Category: Retirement

If you know that you are not in complete control of your life, it is a good idea to listen to the discussion in the following article. Life is hectic. Day to day chores, work, and family obligations can keep us from our longer term aspirations. We may have goals that we set up at the beginning of the year or a timeline that we want to accomplish as we move through certain stages of our life, but these targets can seem elusive, if we do not occasionally take a realistic assessment of our progress. Perhaps, a quick 10 minute financial audit is a good place to start.

Take ten to reflect on your financial life and measure your financial “pulse” to see if you are in decent financial shape. Here are a few quick and easy questions for you to ask yourself to complete the review:

First, are you prepared for a catastrophe?

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We all have family members, coworkers, and friends who have experienced a job loss, death, or disability. We tend to think naively that a similar event would never happen to us; but unfortunately, we are not immune from hardship. Ask yourself the following specific questions.

  • Is your job secure? If not, do you have at least 6 months cash to cover your expenses until you can find employment?
  • If you or your loved one were to die, would there be sufficient insurance to cover your future living expenses such that you could maintain your current lifestyle?
  • Do you have an updated will and other estate planning documents or would there be chaos or confusion among your family members upon your death or incapacity?
  • If the primary earner was to become disabled, how would you cover the lost income from his or her salary?
  • If you have group disability, will the after tax benefit be sufficient to pay your monthly living expenses? (Disability benefits for which premiums are paid with pretax dollars are taxable, whereas benefits paid with after tax dollars are tax free).
  • Even if you were to cover the basics through a disability policy, would you be able to still save for retirement?

These are tough questions to ponder, but very important to consider, just in case the unthinkable happens. The probability of a disability is very real. Statistics show that just over 1 in 4 of today’s 20 year-olds will become disabled before they retire, and that of the 37 million disabled Americans(in 2013), 50% are in their working years (age 18-64).*

In fact, a typical non-smoking female, age 35, 5’4″, 125 pounds, who works in an office job with some outdoor physical responsibilities, and who leads a healthy lifestyle, has a 24% chance of becoming disabled for 3 months or longer during her career with a 38% chance that the disability will last 5 years or longer. The typical male has a 21% chance of becoming disabled with the same rate as females of a long term disability (38%).* Of course, the risks are higher for people who do not live a healthy lifestyle.

If you can’t answer the questions above, or you are concerned that you are not protected in the event of an unforeseen circumstance, you need to focus on risk management. You should immediately look into additional insurance coverage to protect against these events.

Second, are you moving closer to your important life goals?

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If you need to purchase a car or other large purchase in the near future, are you gradually saving money in a separate savings account so that you can pay for your purchase in cash?

Are you contributing annually to your kids’ college funding accounts?  It is best to start as early as possible so that you save less each year. If you wait until the kids are in high school, there are fewer years to save and the process will be much more onerous. Time and dollar compounding make the process easier requiring that you save less over time.

Are you saving at least 10% of your salary (not including your employer contribution) for retirement and are you on track to retire? (A basic rule of thumb is for a retiree to amass roughly 15 times their income by age 65. By age 50, you should have about 6 times your income saved; and at 40, 2.5 times your income saved.) If you are behind, you will need to save more than 10%.

Third, do you understand what your invested in and why?

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You should primarily be aware of how much exposure to the stock market you have and if that makes sense given your age, goals, and investing personality.  Ultimately, you should have a low cost, diversified portfolio of funds that you can stick with, even in the event of a very large market correction.

You should also not be paying high fees for investment management and for “active” funds. If you think you are paying too much or are worried you have too many accounts that are spread over several investment companies, you would likely benefit from cost reduction, consolidation, and simplification.

Finally, do you have anxiety over any aspect of your financial life?

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If there is something that is bothering you, it is important to address it quickly and thoroughly so that you can sleep better at night. Furthermore, if you are the kind of person that would find it hard to quickly pull together your key financial documents such as recent tax forms, investment statements, and insurance policies, you will likely benefit from some financial housekeeping and coaching. Awareness and intention are important elements for financial success.   To this end, you may find that working with a financial advisor or coach is a great way to improve and enhance your financial security.

The financial planning process is a great way to create a roadmap for your financial life. Working with a fee only CERTIFIED FINANCIAL PLANNERTM professional is a great place to start. The planner can put together a comprehensive plan and then meet with you to review the plan on at least an annual basis.  For my clients, each year I provide a color coded financial “report card” that measures progress toward specific financial goals in all areas of their financial life—insurance, cash flows, college planning, retirement planning and estate planning.

We also review their portfolio, and discuss market valuations and the very real and ongoing potential for markets to correct. This ensures that the client is mentally and emotionally prepared for market volatility and protects them against irrational behavior at market peaks and troughs. A tax checklist is also reviewed to see if there are opportunities to reduce taxes, both in the short and long term.

Annual reviews are an essential part of the financial planning process. They provide feedback on progress and direction in response to changes in financial markets and retirement and tax legislation. Most importantly, they provide moral support and encouragement for the client. The review forces clients to focus on their finances in an intentional way.

I once told one of my long term clients that since she had been coming in for years and her plan was in good shape, we could move to less frequent reviews, say every other year, if she wanted. She commented that she was happy to pay the fee for more frequent reviews, as it forced her to pull her information together and give it a good look every year. This annual exercise was meaningful for her and well worth the time and investment.

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At this middle age you might have thought about what you will become in 10 years, 20 years, even when you retire. However, for some people, they might just simply lead a life without a clear direction even if they are nearing their retirement age.

Many Baby Boomers are working long and hard in stress-filled jobs. After 20-plus years laboring in the same industry, performing the same duties day in and day out, they have gradually lost the passion they once had for their career. In a “flight or fright” response, they are reflexively expressing a desire to retire early and rid themselves of their daily toil.

This knee-jerk desire to tell their boss to “take this job and shove it” often occurs due to a lack of purpose and passion in their everyday life. Perhaps, rather than trying to retire at the age of “50 something”, these frustrated workers should instead consider redesigning their work life such that it aligns with their core values. In doing so, they may find work to be a source of pleasure and excitement as opposed to a continued source of stress. Their physical health may improve too, as studies show that continuing to work later in life can significantly improve physical and mental well-being.

This blog was inspired by a presentation given by Randy Gardner, JD, LLM, MBA, CPA, CFP(R) at the 19th annual Garrett Planning Network retreat which I recently attended. Mr. Gardner emphasized that many retirement plans, especially early retirement plans, fail because the retiree does not have his or her “next step” configured.

A retiree’s ext step— Ask what am I retiring to?

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A good question to ask oneself prior to retirement is, “what am I retiring to?” It is extremely helpful to envision a typical day, week, month in retirement. How will you fill your day? What is your purpose or passion? And, better yet, why can’t you instill that passion in your workplace today?

An early retirement can be hazardous to your health.

Gardner also cited research that suggests that an early retirement may be hazardous to your health, as calling it quits early is highly correlated to an increased risk of heart attacks as well as Alzheimer’s and dementia.

In a study by the Institute of Psychiatry at King’s college, London, researchers found that keeping the brain active later in life reduce the chances of an early onset of Alzheimer’s. In fact, there was a significant link between late retirement and delayed symptoms. The researchers found no link between education or employment and dementia risk, but found that those who retired later prolonged their mental abilities above the threshold for dementia.

Furthermore, mortality rates increase with a reduction in the retirement age.

In a study out of the University of Zurich researchers found that a reduction in the retirement age causes a significant increase in the risk of premature death – defined as death before age 67—particularly for males. According to the study, one additional year of early retirement, causes an increase in the risk of premature death of 2.4 percentage points.

Losing daily structure can lead to boredom, and chronic boredom is bad for your health.

Experts purport that the root cause of declining health in retirement is due to a lack of purpose. Having a long and successful career provides structure for the week and gives us all a reason to get out of bed in the morning. Losing that structure can lead to boredom, and chronic boredom is bad for your health.

In addition to these non- financial risks, the risk of longevity, increased taxation, legislative changes to entitlement programs, and poor market returns can hamper a retiree’s ability to receive adequate lifelong income.

Plus, let’s face it; the math of an early retirement can be daunting. It is hard to work for 30 years and live off of your savings for possibly the next 50 years.  There is a good chance that you will need to downscale your lifestyle in order to make your assets last.

How can a generation of burnt out Boomers respond to these ongoing pangs for an early retirement?

“Purpose perhaps is more important than exercise.”

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Rather than retire early, Gardner suggests that burnt-out workers instead instill purpose in their lives. In fact, he believes that purpose is “perhaps more important than exercise.” Frustrated workers of all ages owe it to themselves to design a career that engages them in the things that they are passionate about. Since only 20% of workers find their jobs to be engaging, they need to commit to strategies that improve their work responsibilities and environment.

Mr. Gardner recommends that people engage in “job-crafting.” Job-crafting is the process of redesigning your job in order to engage in tasks, relationships, and intellectual pursuits that engage, excite and interest you.

Here are some tips I put together based on the job crafting concept that will hopefully help you get started in creating your purposeful career and life.

Find out which tasks you enjoy and try to incorporate them into your work.

If you would like to write, start a blog or newsletter for your company or industry. If you enjoy working in a team or competitive environment, see if there is an opportunity to join a task force in your company. If you enjoy working with your hands to create things, start a small business that allows you to do this or add these activities to your weekend to do list. During your vacations, engage in the pursuits that energize you. This will refresh you when you return to work.

Determine which relationships are most important to you and try to build these within your work day

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It could mean that you need more time with peers whom you work with, or perhaps, you crave a connection with a more experienced mentor.  You may need a study group or network of people outside your company but within your trade or industry to connect with. Increasing these connections can make you feel part of a larger group and also help you build bridges with colleagues across the country.

You may crave relationships that are outside of the workplace during the week, so you should take the time to meet with friends for lunch or dinner after work in order to get a break from the people you work with every day.

Maybe you work by yourself in a home office and you need to be more intentional about getting out and connecting with other professionals like yourself. The point is that with some soul searching, you can identify the things that frustrate you about your job and try to refine them so that they work for you.

Although I am a solo practitioner, I really value the relationships I have built over the years with other financial planners and industry professionals I have met through the Garrett Network. They make me feel like I am not alone and less isolated. I connect and engage with them through webinars, study groups, and our annual meeting.

Re-engineering your work functions could give you a renewed perspective.

Finally, we are driven by curiosity and intellect toward various careers or pursuits; periodically we need to be stimulated to nurture our creativity and sharpen our intuitive skills. Performing our job functions in the same way day in and out can make our skills stale. Re-engineering your work functions can give you a renewed perspective. Mentoring a younger employee new to the organization may also provide you with a fresh outlook on your job as well as foster camaraderie.

Complete This “Passion” Exercise

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In order to create you ideal career and personal life, I encourage you to:

  • Create long list of all of the things that you are passionate about. Compile this for all the areas of your life.
  • Pick the top ten things you are most passionate about from the list
  • Ask yourself—why do I enjoy this pursuit? Mr. Gardner encourages people to be as specific and exhaustive about what aspects of their passions they enjoy, as opposed to focusing on the activities themselves.  This particular step can provide rich insight into what really excites us and makes us tick.
  • Create a long term plan to infuse your life with elements from your passion list. We tend to get bogged down in short term thinking, which can make us irrational and depressed when we don’t reach our goals quickly. People who are able to think and plan longer term tend to be more optimistic about their situation. In short, create a plan for the next few decades as opposed to the next 365 days.

A valuable tool I recommend to my clients which helps them identify their passions, is the Highlands Ability Battery test. Its premise is that the skills or abilities that come naturally to you, tend to be the ones that you enjoy. The function of the Highlands Ability Battery test is to define each of your abilities and then determine the patterns or “clusters” into which they fall. Armed with this knowledge, individuals are able to avoid stress and achieve satisfaction with work.

Finally, remember that some stress can be a good thing. Stress is a necessary emotion and intermittent stressful events are probably what keep the brain more alert and enable you to perform better. Here is a related article on how successful people manage their stress.

Don’t plan your retirement to fail; instead, plan for passion. Not only will your work seem like play, but it will also help you achieve the financial independence you now crave.

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Do you ever thought that your medical check up will change? I think, we all do and of course government has done it. They have tried to make some solutions. Health insurance has been made by government also private insurance company. And you can choose what is suit for you.

According to the Center for Medicare and Medicaid services, 70% of people over 65 will need long term care support at some point. Since health insurance and Medisupp policies do not pay for long term custodial care (Medicare only pays for up to 100 days of care in a skilled nursing facility), it is important that you have a plan to fund these costs, which can be exorbitant. You can choose to self-fund by spending your own assets or purchase a long term care policy. A less desirable option would be to rely on family members.

Is Medicaid The Solution?


Many people also incorrectly believe that they can rely on the government through Medicaid to take care of them should they require long term care. Unfortunately, this option is also not favorable. In order to qualify for Medicaid eligibility, a patient must demonstrate that they have very little income and limited assets.  This will occur once they spend down almost all of their cash and investments. If they have a spouse, he or she will be left destitute. In addition, the Medicare facilities that are available in your state, may not be ideally located cost to family members nor provide the quality care you desire.

In order to gain some insight into the potential cost for care, Genworth publishes an annual cost study.

Given the above costs and the average length of a long term care event (3 years), a 65 year old couple from SC will need roughly $180,000 in extra assets now to fund the possibility that one of them will need nursing home care. This assumes 6% rate or return and 5% LTC inflation.

Baby Boomers Age Need More


As the Baby Boomers age, we will see an epidemic of dementia patients. According to a recent article in Investment News, one out of ten men and one out of five women will suffer from some form of dementia. Furthermore, half of individuals over 85 are at risk of developing Alzheimer’s.  Future medical advances may help reduce the risk, but at this point, there is no cure for Alzheimer’s. It is also much harder to care for an Alzheimer’s patient and can require 24 hour nursing care in the latter stages of the disease.

Although we don’t want to talk about being old and fragile and we don’t believe we will ever be infirm, it is important to have this discussion with our spouse or family members in order to determine the best plan, if and when we do need care.

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One of the most important aspects of retirement is traveling. It is a number one priority for most of my clients and they often have very ambitious plans. As part of my exercise to better understand client bucket lists and goals I have them list the things they want to see, do, and experience before they die.

Some common responses include travel to all the continents, visit all of the state parks in the US, spend a month each year in Europe, and travel in an RV around the country. Some of the more exotic destinations that they want to explore are Bora Bora, Fiji, and the Galapagos islands.

As people prepare for retirement, they need to put together a realistic assessment and estimate of annual travel costs. Travel expenses of $20K a year have a far different impact on your yearly cash flow than $7K a year—and cash flow is king in retirement! A $10K increase in spending can make a huge difference in whether or not you will outlive your funds during your lifetime. Thus, it is essential to be realistic about your goals, but also to try to save money on your travel pursuits. Here are some tips and considerations for cutting your travel costs.

First, determine how you will travel in retirement. 

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Will you go on a large overseas trip every three years with domestic travel in the off years?  How many trips will you go on each year and for how long?  Do you prefer several trips that span a long 4 day weekend or one large ten day trip?  Would you rather have a second home in retirement and primarily travel to and from both locations, forgoing any additional travel?  How much of your travel budget will be designated for visiting your children and grandchildren?  Can you stay with family or friends when you travel to save money?

Use the information above to budget what your anticipated annual costs will be in retirement. You can look at your current travel spending and adjust your budget up accordingly based on your plans. If you spend roughly $7,000 a year in travel and expect to double that in retirement your budget would be at least $14,000 a year.

Remember that as we age we may not be as able or willing to travel. You may want to decrease your budget in your 80s and possibly assume that no major travel will be necessary in your 90s. This enables you to “front load” your travel plans in the early years of retirement.

Regarding cutting costs, if you and your spouse or partner are both retired, you can travel at a moment’s notice and are generally more flexible regarding the times and dates. Considerable savings can be realized if you travel outside the peak time periods. Consider this when booking trips and flights.

Save Money on airfare

Use websites such as and to comparison shop airfares and book either well in advance to lock in low rates or last minute to take advantage of timely deals.  If you tend to fly a specific airline for most of your flights, consider signing up for an annual pass to their lounge. This will provide you with a comfortable place to wait if your flights are delayed as well as provide you with complimentary snacks and beverages. Use a credit card that provides mileage bonuses or pays for baggage fees.

Save on accommodations

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One site that features high end resort properties at deep discounts is You can sign up for their newsletter to receive weekly deals. Cruise lines also offer special deals to previous travelers if they are under-booked, so make sure to get on their email list.

Another popular way to save serious money on accommodations is to house or apartment swap with someone else. If you want to explore that option, look into also offers you lodging from private owners and has become popular in high rent cities such as New York and San Francisco.

Another interesting app called Hotel Tonight allows you go book unsold rooms last minute for that day at deeply discounted prices.

Of course never forget to use your AAA or AARP discount if you are a member, and research your hotels and other lodging at I find that the reviews are generally very accurate and can help you plan a trip that fits your tastes and your budget. You can even check out restaurant reviews to plan your meals.

Another fun planning tool is to create a board on Pinterest. You can add all of your desired destinations to one board or create a board for each trip.

Finally, don’t hesitate to use a travel agent or service that specializes in the destination you are interested in as they can often provide you with an insiders’ perspective and save your time and money.

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It takes us years to build up our financial resources for retirement.  We target a monetary goal for retirement and invest accordingly, but what about our vision of retirement?  How do we make sure that we are on the same page with our spouse with regard to a common vision of our lifestyle in retirement?

study by Fidelity investments indicated that approximately 4 out of 10 couples not yet retired are in disagreement about their lifestyle in retirement.  One out of three disagreed about the overall vision of retirement.  

Establishing Common Goals

Upon retiring, many individuals experience depression and a sense of loss.  This can be overwhelming.  Action-packed days are suddenly replaced with leisurely weeks with nothing on the schedule.  Since we often derive our self-worth through our workplace accomplishments, we may experience a loss of identity.  Engaging socially with work peers is suddenly replaced with extra time with our spouse.   Conflicting goals between the two of you can result in additional stress and possibly harm your relationship.  Establishing common goals is essential to a fulfilling relationship during the retirement years.

Vision of Retirement

It is important to discuss your vision of retirement as a couple years prior to your anticipated retirement date. Schedule time to discuss your ideas about retirement and make this an ongoing conversation.  Be as specific as possible.  It is okay to change this vision over time.  Life is dynamic. Our hobbies, interests, and goals change with time.  This conversation, will at least help set expectations for retirement, so that there are no surprises.  You can both input and affect the ultimate decisions.   If you disagree, that is okay. You can negotiate issues over time in order to come up with a suitable workable solution that is amenable to both of you.

If couples don’t have these types of conversations, they may be suddenly thrust into the “second act” of their lives with conflicting opinions – which will only harbor resentment.

One helpful way to get started is to map out what a typical day, week, and month looks like during retirement.  Think about the following:

  • Will you both retire at the same time or stagger your retirement dates?
  • How much time will you allot to individual pursuits versus spending time together?
  • Will the two of you travel alone or will you schedule joint trips with friends?
  • How much time will spend with friends or hobbies and other activities that will not involve your partner?
  • Will you need “alone” time or time that is spent in solitude without your partner?
  • How active will you be?  How much time will you devote to exercise, kids and grandkids, travel, friends, volunteer work?
  • Will you consolidate homes or keep the vacation home and commute between both?
  • Do you want to downsize your homes and free up cash for traveling and renting homes for a month at a time around the world?
  • Do you want to live close to kids?
  • How much support will you be providing to kids and grandkids?
  • How do you plan on taking care of your spouse should he or she need long term care? How will you fund this?

Fleshing this out will have the added benefit of assisting you in determining your expenses in retirement. You can also work with a financial planner to address these softer, qualitative issues regarding your retirement lifestyle.  She can assist you in prioritizing goals as a couple as well as determining how it might impact your budget in retirement. Having a third party help you map out your future in a quantitative and qualitative fashion can be a valuable exercise.

The Result

Americans tend to procrastinate saving for the future and often avoid talking about the future. Planning for your retirement lifestyle will not only help motivate you to work hard to achieve your retirement goals – a clearer vision makes it seem more real – it will also result in improved harmony with your loved one.

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A common mistake investors make is to continue to contribute to their Roth IRA even though they are no longer eligible. Most people will start a Roth IRA when there income is lower and mistakenly think that they can continue to make annual contributions; but unfortunately, the IRS limits Roth contributions at higher income levels. Luckily, there are ways to continue to build these accounts, regardless of income. Here is what you need to consider if you want to increase your investments to Roth accounts.

First off, what is a Roth?

A Roth account is a great way to save on your tax bill to Uncle Sam. Roth accounts are unique in that they are only taxed once. When you contribute to the account you are adding after-tax dollars, the money then grows tax-free, and it is not taxed when it is withdrawn. (Earnings may be taxed and or penalized if they are taken prior to 59 ½ or within 5 years of the first contribution to the account.)

Why should I invest in a Roth?

A Roth account is particularly valuable when contributions are made when your tax bracket is relatively low, and you have a long time for the money to grow. For example, let’s say you start to contribute to a Roth IRA at age 20 and contribute $5,000 a year until age 30. Even if you do not contribute to it at all after age 30, your balance, assuming a rate of return of 8%, at age 65 would be roughly $1,070,900. You only paid taxes on the $50,000 of contributions and will never pay taxes on over $1M worth of growth. That is the power of tax-free compounding.

Who can contribute?

Generally, you can contribute to a Roth IRA if you have taxable compensation, are less than 70 ½ years of age, and your Modified Adjusted Gross Income is less than:

  • $191,000 for married filing jointly
  • $129,000 for single, head of household, or married filing separately and you did not live with your spouse at any time during the year, and
  • $10,000 for married filing separately and you lived with your spouse at any time during the year.

The maximum contribution is the lessor of $5,500 ($6,500 if you are age 50 or older), or your taxable compensation.

If you have income over these amounts, you are disqualified from adding to your Roth account. (In addition, you will also be over the limit for a deductible traditional IRA.)

If my income disqualifies me from contributing to my Roth IRA, do I have any other options?

Yes. You have three options a Roth conversion, Roth 401K, or backdoor Roth conversion.

Roth Conversion

Even though you are unable to contribute to a Roth, there are no income limits to Roth conversions, so you may decide to convert your traditional IRAs to Roth IRAs and take advantage of your investment growing tax-free with no future required minimum distributions. A conversion would make sense if you expect your tax rate to be higher in the future and are willing to pay the taxes on the conversion with funds outside of the IRA account.

Roth 401K

Another way to build some tax-free investment growth via a Roth is to sign up for your Roth 401K if your workplace offers the option. Unlike the Roth IRA, the Roth 401K has no income limitations for eligibility. Since we prefer income that will be taxed at relatively low rates to fund a Roth, it may make sense to contribute after-tax payroll deductions to the Roth 401K up to point where your taxable income puts you in the top of the 25% income tax bracket, after which point, any additional contributions could be made to the traditional 401K, so as to keep you in the 25% marginal tax bracket. This not only helps diversify the taxability of your investments but also provides added flexibility for your withdraws in retirement.

Note that you will likely want to roll over the Roth 401K at retirement and or prior to age 70, as the Roth 401K does require that you take annual RMDs (Required Minimum Distributions) during your lifetime, whereas the Roth IRA does not.

Back door Roth conversion

Another way to add funds to your Roth IRA is through a “backdoor” Roth conversion. Here is how it works. You make a non-deductible contribution (after-tax dollars) to a traditional IRA and then, convert the IRA to a Roth IRA. If done correctly, this conversion will result in minimal taxation.

Ex: Tony and Tina make over $225K a year. They are in their 40s and want to build some tax-free funds into a Roth for their retirement. They each make a $5,500 contribution to a traditional IRA in January which has a zero balance, as they have already converted all of their traditional IRA accounts. Six months later, they convert the funds to their Roth account. The tax impact of the conversion will be based on the difference in the value of the account at conversion and the original $5,500 contribution.

When would you not want to do a backdoor conversion?

  • If you have substantial traditional IRA assets which have been deductible, the back door conversion becomes tougher as the pro rata rule comes into play. The pro rata rule aggregates all of the existing IRA balances and taxes the conversion based on the ratio of deductible funds to the total. For example, say that Lars has $94,500 in several traditional IRAs in which he contributed deductible pre-tax money. He makes a contribution of $5,500 to a non-deductible IRA this year and then converts the $5,500 account using the backdoor strategy. If he did not have any existing IRAs, the conversion would likely not be a huge taxable event (depending on the account value when he converted that year). However, since the total IRAs are now $100,000 and his conversion amount is $5,500, 94.5% of his IRAs are deductible, so $5,198 of his conversion would be taxable.
  • If you are going to need the funds within 5 years, this strategy will not be optimal, because a backdoor Roth is considered a conversion and not a contribution. Converted funds will incur a 10 percent penalty if withdrawn within five years unless you are age 59 ½ or older.
  • As always with a Roth, if you are in a higher tax bracket now then you expect to be in retirement, you may want to keep the money in the traditional IRA.
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With a crying baby or a two-year-old throwing a tantrum you may feel ready to retire on some days! You may also have a hard time conceptualizing the relaxing vision of your “Retirement.” Alas, the day will come when our little ones have grown up, and we will all be enjoying a new kind of independence—-one that will hopefully last a long time! The question is, “Will you be ready?”

While “ready” can come with many emotional factors such as the empty nest and exiting the social network of the workplace, as a financial planner, I will focus on the financial aspects of “ready.”

First, let me define retirement. You may immediately think of the outdated images of older people sitting in Adirondack chairs reading books and wistfully gazing at the sea. We’ve all seen this picture in any number of advertisements targeted to retirees. Ahhh….how peaceful.

In reality, though, as we consider our generation, we have had our children later, we are living longer, and we will likely want to lead very active lives as we continue to age. When I talk about retirement, I really just mean that time when you are going to rely upon — and draw upon —- your accrued savings whether that is from a 401K, your IRAs, or just money from a brokerage or savings account that you have invested.

To know if you are “ready,” you have work to do before you get to the money part. Do you know what you want from this time that society calls retirement? Have you painted this picture in your mind? I challenge you to ponder what you might want for your future. If you have read my column in the past, you know that I am a strong proponent of creating a vision —- that is, really setting aside time in a serene place to feel and envision what you want to create. I recommend that you and your spouse do this separately — and then compare your answers about what your retirement will look like. It makes for very lively date night conversation!!

Once you know from a lifestyle perspective what you want to do, feel, and “have,” the next part of being “ready” is to attach costs to this vision. The purpose of doing this exercise is ultimately to answer the question, “How much money will I need for retirement?”

This question alone keeps many financial planners in business since the art of calculating this need is not easy. And, the resulting numbers are astronomical (think Millions). The list of factors and considerations that impact the amount is long. A few questions you will need to be able to answer before any planner can help you are:

What age to you anticipate you want to retire? Do you have a goal of retiring at age 50 or do expect to keep working through until your mid-sixties or beyond? Again, this is the age where you would start to rely on your assets accumulated.

How much income do you want? This is hard to get your head around, so start with your income today. Are you comfortable? I will guess that you will want at least as much as you make now, if not more. While you may reduce your expenses in retirement (home costs may be eliminated, you may relocate to a less expensive area, you no longer have to save for your children), you will have much higher health insurance costs, and you will probably want to travel or do other exciting activities that require cash.

Will you have additional income? What is your confidence level in the existence of a social security system? Do you envision yourself working part-time or starting a business? Do you have cash flow from other investments such as real estate? Are you fortunate enough to have a pension? Are you confident it will still be available when you retire?

As you can see, getting “ready” to retire is a process you can start right now. While your idea of retirement will probably change many times as you have more birthdays, the practice of creating the vision, assigning value and ensuring you are contributing enough money toward your goal is one that will serve you well in any area of your financial plan. Make sure you get ready now.

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Many studies show that Americans are woefully behind on their savings for retirement.  In fact, according to the 2018 EBRI annual survey, roughly 60% of all workers surveyed have less than $25,000 saved for retirement. But things might not be as bad as they seem. 

A recent study by risk management firm Towers Watson attempts to debunk the magnitude of the retirement crisis in America.   The authors suggest that most retirees will be better off than predicted, since they don’t require as high a replacement ratio of preretirement income, as what is commonly recommended. They argue that the often quoted rule of thumb that retirees will need to fund 85% of pre-retirement income annually, may be too high.  In reality, retirement cash flow needs change over time.  As retirees age they move through the “go-go” years, the “slow-go” years, and then the “no-go” years.  We spend far less than we anticipate at the end of our lifecycle, due to diminished mobility and health.

In addition, the savings cycle is variable.  People will forgo savings early in their career, but ramp savings up substantially in the latter stage of their working years to make up for lost time.

I was recently asked to comment on the Towers Watson study by reporter Mandi Woodruff for an article in Yahoo Finance.  My instant reaction to this story was that individual investors have to take these rule-of-thumb numbers with a grain of salt.  The data on annual retirement savings is flawed (as the Towers Watson report points out).  For example, it does not include the value of pensions, real estate, or closely held businesses.  It also does not include the value of transfer payments and other governmental programs, so the resulting data set is incomplete. We cannot draw conclusions based solely on this data.

Gauging retirement readiness should be done on an individual basis.  More importantly, as a financial planner who specializes in retirement planning, I know that simple tools or rules of thumb are crude at best.  They are like applying blunt machetes in a surgical procedure.  They are not going to result in the precision that is needed for each individual’s situation.

The best way to approach retirement planning is to work from the bottom up and determine the clients’ specific personal cash needs and requirements over the balance of their lives.  Quick on line calculators and rules such as multiple of final income or spending as a ratio of income can’t possibly apply to everyone.   These repeatedly quoted prescriptions for success insinuate that the planning process is static and deterministic, when in fact, it is a dynamic process based on many fluid assumptions and variables.  The ever changing-nature of a client’s personal life, tax laws, financial markets, etc. require that the plan is periodically updated.

Instead of a rules based approach, each client should be evaluated in a highly customized and holistic way.  That is the essence of true financial planning.  It’s not just about investments anymore. It is about how a person will fulfill their dreams and what money can do for them during their lifetime.  It is about career planning, lifestyle planning, legacy planning, tax planning, and cash flow planning.  More importantly, it also encompasses the “x factor” of a client’s behavior towards and attitudes about money in his or her life.

While many in the field of finance are touting the trend and threat of robo-advisors, holistic retirement planning lends itself far more to the human touch. Since many Baby Boomers are entering the distribution phase of their financial life, customized financial planning is becoming more important than ever.

Proper financial planning starts with an in-depth conversation with a client to better understand what makes him or her tick.  It requires listening, attentiveness, and is done best when there is an ongoing relationship with that client.  It is not a one and done event.

A detailed retirement plan projection often requires the client answering the following questions:

  • What are you needs, wants, and bucket list items in retirement?
  • When would you like to retire and how will you phase into the new lifestyle? Will you still want to engage in part time work once you quit your job?
  • How will you spend your free time?  What might a typical day look like?
  • How often will you be travelling and where will you go?
  • How often will you be connecting with friends and family?
  • Do you want to leave money to heirs or a favorite charity? How will gifts to kids and your charities change upon retirement?
  • How healthy are you and do you have a history of longevity in your family?
  • How much are you willing to save in order to achieve an early retirement?  And conversely, how much are you willing to cut spending before and after retirement, in order to retire early?
  • What are your plans for your home? Will you relocate?  Will you keep your second home?  Will you need any major improvements done? Will you downsize?
  • How often will you buy cars and other vehicles?  How much will you spend on each vehicle?

These questions not only help to determine annual and overall cash flow needs, they also can help assess behavior around money as well as risk tolerance.

I often use the metaphor of a jigsaw puzzle.  Each client walks into my office and figuratively drops the pieces of their life puzzle on my table.  Each puzzle picture is uniquely different.  It is up to the client and me to put these pieces together to develop a vibrant picture of their future retirement years.

While I think these rules of thumb to assess retirement readiness are not adequate, there are some principles that are highly correlative to retirement readiness.

I suggest that if clients are serious about wealth-building they should save at least 15% of their salary throughout your career and that should limit wealth in personal real estate to no more than 25% of your total assets.

These principles encourage strong savings mentality, keep debt to a minimum, and reduce exposure to a low return asset class (personal real estate).  Living below one’s means is a successful way to build wealth and a good lifelong habit.  A strong savings rate helps protect against longevity and poor investment returns, as well as having to heavily tilt retirement savings to the back end of a career–which makes the investor more susceptible to market corrections in the years just prior to retirement.

Finally, the personalized, holistic approach to retirement planning addresses the significant challenges that savers have with regard to retirement planning.  Having a planner that fully understands these risks and properly accounts for them will help the client feel more confident about his or her prospects for retirement.  For example, if the planner assumes conservative investment return assumptions, accounts for higher healthcare cost inflation, adjusts Social Security benefits to account for some reform, assumes a relatively long life span, and the clients still have a high chance of success, they will feel more confident about their upcoming retirement.  The peace of mind that is achieved through the financial planning process is something that a rule of thumb or quick on line calculator won’t necessarily provide.

While the savings statistics for Americans suggest significant shortfalls in retirement, working with a planner to determine how to maximize financial opportunities like Social Security and pension maximization, tax reduction strategies, and maximization of their human capital, is essential to preparing for a successful retirement.  Ideally, the process is started as early as possible to improve a retiree’s chance of success and ensure that their unique vision of  retirement is realized.

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If you are like most workers in South Carolina, you probably have procrastinated saving for retirement. Now that you have put your retirement planning on the front burner, you realize that you’ll have to aggressively ramp up your savings rate. You wonder if you can make up for lost time by being more aggressive with your investments. Unfortunately, that may not help you as much as you thought. Retirement planning is all about math, and to help illustrate the math equation, I like to use the metaphor of a garden to explain the lifecycle of retirement savings and distributions. Here are four basic questions that will help you assess your ability to retire. Reflecting on each of these questions will enable you to better understand where you need assistance and also what you are doing well.

Questions One: The Retirement Garden- How Big is Your Plot?

The amount of income you make during your career is your “human capital.” You potential capital is greatest when you are just entering the work force. Whether you work for decades with a low to modest income or you retire early and get a golden parachute worth multiple millions, think of that total income (years worked x income per year) as the land you have available to plant the seeds of your retirement savings. One way to maximize your land is to retire later or invest in your career development. It is also imperative that you protect your “land” with proper insurance such as life and disability.

Questions Two: Planting Seeds for Future Growth- What is Your Savings Rate?

It is how you cultivate your land that counts. In order to have an abundant garden, you need to plant a lot of seeds and seedlings. For example, you may have a high income for many years, but if you are not systematically saving a portion of your income (at least 10%, if not 15%) your land will not bear enough fruit in the future. Your land will be barren. Even investors with modest plots (income) who have diligently sowed the seeds of savings over the years may have more plentiful income in retirement than their profligate neighbors. This is why most financial planners recommend starting early and putting retirement savings on autopilot. To sow more seeds for retirement savings, increase your savings rate into your 401K or other retirement plan and cut back on spending to save additional amounts outside your retirement plan, if you are already at the maximum limit.

Question Three: Weeding, Feeding, and Pruning for Optimal Growth- Do You Have a Sound Investment Plan?

A well thought out investment strategy helps you maximize the growth of your “retirement garden,” but most of the heavy lifting needs to be done by acquiring land (income) as well as planting seeds and seedlings (consistent and/or significant savings). Many people think of their investments like fertilizer, and rationalize that if they increase the aggressiveness of their portfolio, they can make up for lost time. But you can’t rely solely on fertilizer for the output of your garden. Just like fertilizer, too much of a good thing, (say holding a concentrated position of one stock, maintaining too high an exposure to equities, or skewing your portfolio to highly volatile sectors like emerging markets) could undermine your progress, especially if you have limited time left to build up your retirement silo.

Proper asset allocation among low-cost, diversified asset classes such as domestic and international stocks, real estate, commodities, and high quality bonds can provide adequate growth while helping to mitigate potential losses. Just like we plant various crops to hedge our bets, we invest in various asset classes to create an all-weather portfolio. Planting a variety of crops will protect us from a variety of risks and ensure some of our harvest survives no matter what Mother Nature (or the markets) throw at us. Ideally, some investments will perform well when others underperform, and vice versa. The overall performance will be unpredictable and change as often as the weather. Consistently pruning your portfolio through periodic re-balancing of these asset classes, possibly as infrequently as once a year, will help maximize the long run return or yield of your garden.

Questions Four: Providing For Your Future Harvest- Should You Consult an Experienced Gardener?

Retirement planning and investment management need not be (complex or expensive). It is all about how investors behave within the retirement planning cycle. In order to help motivate and guide your master plan for retirement, you may want to consider seeking out the expertise of a fee-only CERTIFIED FINANCIAL PLANNER Professional. He or she will help you determine how much you need to save based on your unique goals and design a low cost investment portfolio to help build and maintain wealth as well as minimize drawdown during your distribution phase. Probably the most important benefit of a professional advisor is that he or she will keep your invested through thick and thin instead of bailing when times get tough. Some investors try to time the market by buying into the market during upswings and selling during declines. This could reduce the overall yield of their crop, just like harvesting a crop before its peak might. Instead, you will need to plant often and consistently (through dollar cost averaging).

I hope that the retirement garden serves as an inspiration for you to focus on maximizing the abundance of your retirement garden. By planting, harvesting, and consuming the fruits of your labor in a prudent manner, you will reap the rewards in the form of a satisfying retirement lifestyle.

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Over Memorial Day weekend my company was an exhibitor at the San Francisco Birth & Baby Fair. As usual, many expectant and new parents wondered by my table, and when I asked them about their financial plan, they hesitated, “Well, we’re going to get a 529 Plan….right??”

Not so fast, I caution you. College funding is often detrimentally the primary focus of new parents’ financial plans. With the birth of a child, parents suddenly feel a need to start saving for college. Before their child can eat solids — let alone order out a late night pizza —parents feel the stress of the tuition bill. This is not surprising. The cost of college is increasing at a rate that is almost double inflation, and it does not appear to be changing any time soon. If you have had a baby recently, you are looking at shelling out approximately $250,000-$450,000 (depending on cost and investment assumptions) if you decide you want to pay for your sweet baby’s college. This means you have to save $500-$1000 a month for 18 years (more or less, again depending on assumptions) to fund a college education fully. Yikes!

You may think it is almost blasphemous to say that parents should not save for college yet. I shock many parents when I don’t jump in and quickly answer their question, “Should we get a 529 Plan?” They may expect that I start listing the states’ plans which I would select, but I truly do not know how to answer that question. It’s like my son’s favorite Animal Rescuer. Once his trusty camera locates the crying wolf pup, she has to “zoom out” to see more of the picture. That is what I have to do before I can answer the inevitable 529 question.

What is your Big Picture? How is your retirement savings? Are you on target to have enough saved for your later years (probably not—that’ll be a different article)? Have you switched from two incomes to one? Do you plan to move into a more expensive home soon? What are your values? What are your priorities? And the list goes on …

Let’s say you’ve met with your financial planner and/or you’ve had a focused exploration of all areas of your financial situation in another manner. You’ve decided you do have college savings as a top priority, and you are ready to contribute some cash. Should you have a 529 Plan?

The answer is a very clear “maybe.”

While there are many vehicles for college savings, I will focus on the common dilemma I address with most parents, “Should we fund a 529 Plan or just put our savings in a tax-deductible account (a regular brokerage account)?”

If you are not familiar, a 529 Plan is a college savings account into which you make after-tax contributions and invest in funds as offered by your selected state’s plan. As long as you use the funds in the account for qualified education expenses (tuition, room, board, etc.) for the named beneficiary, you will not have to pay tax on the investment gains. This tax advantage makes these accounts very exciting!

However, 529 Plans may have limited investment choices, narrowing your options and potentially limiting your ability for maximum gain or adequate diversity. Finally, non-qualified distributions will be taxed at ordinary income tax rates and assessed a 10% penalty, so if you do not use the money for education and you do not transfer it to someone else, you pay the price.

You do not have to take advantage of any of the college savings vehicles to pay for college—-or use them exclusively. Many people choose to invest in a regular brokerage account, paying capital gains (15% in many cases) on the sale of assets when it is time to pay for college. This route opens up the potential use of the funds (rather than limiting it to education and the rules of the education accounts) and gives ultimate flexibility in investment choices.

How do you decide which vehicle to choose? Take a look at your situation and your habits:

1. Check in on your total financial picture, especially your retirement goals. Do you know how much money you will need when you retire (it’s a higher number than you think!)? Are you on track? Most couples I meet with get my “oxygen mask” speech, “Secure your mask before putting on your child’s…..” In other words, save first for your retirement, then focus on education, especially if dollars are limited. You can borrow for college, but not for your retirement. And who would have to step in to care for you if you run out of money? Your children.

As you look at where to put your investment dollars, remember that IRAs have special rules for using funds for education expenses, and taxable investment accounts can be used for retirement or education. The tax argument for using a 529 may be a moot point when you finally want to use that money —- it depends on the investments available, the rates of return, fees charged, capital gains tax rates, and cost of borrowing if you need other funds to name a few factors. If you want to leave your options open for use of your savings, then a 529 Plan probably does not work best for you.

2. Do you have parents/grandparents who want to contribute money for your son’s or daughter’s education? Do they care what kind of account the money goes to? Often times, grandparents like to be assured that their money will go to pay for college and not your next vacation. This is where a 529 Plan comes in handy. 529 Plans give family members the comfort of knowing their contributions are earmarked for education. Plus, you may encourage ongoing giving by having an account in place into which anyone can contribute.

3. What are your savings habits? Would you be too tempted by an accessible brokerage account? Will having a specific education account for which you’d be penalized if you withdraw money for other uses be the most assured way you will save for children’s college? Do you just like the idea of having money set aside in an account specifically labeled for college? If yes, then a 529 Plan could work well for you since it would separate these savings from other funds.

When it comes to college savings, you will probably want to utilize a few different vehicles. Which one(s) are best for your situation — and whether or not you should even save for college right now— should only be answered after looking at your total financial picture. Before you jump right into making a large contribution to a 529 Plan, make sure you “zoom out” to see more of the picture first.

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