President Donald Trump signed an executive order Friday, August 31, that proposes asking for reviews on changing certain rules for tax-deferred retirement savings such as 401(k)s and individual retirement accounts, or IRAs. Trump signed the order during a scheduled visit to Charlotte, N.C., and asked the Treasury Department to push forward several bipartisan changes to how retirement plans operate.

Here are the big initiatives:

• Review Required Minimum Distribution (RMD) rules with an eyes towards starting them later than age 70 ½ and/or reducing them once they start;
• Consider the creation of pooled Multiple Employer Plans, which would allow companies to offer financial institutions’ 401(k) plans with participants pooled from multiple unaffiliated employers, rather than asking employers to create their own independent 401(k) plan from scratch; and
• Review paperwork and administrative requirements for employers’ workplace retirement plans with the intent of lowering costs and spurring retirement plan adoption among small and medium businesses.

No changes are certain, and the changes if enacted would likely take months or years to go into effect. And it’s also unclear what impact (if any) the executive order will have on pending bipartisan retirement legislation in Congress.

Currently, holders of tax-deferred retirement accounts are required to begin minimum withdrawals from the accounts beginning the year following age 70 1/2. These RMDs are predetermined amounts in a table set by the IRS according to age and must be taken on an annual basis. The purpose of the withdrawals is for the government to start collecting the taxes owed on these accounts, which have enjoyed tax-free status until then.

According to CNBC, the reviews would be of the life expectancy tables from the IRS for the purpose of updating the tables, which may allow retirees to withdraw lower RMDs from their tax-deferred retirement accounts. These tables were last updated in 2002, and the average life expectancy has risen since then from under 77 to 78 1/2, as derived from data compiled from the Federal Reserve Bank of St. Louis.

This could be helpful to retirees because the tax hit of these withdrawals can be spread out more over a longer period of time. Taking large withdrawals can significantly increase income levels, which translates to a higher tax bracket for many. These smaller distributions can also help those who have inherited tax-deferred accounts and are taking distributions.

If the rules for open multiple employer plans are relaxed, small business owners could join with other, dissimilar small business and implement savings plans for their employees. That could help these business owners attract more skilled employees because of the retirement savings plans added to their employee benefit packages.

The average individual can spend less during their retirement due to a budget. One exception can be giving to charitable causes. A study by the WPI or the Women’s Philanthropy Institute looked at the way households in America spent money as they retired. The study revealed both single women and married couples maintained the same level of giving to charities both prior to and after they retired. The charitable giving of single men decreased once they retired.

The report from the WPI also showed both married and single women have less confidence regarding their financial health upon retirement than men. Their focus is not on outliving their savings. Considering women generally live longer than men, this fear is justified. There are numerous ways for both women and men, married and single, to donate to charitable causes without being concerned about running out of money. Using savings meant for retirement to make donations is most likely to cause the individual to outlive their savings unless they use proper care.

A way to donate to causes in retirement is to plan for them just as you did your retirement savings portfolio.  A portfolio likely plans for retirement income to last the life of the individual. One of the most important aspects of the retirement portfolio are the monthly retirement paychecks. These are guaranteed and will last for a lifetime. If the stock market crashes, this income will not decrease. These paychecks can then be supplemented with either yearly or monthly retirement bonuses. These may have fluctuations depending on the investment performance, but they can last for life.

When the portfolio is properly in place, charitable giving can be funded with these bonuses and paychecks. It is important to allow for charitable giving as part of the budget in addition to the other living expenses. This will enable the individual to give to charities while ensuring the person will not outlive their savings. There is another excellent method for planning to increase effectiveness for charitable giving. Many individuals have concerns the recent changes made to the tax laws may decrease their income and impact their charitable giving.

The concern is there will be a significant decrease in the taxpayers itemizing their deductions. This makes it harder to use taxable income to make donations. Any individual age 70 and 1/2 or above has another option. A traditional IRA can be used for a qualified charitable distribution. This distribution will not be included in the taxable income. The distribution will also apply towards the minimum required distribution.

There is an annual limit of $100,000 for qualified charitable distributions. This cannot be funded from both 410 (k) plans and IRA’s. If the 401 (k) plan contains a substantial savings, these funds can be used for charitable giving by rolling over the savings into an IRA. The IRA platform must enable the individual to be able to write checks.

The report from the WPI also revealed married couples and single women have a higher likelihood of volunteering once they retire than single men. There is a lot of research showing volunteers enjoy financial security and health benefits while providing their communities with substantial contributions. The documentation for this research is located in the Hidden in Plain Sight report prepared by the Center on Longevity located at Stanford. Anyone not currently volunteering may want to give some thought to pursing this activity once they have retired.

Planning for both volunteering and charitable giving may be important when determining retirement planning. This will not only enable the individual to give something back to their community, it often increases the enjoyment of life.  Let’s review your plan today, contact us to set up a time to talk.

The way we work and save for retirement has changed and the old rules no longer apply to every individual’s situation. There are many professionals with the resources to retire early, but continue working until retirement age just to avoid paying penalties to the IRS. However, there are ways to retire early that you might want to consider.

You Can Pay the Penalty

The most obvious solution is to bite the bullet and pay the 10% penalty for early withdrawal. Most people are motivated to avoid paying the early withdrawal penalty and will wait until the legal retirement age of 59 ½, before accessing funds in their retirement accounts. This can be an attractive option, simply because the tax-deferred investments in your 401k may have outperformed other taxable investments. If this is the case, your tax benefits may actually pay for the penalty by the time you’re ready to retire. Of course, this all depends on how well your tax-deferred investments have performed.
The Substantially Equal Periodic Payments Option
The IRS allows early retirees to access their retirement funds without paying the penalty through their Substantially Equal Periodic Payments (SEPP) program. An early retiree will have to consent to making substantial annual withdrawals each year until they reach traditional retirement age, as outlined by a calculation chart published by the IRS. However, failing to withdraw the correct amount each year can cause the IRS to charge you with the 10% penalty for each withdrawal you have already made. For this reason, it’s best to work with a tax professional to ensure you meet all of the requirements set out through the SEPP program.

Additionally, the program requires that you fulfill a minimum of five withdrawals, before your obligation is complete. If you retire at 40, you must adhere to the withdrawal requirements until you turn 59 ½ years old. However, if you retire at 57, you must continue the SEPP withdrawals until you reach 62 years of age. As long as you can adhere to the timetable, this may be a good option for accessing your retirement funds early and without paying the penalty.

Convert to a Roth IRA

Another option that will help you avoid the 10% penalty is to convert your 401k to a Roth IRA. Once you open the account, you will have to wait five years, before you can begin withdrawing your contributions. For that reason, it will be important to anticipate your early retirement and plan ahead. However, once you have met that requirement, you can begin withdrawing without facing a penalty.

An additional restriction is that the IRS requires that withdrawals be made in a particular order. You must withdraw direct contributions first, before withdrawing funds that were converted into the account. Lastly, you can withdraw earnings on those contributions. Depending on your situation, this may be a worthwhile alternative.

While these options do exist, waiting for retirement age may still be worthwhile. Where a 401k account is concerned, remaining on the job will keep those employer contributions coming. That “free money” will pad your retirement account, while your savings continue to earn on investments. Additionally, you’ll continue to benefit from tax breaks for a few more years. Ultimately, it will be your decision, which you can only base on your specific circumstances. If you do choose to retire early, you should consult a Financial Advisor and/or tax professional, before you act.

In retirement it’s not always about the money you have, it’s about how much you are spending.  As you prepare or revise your retirement plan, one of the most important steps that you can take is to ensure that your projected future budget is accurate. Any oversights or poor estimations can unfortunately lead to financial shortage in retirement. However, the flip side of this is that overestimating expenses may lead to unnecessary financial anxiety. It could cause you to scale back your lifestyle so dramatically now that you cannot maintain a comfortable lifestyle. In some cases, it could cause you to work for several additional years than you actually need to.

When you read retirement planning books and articles, you will commonly see advice that tells you estimate future financial needs at 80 percent of your current monthly expenses. However, the Bureau of Labor Statistics indicates that actual retirees spend approximately 25 percent less than they did in their working years. This five percent difference may not sound like much, but it can result in a significant reduction in the amount of money that you need to save for retirement. These are some of the major expenses that may decrease after you retire.

Transportation Expense

Your current transportation expense may include two car loan payments, auto insurance on two vehicles and gas. The Bureau of Labor Statistics indicates that fuel expense may decrease by more than 30 percent annually after you retire. In addition, many married couples are able to downsize from a two-car household to a one-car household. This eliminates a substantial amount of money on car loan payments and auto insurance premiums.

Food

Working adults may go out to eat more frequently than retired adults. For example, it may be convenient to drop by a fast food restaurant on your lunch break at work or to pick up a pre-made meal on your way home in the evening. When you are retired, you may have more time to make thoughtful grocery store purchases and to prepare affordable meals at home. In fact, you may expect to spend up to 25 percent less on food after you retire.

Housing

The primary housing expenses for older adults are a mortgage payment, property taxes and home insurance. The Bureau of Labor Statistics states that almost 62 percent of retirees have paid off their mortgage, and this number increases as seniors continue to get older. While property taxes and home insurance premiums remain, the elimination of a mortgage payment can result in significant savings in your budget.

Insurance

Insurance costs fluctuate in retirement. After all, as you get older, you may pay more on medications and related expenses regardless of the insurance plan that you have. However, you may qualify for auto and home insurance discounts. You also may no longer have the financial need to maintain life insurance, and you may be able to eliminate this premium from your budget.

Entertainment

As you prepare for retirement, you may believe that your entertainment expense would increase dramatically because you seemingly will have more time to spend golfing or watching movies at the theater. However, as you get older, your energy level for participating in these types of activities can decline, and you may feel more content to simply spend time at home or in the company of family and good friends. You may expect to spend a decreasing amount of money on entertainment as you continue to advance in age.

As you can see, you could actually spend considerably less in retirement in many areas than you currently do. This information can help you to create a more realistic budget based on your projected lifestyle. Remember to review your retirement budget periodically going forward so that it remains as realistic as possible.  Yes, we are here to help create your budget and plan with you.

Achieving a high income and net worth is half the battle in the quest for financial security. The other half is trying to keep and grow your assets once you have them. While this latter half is perhaps a nice problem to have, it has been the cause of many a headache.

One problem some people make is the proverbial “putting all of their eggs in one basket.”  In the investing world, even just putting too many eggs in too few baskets can be enough to sink a financial battleship. Too often, people make this mistake in a misguided effort to go all in on chasing maximum returns.

Conventional wisdom does indeed hold that you have to accept higher risk in order to get higher returns and, accordingly, have to accept lower returns in order to lower your risk. However, there are a couple of quite serious problems with this logic, common though it may be. For starters, it is almost impossible to predict with certainty which investments will flourish in the future and which ones will tank.

It is not as though anyone ever sets out to have their financial goals torpedoed by a bad investment, but, no matter how sound a plan may seem at the outset, there is always at least some chance that it could go awry. If a particular investment makes up even as little as 20 percent of your portfolio and crashes, it can take your financial goals and security down with it. Fortunately enough, this reality does not have to doom investors to rolling the Wall Street dice as best they can and then sweating out results over numerous sleepless nights.

The concept of financial diversification is actually old enough to have been referenced in a Shakespeare play, “The Merchant of Venice,” four centuries ago. In the 1950s, Harry Markowitz, an academic researcher, articulated modern portfolio theory. His research uncovered the insight that putting together a portfolio of investments that did not all correlate with each other had the effect of reducing the variability (risk) of the portfolio without giving up returns.

In other words, as long as all of your investments do not tend to rise and fall in value at the same time, your portfolio could be effectively insulated from catastrophic losses while still set up for strong long-term gains. Accordingly, diversifying your investments across numerous (thousands) of companies prevents you from having to worry about whether one or even several of them will collapse. Even though it could happen, it could be on a small enough scale that it will not hurt you.

Undoubtedly, these realizations explain much about why it is so difficult for even professional investors to beat the returns of broad indexes like the S&P 500.  Diversification is sometimes described as the only free lunch in finance.  Accordingly, as simple as it sounds, the best approach, by far, that you can take once you have otherwise reached a high income or net worth is to put your investment money in broadly diversified funds and leave the anxiety to those prone to over-thinking things.

Allow us to take a look at your retirement plan and assess the amount of risk you currently have.  You should be confident your plan will make it through any potentially volatile years to come.

If you are like many other hardworking adults, you may find yourself periodically dreaming about what life will be like after you leave the workforce and enter retirement. Regardless of whether you plan to simply kick back and relax close to home or you have grand dreams of traveling frequently in retirement, you will need to have enough cash on hand to live on. Unfortunately, a report released by Financial Engines indicates that almost one in seven adults who are at least 55 years old have stated that they procrastinated on saving for retirement.

Why Adults Procrastinate on Saving for Retirement

You may think that the primary reason why individuals would not save money regularly for their golden years is because of a lack of funds, but this is not the case. In the same report, two out of five procrastinators said they got a late start because they had other priorities for their money. Half indicated that stress played a role in retirement planning and saving. Some of the other more common reasons for procrastination include the belief that it is too difficult, the thought that they may get taken advantage of or a lack of knowledge about retirement planning and saving.

The Impact of Procrastination on Your Retirement Plans

Many adults who procrastinate in this important area have the intention of playing catch-up later in life. However, this may be more challenging than it may seem at first glance. When you procrastinate, you give up your regular contributions. You also give up employer-matching contributions and compounded growth, and these two factors can have a huge impact on the size of your nest egg. Delaying your retirement planning and saving effort essentially means that you must come up with a tremendous amount of additional money to catch up to a balance that you would have had if you started saving regularly in your 20s.

The Urgency to Get Started Today

Regardless of the reasons or age, now is the time to make a bold change. By continuing to procrastinate, you simply dig an even larger hole that is more difficult for you to get out of. Saving may be as easy as foregoing that fancy vacation that you take every year or downsizing the scope of your vacation. It may mean not redecorating your home as frequently or scaling down your holiday gift-giving efforts. There are many ways that you may be able to simply cut back without detracting from your quality of life, and these steps can have a huge impact on your financial status in your retirement years. Of course, making regular monthly contributions is also advisable. Saving at least some money now is better than not saving any.

How to Get Started

There are various types of retirement accounts that you may have access to depending on your circumstances. A good starting point is to maximize an employer-sponsored retirement account if your employer offers matching contributions. These contributions could essentially double your total account contributions and help you to get back on track more quickly and easily. If this is not an option, carefully review the pros and cons of various retirement accounts. Once you decide which type of account you want to open, schedule automated transfers. By automating this aspect of your finances, your balance will grow without additional effort required.

Some people prefer to hire a financial advisor to assist with retirement planning and account management. If you are confused about or intimidated by any aspect of retirement planning, it is best to seek professional guidance rather than to take chances.  Remember, you see a doctor when you have concerns with your health, why not talk to a financial professional when you have concerns about your finances?   We are here to help.

A common problem faced by insurance and annuity holders relates to a need to upgrade to a better financial option without paying taxes on gains earned on the old policy. There are many legitimate reasons for wanting to upgrade. AAFMAA recommends a 1035 exchange to accomplish this objective. A 1035 exchange has a complicated set of rules established by the tax code that must be followed to qualify this exchange as a nontaxable event. Based on the complexity of the tax code and limitations placed on these exchanges, it is highly recommended that you seek the advice of a tax professional before moving forward to avoid possible tax complications.

Factors to Consider When Exchanging A Life Insurance Product

The main thing you must remember is that no cash can change hands for this exchange to legally qualify as a tax-free 1035 exchange. A life insurance policy can be traded for another life insurance product. The tax code also allows for the exchange of a life insurance product for an annuity. This type of transaction is referred to as a replacement. In all tax-free exchanges, the policyholder must remain the same.

It is prudent to exercise caution before moving forward with a 1035 exchange. Not all exchanges are tax-free. Remember that in the case of life insurance policies, if you surrender your policy early, you may incur surrender charges and taxes. Before any definite decisions are made, you need to research the marketplace to determine whether you are insurable. Your health status and age will significantly impact the cost and availability of a new life insurance policy.

What to Consider When Upgrading Your Annuity

When making a change from an old annuity to a new one in a 1035 exchange, you won’t have to pay taxes on your earnings. Immediate Annuities reminds clients that while your taxes can be deferred, it is important to realize that you still may have to pay surrender fees and penalties depending on the terms of your current contract.

After the exchange takes place, then you are free to change ownership. To qualify as a 1035 exchange, an old annuity can only be exchanged for a new one. An annuity product can’t be exchanged for a life insurance product to comply with the strict requirements.

General 1035 Exchange Guidelines

You can exchange multiple old contracts for a single new contract. The IRS code does not limit the number of old contracts that can be traded for a single new contract. This fact opens the door to many possibilities. As mentioned above, the rule about ownership consistency must be followed naming the same owner on all policies. For accounting and tax purposes the adjusted basis of the new contract will be calculated by totaling the adjusted basis amounts of all contracts exchanged.

Conclusion

There is a practical reason 1035 exchanges are so popular. Deferring taxes as long as possible is always a priority. There is no reason to feel trapped in your current life insurance or annuity contracts by tax ramifications. By using a 1035 exchange, you can take advantage of better alternatives while still deferring taxes.

Everyone should have a will; it ensures that your loved ones will receive the assets you wish them to have in the event of your death. To be clear, a will is a legal document that states how you want your property to be distributed and to care for any minor children. To ensure that your wishes are carried out as stated by you, a will must be written and signed by you and your witnesses.

Keep in mind; even though you have set up a will for your family; you may have several reasons to update your will, especially if your family situation has changed such as a birth in the family, an adoption, marriage or divorce. Another reason to update your will is if you have another child, a child you have after your will was created.

Most importantly, if your marriage ends, your estate plan will need to be updated. For example, if you divorce your spouse, you may not want to leave any assets to your ex. This would be a time and situation that you may want to discuss with your attorney; what changes you want to make to your will. You may also want to talk with your lawyer about how to protect your assets should your will be contested.

Another reason to update your will and estate plan is if your relationships have changed. Relationships, over time, change due to how you feel about people in your life. When relationships change or deteriorate, you may want to modify your will to either cut them out or readjust the distribution of property and monies.

In addition, adjustments to your will may need to be made if you move to a different state. Keep in mind; each state in the U.S. has different rules and regulations; especially when it comes to estate taxes and property. It is important, once you move, to consult with a lawyer to ensure that your will is adjusted to your new state and that it is legal.

If you have had important changes made to your assets; especially if you have had an increase or decrease in the value of your estate, you need to update your will and estate plan. Examples of such changes might be, making a large investment and upping the value of your estate or a family member dies and leaves a substantial amount to you.

Or, maybe you change your mind about certain parts of your will. Perhaps there may be some in your life have emotionally turned away from you and your spouse and you want to adjust your will according to how you feel about that person or persons.

When it comes to updating a will, there are two options on how to make it happen; you can revise your will or create a new one. You can set up your own will; however, you may want to consult a lawyer if you have doubts about the content of your will, if you anticipate leaving a substantial amount of money to people not originally listed in your will or if you want to change the executor of the will.

Other reasons why you may want to consult with a lawyer are if you want to make arrangements for long-term care for a loved one, if you fear that someone will contest your will or if you wish to disinherit your spouse.  

“To know the road ahead, ask those coming back” is the famous Chinese proverb although for this article it may be more fitting to say, to know the road ahead, ask those looking back. Everyone has different ideas of what it is like to retire. However, their ideas may be based solely on what they assume or what they have heard. The only way to know for certain is to ask people who have gone through it. Here are several facts and myths that you should learn more about the retirement planning experience.

Boredom

A lot of people assume that boredom is a common occurrence for people without jobs. This is not an issue for those who have their days planned out. Many retirees claim that they have very few boring days. They say that they simply have more time to invest in things that they enjoy doing. Those who are struggling with boredom are encouraged to create their day-to-day schedules and list the activities that they now have time for.

Expenses

Many people worry about the high costs of covering a retirement. They automatically assume that without having a steady income, they will run out of money quickly. However, some retirees claim that their lives have become simpler with fewer responsibilities. They have given up the activities that they did during their workdays and now spend more idle time at home.  Of course, retirement expenses are less of a concern when proper planning takes place.

Work

Retirement does not have to mean no work forever. There are numerous retirees who have taken on part time jobs or gigs to make a supplemental income. They do this to add to their current income or to cover costs for vacations or recreational activities. Other people continue working just to remain occupied. For every retiree, there is a work activity that he or she can do to stay active.

Planning

Planning is a task that few people look forward to about retiring. Without a well-detailed plan, any retirement is not guaranteed to go smoothly. An injury or accident could happen unexpectedly and cause major losses to a person’s budget. People should plan their retirements carefully like they are planning their careers.

Long-Term Process

A retirement does not have to be figured out in a short period of time. You could learn more about planning for a retirement while you are retired. For many retirees, the most helpful experiences are faced firsthand. Do not stop learning about the retirement process before you begin it and remain open to gaining more knowledge through your retirement years.

Health

Declining health is an obvious concern for retired seniors. Young retirees in their 30s or 40s also worry about their health because they are more idle after quitting their jobs. We should be so lucky!  Some retirees are less active and more likely to become lazy or overweight than employed workers. Regardless of age, it’s important that they keep track of their health until the last days of retirement.

Retirement is one of the most unpredictable events in life. Many people plan for years but still face challenges that surprise them. While some people may assume that retirement is boring, some retirees claim that it’s the most exciting period of their lives. It’s important to plan well for the retirement planning experience and make the most from this period in your life.

As with most experiences in life, proper planning can help make your retirement more enjoyable.  We are here to take a second look at your retirement plan or create a plan that helps you achieve your goals.