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Retirement

Patience Pays Off

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Good things come to those who wait. This is true in multiple aspects of life. However, in today's world where information, entertainment, and consumerism are delivered at incredible speeds, waiting is often seen as a negative. But not everything can be delivered overnight – long term investment success being one of them. Choosing to save a percentage of your income and making daily choices to live on less than you make is the most common way for everyday Americans to retire with dignity.

Long-term investors go through three phases of finance: accumulation, preservation, and distribution. Preservation and distribution are both important, but they are optimized with proper planning and decision-making during the accumulation phase. The accumulation phase requires patience and fortitude because progress is very slow in the short term, but you are planting seeds that will make a significant impact on your investments and the taxes you will be subject to pay in retirement.

The most important things to focus on in accumulation are systematically saving the right percentage of your income and building tax diversification amongst your investments.

During accumulation, the amount you are contributing to your investments on an annual basis will most likely be more impactful than the return your investments create. Choose investments that match your time horizon and risk tolerance, but do not get discouraged when the investments do not generate a high return every year – just keep making contributions. Your average return becomes most important in the preservation phase – this is when your investment return becomes more impactful than your annual contribution.

Accumulation is also the best time to start building tax diversification within your investments. Most long-term investors have great savings habits and are motivated to see their savings grow over time, but they rarely think about the tax consequences of taking money out during the distribution phase. And if you have not done the planning prior to retirement, you will be forced into a tax rate that you have little to no control over.

The three main types of investments accounts include tax-deferred, Roth, and taxable. Tax-deferred contributions go into the account tax free and grow tax free, but distributions are taxed at ordinary income rates and must come out after age 59 ½ to avoid early withdrawal penalties. Roth contributions have already been taxed and grow tax free, and all distributions after age 59 ½ are tax and penalty free. Taxable accounts are taxed each year based off the dividends, interest, and realized capital gains that are generated, but you are not taxed on the distribution amount, and you can take a distribution at any age without a penalty. Pros and cons to the tax treatment are prevalent for each type of account – to have the most control over your tax rate in retirement, investors should spread their savings among each type of account.

The exponential variable in the compound interest formula is time. The earlier you start saving, the more impactful the end result will be. Use the time you have to your advantage.

Financial Enhancement Group is an SEC Registered Investment Advisor. Securities offered through World Equity Group, Inc. Member FINRA/SIPC. Advisory services can be provided by Financial Enhancement Group (FEG) or World Equity Group. FEG and World Equity Group are separately owned and operated.

Why Having a Financial Vision Is Critical to Your Success

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I hate running on treadmills. Not that I enjoy running that much anyway, but when I run, I would much rather feel like I am going somewhere. I want to see the finish line in front of me. We often don’t live our lives with the same philosophy. We are easily stuck in everyday tasks without having a vision of the end goal in mind. And that translates to our finances.

Why is a financial vision important? Money is an incredibly powerful and versatile tool. Yet we only have a finite amount of that tool. Think about all the things you can do with $1 million. My guess is you can conjure a multitude of possibilities to utilize $1 million, but how many could you do at once?

A financial vision is critical to a successful financial plan because it prioritizes the steps on your financial journey. Perhaps your vision is to retire to Florida. This vision gets us off the treadmill of simply accumulating wealth and focusing primarily on investment returns. Now we can focus on steps to achieve your financial vision, such as setting a target date for your move South and saving to purchase a house.

You may not think of yourself as a visionary person. However, your financial vision does not have to be complicated or elaborate. It can be as simple as, “I don’t want to be a greeter at Walmart when I’m old!” Ask yourself some of these questions to spur your creativity:

  • How does my financial situation fit into my life’s purpose?
  • If money were of no concern, how would I raise my overall level of satisfaction with life?
  • How can my finances be used to improve my physical or mental health?
  • What do I want my life to look like 10 years from now?

 

That last question brings up my last point: dream in high-definition pictures. Be specific about what you want to accomplish. Do you want to retire to Florida? What does your house in the sunshine state look like? What is your daily routine? How tan are you? Create an actual mental (or even physical) image of the vision you want to achieve.

It is easy to be stuck in the middle of day-to-day operations. And honestly, your financial plan can be successful without a vision, just like you can lose weight by running on a treadmill. But a vision brings more life and color to your financial plan, sharpening it to a razor’s edge. Envision your ideal retirement and run towards the finish line.

Financial Enhancement Group is an SEC Registered Investment Advisor. Securities offered through World Equity Group, Inc. Member FINRA/SIPC. Advisory services can be provided by Financial Enhancement Group (FEG) or World Equity Group. FEG and World Equity Group are separately owned and operated.

4 Things to Mitigate Financial Risk

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People take risks every day. Some of them are more obvious like driving a car, but we forget the less obvious such as falling in the shower. There are four things you can do to mitigate your exposure to risk, including financial risk, (although that won’t help with the sore backside).

You can abstain from risky things.  Though that may not sound ideal or even feasible, it is an option. Some families won’t drive when it is dark outside. My wife and I used to enjoy riding our Harley Davidson. We still miss it, but drivers don't pay attention anymore (texting and driving, hopefully, the new law will help a little), that the danger is not worth buying a new Harley Davidson.

You can reduce risk by putting down a bathmat in the shower or putting on a helmet when you ride your motorcycle. Reducing risk is really the best option for many situations.

You can accept the risk and head out on the motorcycle or dance wildly in the bathtub. Sadly, every time we drive, we recognize that distracted drivers surround us.

The final thing you can do to address financial risk is to transfer that risk to another party.  Usually, this occurs with insurance products. You have health insurance for the fall, liability insurance for the accident, and even life insurance for the extreme situation.

A common fear among American retirees is the expense of living in a nursing facility later in their life. We have all heard the horror stories of losing assets and being forced to leave homes. My personal experience is this is overstated, but it is a risk, nonetheless.

Health insurance companies developed long term care policies that were written in the past. That industry cannot typically adjust premiums individually, but they can do it by class.  If for instance, the claims-paying experience was increased, the companies can and did raise the premiums in many cases. This made the payments unaffordable for some senior citizens years down the road.

You can’t be mad at the insurers. This is no different than raising premiums on your house or car as they become more expensive to replace. The policies, in my opinion, had challenges from the point of inception. That is no way an endorsement by me that you should cancel a contract if you have already purchased it but do be aware of the situation.

Recently, the life insurance industry (which cannot raise premiums) has created a Hybrid policy that covers long-term care and your life insurance.

If you have plenty of resources for retirement, are concerned with long term care expenses, and have beneficiaries that matter to your legacy plan; this is a possible solution. According to the Wall Street Journal, there were 66,000 traditional policies purchased last year compared to 240,000 for the hybrid.

There are many products that we have investigated and even recommend the purchase for families that fall in the right financial scenario. We reduce financial regrets at the Financial Enhancement Group, visit yourlifeafterwork.com for more information.

Disclaimer: Joseph Clark is a Certified Financial Planner™ and the Managing Partner of Financial Enhancement Group, LLC an SEC Registered Investment Advisor. He is the host of “Consider This” found on WIBC Saturday mornings from 6-7a.m. as well as three other Indiana-based radio stations. Joe has served as an Adjunct Assistant Professor at Purdue University where he taught the capstone course for a degree in Financial Counseling and Planning.

Financial Enhancement Group is an SEC Registered Investment Advisor.  Securities offered through World Equity Group, Inc., Member FINRA/SIPC, and a Registered Investment Advisor.  Investment Advisory services offered through Financial Enhancement Group (FEG) or World Equity Group.  FEG is not owned or controlled by World Equity Group.

Joseph Clark and World Equity Group, Inc. do not provide tax or legal advice. For tax advice consult with a qualified tax professional. For legal advice consult with an attorney.

Analyzing Earnings During This Recession

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There is little doubt that America finds itself in a recession at the moment. Jobs are lost, and some businesses will never recover. What about the earnings of the companies that do survive? Are the earnings deferred, delayed, or vanished forever? It depends on the company. That's why investing in individual companies at this point may be safer than investing in an index. That doesn't mean take up stock trading on your own if you have no experience.

Some earnings will hopefully come to fruition, but they may see deferment to later quarters. Perhaps your company had already completed work but has not been able to deliver the final product. Hopefully, the company still wants, needs, and can afford to pay for the delivery. If so, the earnings or profits are just coming later in this year or next year. Because of this delay, we watch out for canceled contracts within manufacturing. Wabash National and Boeing are examples of companies where these contracts would be critical decision-making data.

Some companies will have earnings delayed. As your house wears out, some things require attention. For example, my water heater recently sprung a leak. Restricted manufacturing may delay installation. The economy's shutdown is of no matter to the water heater. They will break on their own time, but the earnings or profits for the companies may get delayed until people can get the replacements.

The biggest concern is vanishing earnings. Simply because we didn't go out to eat for a month, doesn't mean I can go out to eat for an entire month in the future. Those earnings have vanished—the same for trips to Disney, concerts, events, and even most of the sporting events. There are many companies with a missing quarter – possibly more – that will not just reappear.

Oil has been the discussion this week for most professional money managers. Onlookers see the futures price down into the negative, and they scratch their heads. It's all about timing. Oil will not stay at zero, but you have to have a place to put the oil. Nobody wants it today, and even the most optimistic and opportunistic people have no place to put the fuel they buy.

The wells are expensive to start and stop. The pipelines, refineries, and retail stores are in a pickle.  There are oil barges that have to pick up their next load contractually. The question comes down to what happens later in the year, not the price of the futures contract today or even next month.

The oil industry has parts of the complex that will have delayed earnings; some deferred, and some vanished. As you think about your retirement, ask yourself: Which companies have the best chance of survival today and the ability to thrive in the future? Resist the challenge of buying items just because they appear very cheap today.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see our Disclosure page for the full disclaimer.

What is a Buffered ETF?

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A successful retirement requires you to get many components correct. Sadly, failing at retirement can occur by missing or failing in just one of the many areas required for success. How issues relate to one another can be confusing and complex. Changing market conditions and technology innovations can all be disruptive to existing plans.

There are things in your portfolio that we refer to as “tools.” Tools can be an actual investment or the strategy that convinced you to buy the stock, bond or annuity. What is your process for identifying when changes need to occur in your toolbox?

Exchange-traded Funds (ETF’s) came to existence in the late 1980s. They are cheaper, more transparent, more tax-efficient and easier to trade than mutual funds. There are still investors unfamiliar with ETF’s (exchange-traded funds) more than 30 years later.

The tax code had a major overhaul in 2017 that took effect in 2018. We recently received a call from a person trying to deduct their college-age child on their tax return as a dependent to get a tax exemption. Exemptions are no longer available after the tax change two years ago.

The point is that it takes the average family years to notice when things have changed that will impact their financial future. This article hopes to keep you abreast of some of those changes, but ultimately to suggest you find a resource that helps you along the way.

Relatively new to the scene are investments called buffered ETF’s. They aren’t right for everyone and you should never put all of your money in one type of “tool.” Make sure you are working with a well versed and experienced financial advisor to understand the complexities of these and other investments.

Buffered ETF’s have the ability to help you buffer or minimize the downside market risk of an index like the S&P500.  Think of them as an insurance policy with a deductible and a maximum amount of coverage.

Depending on the situation, you may be worried about a market downturn and yet still want to be in the market. Buffered ETF’s are one way to consider doing that.

Just as insurance requires you to pay a premium, buffered ETF’s have a cost to them.  The cost of protection to the downside is limiting the growth to the upside.  That is known as a “cap.”

There are similar terms used in equity index annuities but these are different instruments. The liquidity feature and tax nature of the buffered ETF’s make them worthy of understanding.

As fiduciaries, we make the determination if investments are right for the families we serve. You will want to look to a professional to help make that decision for you. All investments have risk and are subject to volatility and these are no different. Don’t miss a valuable tool, helping others work toward retirement, for 30 years before you recognize the value they may bring to your nest-egg.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see our Disclosure page for the full disclaimer.

Three Reasons To Consider Making That IRA Contribution Now For 2019

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There aren’t many actions taken in 2020 that will impact your 2019 tax returns. IRA contributions are an exception to that rule. There are three reasons to consider making that contribution now for 2019, and the third reason may surprise you.

IRA contributions require that you or your spouse have earned income for the year of the contribution. In 2019 you needed to be under 70.5, but for 2020 and beyond, the age requirement is removed. For a tax-deductible IRA, you still must qualify based on age and income. The rules are strict regarding excess income and even more so if you or your spouse have access to company retirement plans. Assuming you qualify, you can contribute $6,000 if you are under age 50 and $7,000 if you are over age 50.

Retirement plans from your employer typically require that money is withheld out of your paycheck in order to contribute. IRA contributions are not the same. You can have money in an existing non-IRA account and simply transfer the money to an IRA titled account.

The IRA contribution can be either tax deductible and thus grow tax-deferred or it can be a Roth contribution (again, there are rules and you do have to qualify) where the investment grows tax-free. Both contributions are legal up until April 15th of the year following the tax period.

The third reason to contribute to your IRA – either traditional which is tax-deferred meaning you pay the taxes later or the Roth IRA – is that the contribution is money you aren’t used to living on. The secret to retirement is not replacing a certain percentage of your income but rather providing all of the income necessary to maintain your standard of living.

Every dollar you use to save today serves two purposes: there will be more money for your future needs and the contribution is a dollar you aren’t used to living on today. That by definition reduces your standard of living today and thus requires fewer assets needed at retirement time. Happy retirements are truly based on replacing the way you lived before leaving the workforce and saving today helps with that issue.

Paying down debt also helps in the same way. A dollar you apply toward a debt like a mortgage or a student debt reduces the debt due in the future, saves the interest expense and the amount of money you are accustomed to using for eating out, travel or cable TV.

The opportunity to add to your retirement accounts is limited in both amounts and in time. If you have the financial resources, you want to make the contribution every year. The earlier you can make the contribution in the year the longer the money has to grow, but it will not change the tax treatment. You must declare if you want a tax-deferred IRA that will be taxed later or a Roth IRA where the money and the growth will never be taxed again.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see our Disclosure page for the full disclaimer.

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