6,000) for tax free withdrawals later. Win today and in the future with taxes.
  • If you only save $5,000 or less you can decide to save taxes today via your 401(k) or IRA, or pay the taxes today and have not tax worries when it comes time for withdrawing in retirement.
 
This is a lot to think about. You must take the time to understanding how your 401(k) match being gone can impact your savings mechanisms for retirement and your overall financial plan. One small email from the big boss can change a lot.
 
Advisory Services offered through Axiom Advisors, LLC. A registered Investment Advisor Securities offered through Cambridge Investment Research, Inc. a Broker/Dealer member FINRA/SIPC Axiom Advisors, LLC and Cambridge Investment Research, Inc. are not affiliated
 

Yes, I said windfall. First it was daycare expenses, then traveling sports teams, tutors, computers and clothes. Finally it was time for the big expense. College. Wondering if you will ever retire? You are not alone.

The Baby Boomers are in a different place than previous generations. Families are attempting to save for retirement while dealing with exorbitant college costs, as well as the challenges (sometimes financial) of aging parents. This is coupled with trying to save for their own retirement, which unlike previous generations does not include a pension.

While this is a big dilemma for most couples, I focus on the absolutes.

Where you cannot impact change:

  • Cost of college and that you did or didn’t save enough for the expenses.
  • Developing issues with aging parents.
  • The downturn in the financial markets.
  • How much you have saved previously for retirement.

What you can impact:

  • How much debt you will personally take on to pay for college.
  • Children’s college choice.
  • What you can afford to do for take care of parents.
  • How you can load up your retirement savings once college is over.

These items, taken one by one are manageable. I am going to focus on the last one. How you can capture the true windfall available when the kids are out of college.

In order to put junior through college you’ve paired down on your own expenses, creating a lower sustainable living expense or developing a reduced budget. Once college is over if you continue to live at this lower sustainable living expense you can put all the savings you were putting towards college into your retirement savings.

  •  Junior’s college cost – $40,000
  • Junior’s financial aide – $20,000
  • Your contribution – $20,000

 Post college add this extra $20,000 to your existing retirement savings and suddenly you have a windfall. In five years you will have put away an extra $100,000. If you were contributing $30,000 a year that number jumps to $150,000. 

This opportunity for extra savings works because you are taking the discipline utilized to pay for college expenses to pay yourself for retirement. If you are not maximizing your 401(k), 403(b) or other employer-sponsored tax-deferred retirement accounts you have another bonus awaiting you. Now you can afford to maximize your 401(k) at a$16,500 maximum this year for those under age 50 and $22,000 for those over 50. This will reduce your overall taxable income and lower your taxes. 

If your 401(k) contribution is now $10,000 larger for your family in the 28% tax bracket, this represents a $2,800 reduction in taxes.  

Saving more and reducing your taxes. It’s a win-win windfall. 

Advisory Services offered through Axiom Advisors, LLC. A registered Investment Advisor Securities offered through Cambridge Investment Research, Inc. a Broker/Dealer member FINRA/SIPC Axiom Advisors, LLC and Cambridge Investment Research, Inc. are not affiliated. 

Here is a great article comparing two investment strategies. Often this is viewed as two camps your either a buy and hold or a market timer. Just remember an investment strategy for you needs to be specific to your investing timeframe, risk tolerance and need.

My view is that you need to have assets with great money managers and track records. Being open to both strategies will provide you with more opportunity. Some market cycles favor the buy and hold strategy and others the market timers. Not being open to both could have you missing out when one of the strategies falls out of favor.

http://www.investopedia.com/articles/stocks/08/passive-active-investing.asp

Advisory Services offered through Axiom Advisors, LLC. A registered Investment Advisor Securities offered through Cambridge Investment Research, Inc. a Broker/Dealer member FINRA/SIPC Axiom Advisors, LLC and Cambridge Investment Research, Inc. are not affiliated. 

Last night at an event I was asked my opinion on the whether individuals should enter retirement with no mortgage.

I am in the camp that successful retirement plans have no mortgage. It is a function of cash flow. If you have no mortgage then you do not need to have your portfolio producing that extra income. Having no mortgage in retirement has a substantial impact on managing your monthly living expenses and projecting what you will need in nest egg.

A widely used reason to keep a mortgage is to keep the interest deduction. While I believe paying taxes is not our patriotic duty and like to minimize taxes, it has to be based on financially sound calculations. Keeping a mortgage to have a deduction just doesn’t work. If you keep a mortgage for a deduction you are going to keep paying thousands of dollars in interest to pay fewer taxes. I challenge you to execute the math.  

 Here is an example with some round numbers. You pay $10,000 in mortgage interest and you are in the 25% tax bracket, which gives you a tax savings of $2,500.

 The end result is you pay $10,000 in interest to have $2,500 refund. It is trading $1 for $0.25. The only one happy about this equation is the bank!

I want to stress that paying off a mortgage is only one part of a sound financial game plan for retirement. While I like no mortgage in a retirement plan, I also do not encourage you to put all your extra income into paying off your mortgage instead of investing. Each financial plan is specific to your goals, timeframe until retirement and investment tolerance. Don’t make this decision without looking at the entire picture and developing your game plan.

Advisory Services offered through Axiom Advisors, LLC. A registered Investment Advisor Securities offered through Cambridge Investment Research, Inc. a Broker/Dealer member FINRA/SIPC Axiom Advisors, LLC and Cambridge Investment Research, Inc. are not affiliated.