It’s a scene played out across every dining room table, in every home where marriage is starting to crumble quicker than an Alaskan glacier caught in the crosshairs of global warming. It’s a domestic math problem; division—who gets the house, who gets the furniture, who gets Fido, who gets the kids, etc. Until the conversation turns to perhaps one of the stickier questions: Who gets what stocks? Then things can get really ugly. For the most part, we are talking about equitable distribution states.
The easy solution is worthy of King Solomon; each partner gets to keep all stocks, but only after they’ve been split. But you may want to take a deeper dive before you split those stock assets. After all, one spouse may have an emotional attachment to stock or investment. For instance, one spouse may want to keep that Amazon stock purchased years ago while the other just bought stock in Facebook of equal dollar value. But be careful here because the Amazon stock may have a much lower basis then the newly purchased Facebook, therefore embedding a larger tax liability for the spouse wanting to keep Amazon.
Another point to keep in mind is that certain assets may be treated differently upon sale, such as a primary residence which, if certain conditions are met, carries a $250,000 capital gain exclusion available for each spouse. Together, that adds up to $500,000 for the marital couple. If the ultimate objective is to sell the house, then it would make more sense to sell it while the couple is still technically filing a joint tax return to avoid major capital gains if they exist. This is a better alternative than transferring the primary residence to the other spouse and have that spouse sell the house a short time later, only to lose one of the $250,000 exclusions.
Fortunately, when it comes to dividing up an IRA or retirement plan’s assets (also known as Qualified Plans) you don’t have to pay taxes. There is a proper way to handle these assets that will allow for the continued deferral of Qualified Assets. In the case of an IRA, there is a process known as “transfer incident to divorce.” In the case of Qualified Plans, such as a 401(k) or Tax-Sheltered Annuity Plan, 403(b), these assets are split under the Qualified Domestic Relations Order, otherwise known as QDRO for short. Each of these will allow the spouses to split the assets without any tax consequences. It is important, however, to make sure that each of these accounts is labeled properly when giving information to the court for division. This is important because QDROs only pertain to those assets mentioned above and not IRAs.
Once investment and retirement assets are split, you will want to explore your newly found goals and objectives.
In addition, QDROs carry broad federal protection from creditors under ERISA (Employee Retirement Income Security Act), while IRAs may have different protections under different state rules. In both cases, once the transfer is made the recipient will have full control of their own retirement assets. This means the recipient is also responsible for taxes and, in certain circumstances, any penalties for premature distributions before the age of 59 ½ and must start taking required minimum distributions in the year in which they reach age 70 ½.
Remember, any lack of attention to detail when it comes to separating these assets can complicate the process and create more of an expense, especially if there is a lot of money at stake. This brings us to the topic of pensions and divorce. While pensions are becoming more and more extinct, a pension earned while married, in most cases, is a joint asset. State courts make the final decision on how those assets are divided, as well as any survivor benefits. Social Security and certain railroad retirement benefits need a court order to get a share of the pension. With many retirement plans, when pension assets are split according to certain requirements put forth under a Domestic Relations Order, the benefits will be paid directly to the divorced spouses. In the case of some states, counties, and cities, direct payments to divorced spouses may not be an option.
Rules for the division of pensions can get very complicated from state to state and between different retirement systems. Now, even though the state laws will dictate how much retirement assets a divorcing spouse is entitled to, if the two parties can agree then there is an option to split these assets in a fair manner independent of the courts. However, in doing so you might still need a financial advisor to navigate you through the complexities and tax ramifications that are part of a divorce.
Lastly, once investment and retirement assets are split, you will want to explore your newly found goals and objectives as they may be much different than previously. This includes taking a closer look at your overall investment strategies and risk tolerance.
Remember, this is only meant to highlight some of the major considerations of investment and retirement assets that often arise in the case of divorce. There are many other items that should be discussed. For more information contact me at RStabile@higbieadvisory.com.
Robert Stabile owns Higbie Advisory, LLC a Registered Investment Advisory located in Melville, Long Island. He has over 30 years’ experience in personal risk management and has spent the last eight years as an investor coach dedicated to helping clients understand their true purpose for money, understand what Wall Street costs them and delivering Nobel Prize Investment. Strategies that meet the Prudent Man’s Rule of Investing. Higbie Advisory, LLC is partnered with Matson Money, an ERISA 3(38) fiduciary. Robert Stabile’s articles have appeared in such well-respected publications as “Small Business Today Magazine,” “Long Island Business News,” Providence Business News, and others. He can be reached at firstname.lastname@example.org.
What parent doesn’t want their child to attend a good college, to further their education and let them enjoy all the social benefits that go along with studying outside on a college green with fellow students on a crisp autumn afternoon? Or cheering for their school team on a brisk Saturday afternoon? Unfortunately, as we saw with the recent college admission scandals, some parents want it too much. But that is not the norm. Most parents play by the rules when it comes to college admissions, although it sometimes seems like the game is rigged in favor of the school. How else to explain why, according to the U.S. Department of Education, of 1,364 four-year colleges and universities looked at, 17 admitted fewer than 10% of applicants in 2017, the most recent year for which comprehensive data are available. That group includes such prestigious names as Stanford (4.7%), Harvard (5.2%), Yale (6.9%) and Northwestern (9.2%). Another 29 schools admitted between 10% and 20% of applicants, including Georgetown (15.7%), the University of Southern California (16%), UCLA (16.1%) and the University of California, Berkeley (17.1%).
Still, let’s say your son or daughter is gifted enough to beat the odds and is accepted, what then? Most parents will be slammed with sticker shock when they see that some high-value institutions of learning will be asking for tuitions north of $50,000 per year. So it’s little wonder that I am frequently asked by my clients, “What can I do to increase my daughter or son’s chance for receiving college financial aid?” With all colleges, prior to admission the Free Application for Federal Student Aid, otherwise known as the FAFSA, needs to be completed and submitted to your school of choice, most often electronically. This is where the school decides how much financial aid to offer, based on your total income and assets. And this is where I want to discuss the ways to help reduce the impact of assets on your eligibility for financial aid. There are four main ways to shelter assets from the FAFSA. Understanding all of them will help you minimize the effects of those assets on your FAFSA application, with respect to needs based assistance. Each way is independent of each other and any one or combination of these four ways will help you towards achieving your financial goals. Please note that we are only referring to Federal and State Aid, not Private College Endowments, which work quite differently. Also, this type of planning is not meant to cheat the government but to give parents a choice of how to use their hard-earned assets. We find that many parents are forced to sacrifice their own retirement at the expense of their children’s education.
We can help you choose the right investment alternatives to best reduce the impact of assets on the FAFSA.
The first way is to understand the difference between Reportable Assets and Non-Reportable Assets. Just about everything you invest in is reportable. However, there are a number of non-reportable assets that will help shelter your money from the FAFSA. Knowing those are the most important of all. The second way is the strategic positioning of those assets. A student’s assets are more heavily weighted than the parent’s assets. So, you want to pay careful attention to how much you invest in Uniform Gifts to Minors or Uniform Transfer to Minors Act accounts as well as 529 plans as there may be better alternatives and solutions. For those of you who already invested heavily into those plans, I would suggest you have those accounts reviewed as quickly as possible. The third way is the Simplified Means Test, where all assets on the FAFSA are disregarded if parental Adjusted Gross Income is less than $50,000 and the family satisfies one of three other conditions.
Finally, the fourth way in reducing the impact of assets on the FAFSA is to spend assets strategically. It is best to spend down any remaining assets that are in the student’s name before using any assets in the parent’s name. This will help with student eligibility in the remaining years of college. At Higbie Advisory, LLC we can help you choose the right investment alternatives to best reduce the impact of assets on the FAFSA. Of course, this is only a short overview of how to shelter assets on the FAFSA. For a more detailed six-page report you can email your request to email@example.com. Thank you and good luck with your child’s college choices! It is certainly one of the most important decisions in your life and we would certainly like to be part of that decision-making process.
Higbie Advisory, LLC is a Registered Investment Advisor in the State of NY.
Tiger Woods didn’t enter this world with a golf club in his hand. But two years later he did visit his first golf course, and 43 years later he had won 15 Majors. And what was the one constant during that time; great coaching? From starting out as a small boy taking instruction from his father, Earl Woods, to receiving instructions from such coaching greats as Butch Harmon and Hank Haney as an adult, Tiger Woods, even at his high-level of play, still has a coach.
And the same is true whether you’re swinging a nine-iron or deciding how to build your investment portfolio. Good coaching leads to winning results.
People often seek out a planner to assist with their financial affairs. But we find that the heart of the
planning problem lies in the way that the planning is carried out. And that’s when an Investor Coach steps in. For most financial planners it’s all about selling a firm’s financial products. Sadly, the investor rarely knows whether or not the plan’s recommendations are in their best interest or in the best interest of the planner and his/her firm. Besides, the majority of planners work for a brokerage firm or insurance company, not the client. Therefore, the brokerage firm or insurance company actually controls what products the planner can recommend to clients.
An Investor Coach educates investors to help them deal with the instincts and emotions that are at the root of a poor investment experience. A coach shows clients how markets work and how to achieve true peace of mind when investing. And he does this by not being afraid to ask the tough questions, by not suggesting a product he doesn’t believe in, and by not endorsing bad investor behavior. So how do you know if you are working with an Investor Coach or a financial planner? Turn this page over and take the “Investor Quiz.” The 20 must-answer questions, as specified by Matson Money, are designed to help you identify the areas of investing where you can build your confidence as an investor and escape the Investor’s Dilemma™ by working with an Investor Coach. If you can answer ‘Yes’ to ALL of The 20 Must-Answer Questions, you will be on your way to a high level of peace of mind with your financial investments.
Take the Investor Quiz HERE.
ROBERT STABILE, INVESTOR COACH CEO – Higbie Advisory, LLC
“Whoever is careless with the truth in small matters cannot be trusted with important matters.”
For every notable quote about trust that we read, it always seems to be offset by disturbing headlines like The Town of Fairfield, CT pension fund having $42 million wiped clean in a Ponzi scam.
But trust is a very real and necessary thing, especially when it comes to business owners protecting the retirement plans of their employees. Let’s face it, many companies are putting hundreds of thousands or maybe even millions of dollars, into their company retirement plans on behalf of their employees. And this is the point that business owners need to make certain they’ve entrusted their funds in the right keeper of the gate.
This is when you need to trust a fiduciary to handle your funds. But before you can trust a fiduciary it’s prudent to know exactly what a fiduciary is. A fiduciary is a person that has the power and responsibility of acting for another in situations requiring total trust, good faith and honesty. When you’re the beneficiary of a fiduciary relationship, you give that fiduciary discretionary authority over your assets. So a fiduciary financial advisor can buy and sell securities in your account on your behalf without needing your express consent before each trade. Because fiduciaries have this discretionary authority, they’re held to a higher standard than non-fiduciary advisors.
But choosing a fiduciary is not a “one-size-fits-all” situation. Many Retirement Plan Advisors are not true fiduciaries and try to puff up their stature by claiming they are an ERISA 3(21) fiduciary. A 3(21) Investment Advisor works with you to recommend the investment lineup for your plan but does not have discretion over plan investments. If you prefer to maintain discretion and control of your plan’s investments, then hire a 3(21) Investment Advisor to select investment funds to make available to your employees. It’s up to you to approve the fund lineup as well as any recommended changes over time. Under this arrangement, the 3(21) Investment Advisor delivers value, but is limited to making recommendations. You would continue to have the liability for selection, monitoring and updating of the plan’s investments.
If your goal is to minimize your fiduciary liability to the fullest extent, you should consider hiring an ERISA 3(38) fiduciary to which you delegate full authority to make decisions about the investment lineup. The 3(38) Investment Manager will have discretion, authority and control to manage the fund lineup. They will acknowledge their fiduciary status in writing. By doing so your liability is limited to prudently selecting and monitoring the 3(38) Investment Manager and benchmarking the reasonableness of their fees. And make no mistakes about it, fees can be an issue.
First, there are explicit fees-fees that you can actually find because they are ‘explicitly’ stated.
Explicit fees in qualified plans are two-fold: first, there are explicit costs to handle the administration and recordkeeping functions of the plan. Secondly, there are explicitly stated investment expenses. You are required as a plan sponsor to know all of these explicit costs. The other side of costs is the implicit expenses associated with your plan. These costs can hurt the overall investment return for your participants because many of these expenses are not easily detected and often come out of the investment returns.
The implicit costs are two-fold in nature as well. First, just like the explicit costs, they are implicit costs associated with the administration and recordkeeping aspect of your plan. Secondly, are the implicit investment expenses? Transition and investment expenses are the ones that can be the most detrimental to your plan.
Having the right fiduciary at the helm is very important. Another reason why is because sometimes these plans can bothersome. You can have employees complain of poor investment performance, confusion due to too many fund choices, administration problems; on and on and on. In many cases, poor investment performance can result in employees complaining to HR or upper management. What was supposed to be an employee benefit and perk ends up becoming a frustration to the business owner and the participants. In the end, morale goes down and no one is happy. Why does this happen?
According to the “Fiduciary Awareness Guide” put out by Mark Matson, CEO of Matson Money – a Registered Investment Advisor with over 9 billion in Assets Under Management, there are seven reasons everything can go south in a hurry when business owners don’t have the correct fiduciary in place:
- Not knowing that a business owner is a Fiduciary
The definition of fiduciary is any person that has discretionary authority over the plan assets or who exercises any control over the plan assets and gives investment advice to the plan for compensation. So, when it comes to your company, you, as the business owner (the sponsor of the plan), are going to fall into this purview of a trustee; in other words, a fiduciary. Not only are you liable for the performances of the company or the organization, but you are personally liable for any breaches of fiduciary standards.
- Relying on a Broker for Investment Advice
By definition a broker cannot be a fiduciary. Many plan sponsors with 401(k) and profit-sharing plans rely on the advice of their brokers. They are assuming that because they have brokers, they are protected from all of the regulatory requirements and are insulated and protected from fiduciary requirements. This is not the case. A broker basically serves as an intermediary for the brokerage firm to sell a product to the plan sponsor/trustee. As a matter of fact, it would be a breach of fiduciary duty if the person who is giving independent advice was earning a commission. Brokers can’t be counted on for this type of independent advice because they are not acting as fiduciaries of the plan.
- Not knowing your responsibilities as a plan sponsor.
The fiduciary’s role is to manage risk and expected return by developing and monitoring the trust portfolios. Not only are these your primary responsibilities as a fiduciary, but the great news is that there is an academic and scientific method, if applied appropriately, that can give you very good solutions and prudent reasons for making an investment decision. Ultimately this helps to reduce your liability. Fiduciaries who are willing to work with an expert who understands Modern Portfolio Theory will have a certain amount of comfort and a degree of protection from both litigious employees and the Department of Labor should you be audited.
- Using Active Management
It’s a process where three things happen.
The first thing is Stock Picking, which is when you hire a manager, mutual fund company, or a large financial institution and they buy and sell individual stocks inside of a mutual fund in an attempt to provide superior returns and beat the market.The second is Market Timing, when you hire a fund manager or money manager and they buy stocks when they think the market is going to go up or sell stocks when they think the market is going to go down.The third is Track-Record Investing. This is when you look at a fund or money manager’s past performance over the last 10, 15, or even 20 years, and use this as a tool in the hope of superior performance in the future.These three different types of hyperactive management are extremely suspect. They leave the plan sponsor/trustee exposed to many potential litigious problems because studies show that those forms of investing are much more in line with speculation, not true prudent investing.
- Relying on Section 404(c) for reduced Liability
As a fiduciary, you have to do certain things to qualify for 404(c). You have to have substantial investment options available for the participants to choose from. These options have to be able to provide true diversification for the participant. If you elect 404(c), you have an employee education requirement. You also have a requirement to let participants make changes in their portfolio on a semi-regular basis. Many plan sponsors mistakenly believe that the fiduciary liability is now transferred to the participants. The reality is if these funds are found to have excess cost, don’t provide a wide enough range of different asset classes, consistently underperform the market, have too much risk, or if there’s no ongoing process to determine if those funds were appropriate or achieved their stated goals, then 404(c) is not met.
- Not understanding the costs, commissions and fees in the plan
What is troubling for many investors is the reality that their investments have hidden fees. These hidden fees affect the overall return of their portfolio. This can be very frustrating for plan participants since they have no control over these costs. The only way to discover what these hidden costs are is to do an independent analysis. As a fiduciary, it is important to be able to understand and calculate these fees. All plans have fees; you need to be able to measure those fees and see if they are in line with the industry. Remember, they must be reasonable and measured.
- Not having an Investment Policy Statement
The Investment Policy Statement (IPS) outlines the asset allocation, risk tolerance, and liquidity requirements of the Plan. The most important duty of the fiduciary is the development and ongoing maintenance of an investment policy statement. The Investment Policy Statement also assists plan sponsors/trustees in the event of a regulatory audit and show that they are following a procedural process. One of the most important functions of the IPS is to make sure that the investment options are prudent and offer the diversification that plan participants need to meet their investment objectives.A recent court decision in California federal court further drives home a plan sponsor’s fiduciary responsibility. The large California utility, Edison International, was found to have breached their duty of prudence because they chose retail mutual funds for their plan investments, when they could have chosen, less expensive institutional class shares of the same mutual fund. Edison International was liable because they paid retail, instead of buying at a discount. There was no malfeasance by Edison, just laziness in not bothering to understand that an institutional share class of mutual funds was available and would have saved plan participants in mutual funds expenses.No company wants to be highlighted negatively in the business section of their local newspaper because they acted irresponsibly in its company retirement plans and pensions. Just ask the Town of Fairfield, Connecticut if doing more homework when it came to entrusting their funds to the right person could have saved the day. I believe the answer is obvious.
This article appeared in the Long Island Business News, September 27th to October 3, 2019 Edition and Provident Business News, October 18-24, 2019 Edition. You can download them HERE.
Robert Stabile’s articles have appeared in such well-respected publications as “Small Business Today Magazine,” “Long Island Business News,” Providence Business News,” and others.
Robert Stabile owns Higbie Advisory, LLC a Registered Investment Advisory located in Melville, Long Island. He has over 30 years’ experience in personal risk management and has spent the last 8 years as an investor coach dedicated to helping clients understand their true purpose for money, understand what Wall Street costs them and delivering Nobel Prize Investment Strategies that meet the Prudent Man’s Rule of Investing. Higbie Advisory, LLC is a co-advisor to Matson Money an ERISA 3(38) fiduciary. Robert could be reached at firstname.lastname@example.org
By Robert A. Stabile, EA, ABA
Considering the recent Billion Dollar Lottery that was just won by one lucky winner in South Carolina, it got me thinking, do people think winning the lottery is a Dream or a Fantasy? This is an interesting concept, because I always refer to savings for retirement as living towards the American Dream. Yet, many investors I speak with consider retirement a “fantasy.” I would like to dedicate this article at helping our investors understand the difference between a Dream and a Fantasy.
I saw an interesting blog on Quora that sums up the differences between a Dream and a Fantasy. While I like to say that “I dreamed this all up,” I must give credit to Quora for some of the definitions listed in this blog. That said, I am also going to relate these ideas as it pertains to my observations on how some investors perceive saving for retirement. First understand that I am not referring to the word “dream” as a nocturnal dream as when you sleep. We are talking about the figurative expression of dream as in “The American Dream”
First: Dreams are something you act on, while Fantasies are something you think about. One can dream of owning a house, or a fancy car or a large retirement account. Then one can create a deliberate plan and take action to start saving money until their dreams are realized. A fantasy is merely a thought such as winning the Billion Dollar Lottery that was just won by the one lucky winner in South Carolina. The fantasy often focuses all around on all the things that money can buy. There is relatively no action required in having this fantasy, except to buy a ticket, cross your fingers and hope for the best. The reality is that the “dream” of owning that house, fancy car or having that large retirement account is achievable by many, while winning the Lottery is just a fantasy which has the same chances of coming true as being struck by lightning.
Second: Fantasies are free. Dreams have a cost. Anyone can sit around and fantasize at no cost. But once you have set upon a Dream, there is a cost for just sitting around and doing nothing to realize your dream.
Third: Dreams have deadlines. Fantasies don’t. Once you set your sights upon a dream, you set an expiration date on when you would like to achieve that dream. Then you take the appropriate actions towards meeting that deadline. Fantasies can go on forever. Let’s be real, how many people continue to play lotto in hope that one day they will be the one? This fantasy creates the perpetuation of playing that one dollar forever? But unfortunately for some, a dollar isn’t enough, then it becomes 2, 5, 10 to the point where some people think the fantasy will come true the more dollars they spend. That can be extremely dangerous, as some people may begin to speculate and gamble with their earnings and possibly even their savings until they lose it all.
Fourth: Dreams produce results. Fantasy’s don’t. Want to change your life? Your Job? Your Status? Dreams can do that? I dreamed of Coaching Investors to achieving their American Dream by investing prudently with their life savings and not to speculate and gamble? I took massive action to accomplish this. Had it just been a “fantasy” I would have not done anything to achieve the results I have gotten. I still dream to be one of the top investor coaches in my region. I assure you that the actions I am taking now will get me there!
Fifth: Dreams must have focus. Fantasies don’t. A fantasy can lead you to forever drifting in different worlds. They can be ever-changing because they are not something that you have to attain. Dreams must have laser focus. They must be specific, and they must always be on the forefront of your mind.
So how does all this relate to investing? As I said in the beginning, I like to refer to saving for retirement as living toward the American Dream. I often run into some investors who state that their quest for a comfortable retirement is merely a fantasy. When I ask them why, they tell me something like, “I fantasize about retiring comfortably, but I keep trying to find right places to invest my money that will give me the best return and I just can’t seem to keep up!” Then they go on to say, “So thinking I can accumulate enough money for retirement is just a fantasy for me!”
The problem here is that this investor didn’t understand the difference between a dream and a fantasy. You see, this investor is living towards retirement in the world of fantasy. That is why his investment strategy is focused on chasing the best return instead of investing prudently. We refer to this as speculating and gambling with the goal to get rich the quickest way possible. It is no different than betting every day on the Billion Dollar Lottery! Fantasies will always lead towards speculating and gambling.
Saving for retirement, or how I like to refer to as living towards the American Dream, takes focus, action and discipline. It begins with the Dream. We help our investors understand what their American Dream means to them. Then we coach them on how to become prudent investors so that the can truly achieve their American Dream.
If you want to learn more, then call Robert A. Stabile, Investor Coach at Higbie Advisory, LLC – 1-800-276-2161
By Robert A.Stabile, EA, ABA
A man walks into a doctor’s office, complaining of some minor chest pain. Without missing a beat the doctor says,” OK, we’ll do open heart surgery first thing tomorrow morning.” If the man wasn’t having a heart attack before, he is now. “But aren’t going to doing any kind of tests, x-rays, lab work… maybe even an MRI,” he asks nervously. “Shouldn’t we first find out what the issues are before we try to fix it?”
The funny thing is that most people take the time to make sure their personal health is in order, but remarkably few take the time to make sure their financial situation is just as healthy. The truth is that without a Portfolio MRI, a detailed look at the various variables that make up your financial portfolio, you really have no idea of which of these components are under-achieving, over-achieving, or simply sitting stagnant.
A Portfolio MRI starts with some basic questions:
- What amount of your savings is being lost every year to investment fees, both implicit and explicit?
- If you own mutual funds, how many of your funds are buying the same companies? Are you diversified or simply redundant?
- Do you know your expected return for any one year, five years, or 20 years?
- Do you know how much your portfolio is likely to lose in any given year?
- If your portfolio adequately diversified in a way you can measure?
- Would it be possible for you to get the same return with less risk?
Very few people are equipped to answer these questions, which can really only be answered with a highly analytical and detailed synopsis of where you are doing well and where you might need an investment jump-start. Fortunately, there are ways to discover problems that may be lurking below the surface, problems you never knew you had and that can be brought to the surface using extensive expertise in all matters financial and a firm grasp of the technology needed to come up with viable solutions.
According to WebMD, an MRI is a test that takes detailed pictures inside your body, used by doctors to see how well you are doing and what can be done differently to ensure you stay healthy.
A Portfolio MRI works on the same principal; to make sure you stay financially healthy.
For more information contact Robert Stabile, a registered Investment Advisor and Investment Coach and CEO of HIgbie Advisory, LLC. He can be reached at 631-878-6195
The Portfolio MRI is a proprietary analytical tool of Matson Money and is authorized for use by Robert A. Stabile, CEO of Higbie Advisory. LLC a Registered Investment Advisor in the State of New York. Fee based Investment Management and Advisory Services are offered through Higbie Advisory, LLC. The material presented in this article shall in no way be considered a solicitation to sell or offer investment advisory services to any residents of any other State other than the State of New York or where otherwise legally permitted.
By Robert A. Stabile, EA, ABA
The Simple Way to Find Your Retirement Number — The Motley Fool
What’s Your Retirement Number? – The Balance
The One Retirement Number You Need To Know – Forbes
What’s the magic number for your retirement savings? – CNBC.com
What’s my ‘number’? Figuring out a retirement target – CNN Money
…..These are all web links that lead you to an article describing on how you can find the right number, amount of money that is, to help you live a successful retirement! But is this really the correct way to approach retirement? That’s the focus of this month’s discussion.
As I reflect on the financial view of our clients ages 30 to 50, the way they think about retirement is fascinating. It’s been said before in national magazines that we should “retire” the word retirement. Why is that? Because it really doesn’t mean much anymore as the landscape of work, family and the economy are constantly changing. There was a recent study done in USA Today, (www.usatoday.com), that suggested 68% of individuals working today said that they would continue working into retirement. In fact, I myself, will live what I call a “hybrid retirement,” meaning that I will work in some part time capacity to keep me busy and my mind limber.
You can see from the web links above, it has been the trend to concentrate on the approach to retirement as seeking the appropriate “number” where it comes to retirement. This financial planning notion centers on the concept of figuring out how much money you will need in your investment portfolio, (whatever that is), on the day you stop working in order to provide you with enough income for the rest of your life. It’s the magic number you will need so you will never run out of money. In retrospect, I am absolutely convinced that this approach to planning retirement is severely flawed. In addition, reaching this number, if you are so fortunate, may in many cases put retirees in the state of paranoia as they age through retirement.
I believe that a better approach would be to search for “what’s my paycheck” not “what’s my number.” This is a very different direction from which traditional planners may take. Tom Hegna discusses in his book, “Paychecks and Playchecks Retirement Solutions for Life,” that we should seek paychecks first and then plan for our Playchecks.
Think about this for a minute. You work hard and begin to earn more and more income as you grow your career. You are quite successful in that you save the maximum in your 401(k) plan,
take the company match, you may even be showered with stock options for twenty to thirty years. You invest your money wisely and achieve a reasonable rate of return on the money. Your financial advisor runs a detailed analysis and now you have a goal of $2,000,000. They tell you upon hitting that $2,000,000 that you will never run out of money if you use a certain withdrawal rate, earn a certain interest rate, and the variable assumptions like inflation and tax rates stay in line.
What’s wrong with this analysis? The item that nobody discusses is that by achieving this level of success, you are guaranteed to spend down your money. So, what happens psychologically is that the first few years of retirement you hit a sensation of jubilation. You start living your “Go- Go” years and you spend more money than you would in normal years living out some of your bucket list. After all every day is a Saturday in retirement. Isn’t that traditionally when you spent the most money in your pre-retirement years? So, after you come down to planet Earth from your couple of years of travel and vacation, you start to withdraw money at the reasonable spend down rate.
The problem is that when some people spend their lives building up a capital base, it makes them emotionally sick to their stomach to see the balances in their investment accounts begin to go down. While intellectually they understand that this money was built up for this very purpose, it is impossible for them to sit by idly and watch the capital base dissipate because they spent their whole lives building it up.
This is why you’ll often hear that people who have a lot of money in retirement are often some of the cheapest people in the world. The reason is the massive fear of the treasured money slipping out of their hands. I call this living a just in case retirement. “I can’t do this or can’t do that just in case… ” I am sure you know a few of these people. The result… the result is they begin to shrink their lifestyle to the point that their investment account balances stabilize or wont’ go down. This is counter intuitive to what should be happening.
Therefore, for those of you in your 30’s, 40’s, and 50’s who are planning now for retirement should understand that the discussion should be around ‘what’s my paycheck’ and not ‘what’s my number’. Some of the happiest retired people I have seen throughout my career are teachers, government workers, and clients who receive steady pensions from their former employers and have a substantial nest egg to spend as well. They don’t think emotionally as much about the market, the economy, or the Government around their future or their investments.
All they know is that a check comes in the mail each month. Month after month after month for the rest of their life. In other words, they keep getting a “paycheck” for life! That means as you plan your family finances, you should have a really strong consideration on what percentage of your assets that you are willing to allocate to a real pension like paycheck in retirement. There are many types of products that can solve this part of the equation. You should ask your financial advisor about how these types of instruments work within the framework of your retirement plan.
Should someone ask the question, “if you had 2 or 3 million dollars in the bank when you retire, do you think you would be happy?” Most of you would unequivocally say yes, but 10 years into retirement you would discover that your emotions would take over and you would be worried about your capital base every single day.
Therefore you should about the new notion of retirement being about a paycheck and not just a lump sum. If you knew the check was in the mail every month, how much fun could you have and not worry about the ups and downs of the economy every day. Isn’t it time you figured out what your paycheck should be in retirement?
Next month discussion will focus on the “playchecks” part of the “Paycheck and Playchecks.” This is where you should count on your investment portfolio to help you “play” and combat inflation during your retirement years!