Tag Archives: Planning for Retirement

Your 401K Choices Are Important

By Larry Luxenberg  

Many times over the years I’ve looked at outside 401k plans for clients and others who have requested this. Often, they know these choices are important but they may not have a clue about how to make the choices or who to turn to.

In bigger companies, human resources professional offer advice about how to sign up or withdraw money but may not know much about how to pick investments either. The decision point often is when an employee is new to a company, has to deal with lots of paperwork and is nervous about adjusting to so many new things. Picking a 401k investment portfolio is way down the priority list.

That’s too bad because the choices of how much to invest and where to put the money are important, especially if you are young and stay on the job for a long time. I’ve also seen people who have held many jobs and accumulated a string of retirement plans and have no way or interest in developing a coherent investment strategy.

Many plans now are electronic only and obtaining relevant information from these websites or digital brochures can be frustrating. As a consequence, many people settle for making what they believe are common sense choices. Many plans offer target date funds and what could be simpler than determining your retirement date and signing up for that fund? Or they pick something else that sounds good: what could be wrong about a “balanced” fund. Failing that, how about picking 4 or 5 choices. That way, at least some of them may be good.

People who are actually using these accounts to invest and save for retirement, have a genuine long-term outlook (many decades) and aren’t using these accounts as expensive piggy banks (borrowing the max whenever possible) could be denying themselves a powerful investment tool.

For someone who is in their 20s or 30s and may not touch their retirement accounts for 30 or 40 years, their most precious investment resource is time. And by making a choice that is not thoughtful or downright wrong, they squander this valuable resource.

The daily ups and downs of the stock market matter little if one is putting away money for the distant future. If one properly constructs a diversified portfolio and leaves it in place for decades, the returns can be powerful.

In investing, as in much of life, there are no guarantees, Instead, we have to rely on the odds and weigh the potential risks and probable returns. In some cases, making reasonable changes to the investment mix and using assumptions based on long-term historical returns, returns of double or more over the decades are possible.

Before making the choices, we have to look at someone’s complete financial life, their hopes and dreams, the stability of their career and their tolerance for risk. Doing all of these things with the help of an experienced professional can make a big difference in someone’s financial life. It’s worth spending a little time on the choices rather than rushing through the burdensome paperwork.

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It All Depends

By Larry Luxenberg  

Often when someone asks me a financial question, the answer is “it all depends.” It’s  not a cop out. The considerations frequently are more complicated than the questioner realizes and individual circumstances or unknowable future developments may determine the answer. Sometimes, the right answer is just a matter of personal preference.

Most Americans don’t save enough for retirement. But the more diligent ones read this in financial publications and overdo it. I’ve told some young people in their 20s and 30s that they’ve saved enough for retirement and need to direct their savings toward other goals such as buying a house, which involve different savings vehicles.

At the other end of the spectrum, some adults read that it’s best to defer collecting Social Security retirement benefits until age 70, when deferred credits stop (you can still improve your earnings record after that date if you keep working and have higher inflation adjusted earnings years to replace lower ones earlier in your career.). The advice to wait till age 70 is fine for many people although comparatively few follow it. However, this advice may overlook individual circumstances.

One glaring example is that many potential Social Security recipients are married or were married and this may affect retirement decisions. Married people have signed a contract that has economic implications and when it comes to Social Security, these considerations (such as spousal benefits and taxes) have to be analyzed as a unit even though this is to complicated to explain in a short magazine article. It’s easier to say, “wait till 70.”

Thinking about Social Security as an individual rather than a couple may cost people tens of thousands of dollars. That’s why this answer “depends” on individual circumstances.

Often people ask me how much money they need to retire as if there is a single magic number. Yet no one would think of asking me how much money they need to live their life before retirement. It’s a far different answer if the person is married with four children in a high cost urban area like San Francisco or New York or is single and living in rural North Dakota. Everyone’s retirement is different, too.

A final example concerns investment vehicles. People sometimes ask where are you investing now? The implication is that there is some all purpose investment vehicle that is “hot” and will work for everyone because it is going to appreciate substantially in a short time. However, there is no perfect investment.

Some investments are appropriate for certain circumstances and other investments are better suited for others. For example, a private investment vehicle might require you to lock up the investment for ten years or longer. The expectation is that this investment is risky but holds the possibility of extremely high returns if it works out well and if it doesn’t, the chance that it becomes totally worthless. This may be enticing to a well off investor as part of a diversified portfolio who can handle the risk but may not work for someone who has a small sum to invest and needs part of it for next month’s rent.

When I ask people if they are “average,” no one says, “yes, I’m average.” Everyone feels unique and wants treated that way. So why would they be satisfied with an answer that relies on a “rule of thumb” and treats them as average when each one is special and wonderful. That’s why “it all depends” is a real answer and not a cop out. You wouldn’t want it any other way, would you?

 

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Babe Ruth and Financial Planning

By Larry Luxenberg  

Babe Ruth was born into a poor family in Baltimore and died young as a wealthy man and the hero of the golden age of sports. Although he didn’t look like a heroic athletic and roamed well outside of fair territory, he broke ground in athletic and business achievement. He had good coaching and support in both arenas and knew which rules to break (most) and when to listen to his coaches and he had some of the best.

Ruth’s life is swathed in myths and we will never know the full story. But what facts we know and the many myths are instructive. Ruth was a great athlete and dramatically changed the game of baseball – then the national pastime – forever. And despite his great hunger and appetites, he achieved success on and off the field, making up in part for the deprivations of his youth.

At age 7 he was a wild youth and his parents shipped him to reform school at St. Mary’s Industrial School in Baltimore. He remained there till the end of his teenage years and the beginning of his life as a professional baseball player. Life at the school was regimented and austere; he only got meat once a week and had to learn a trade and work. He became a proficient shirt-maker and carpenter. At the school he also became a great baseball player under the tutelage of Brother Matthias.

At 19 he signed a contract with the Baltimore Orioles, then a minor league team. Soon they sent him off to the Boston Red Sox in 1914. It was not love at first sight and he spent part of that truncated season in the minor leagues, helping the Providence Grays win a minor league pennant.

Back in the majors the next season he began to establish himself as the best left-handed pitcher in the American League and a strong hitter. Short of cash, the Red Sox sold Ruth to the New York Yankees in 1920 after three World Series Championships. At that time, the Red Sox had won five of the 16 World Series and the Yankees had yet to win their first American League pennant. He went on to lead the Yankees to four World Series Championships and create an aura of success there.

Ruth was already the best home run hitter in baseball and 1920 ended the “dead ball” era. The livelier ball and some other changes opened up the game and with Ruth in the daily lineup, he led the charge,

In 1923 the Yankees opened up Yankee Stadium, “the House that Ruth built.” He was the biggest draw in the major leagues at home and on the road. He soon broke records for player salary as well as for batting and pitching. Prior to Ruth, Ty Cobb’s salary of $25,000 was the highest in baseball history. This at a time when $10 or $20 a week was respectable if not great pay. At his peak, in 1930, Ruth earned $80,000 a year, more than President Hoover. Asked about that, Ruth said, he’d had a better year than Hoover and that was demonstrably true. For 14 straight years, Ruth was the highest paid player in baseball with no one close, another record that has never been equaled or approached.

While Ruth made a lot of money, in the early years of his career, he kept little or none of it. He was generous and lived high and partied wherever he went. He bought cars as fast as he wrecked them and the beer in his hotel rooms was always cold and plentiful. His appetite for food and many vices was brobdingnagian. In addition to major league baseball, he made money barnstorming with Lou Gehrig around the country, appearing on the Vaudeville circuit, in the movies and making endorsements.

In 1927 his fortunes changed dramatically for the better. That year the Yankees fielded one of the great all-time teams with Ruth in the middle of a lineup termed “Murderer’s Row.” He also became the first baseball player to earn as much or more off the field as on it in the regular season. That year he also turned most of his financial affairs over to Cristy Walsh, the first real baseball agent. Walsh was a promoter, public relations man, business manager, investment manager and all-around trusted adviser. It isn’t clear, how Walsh first established the relationship. But the story I like best happened when Ruth was living in the Ansonia, a famous apartment building on Broadway in the Upper West side of Manhattan. Walsh described hearing that a local deli was going to be delivering a shipment of beer to Ruth’s apartment and Walsh bribed the deliveryman to let him bring up the beer. Once there, Walsh got Ruth to agree to let him represent him.

No one now knows the true story of the beginnings of the relationship but we do know that Walsh had a talent for ingratiating himself with successful people and in turn did well by them. Over the next few years Walsh expanded his relationship with Ruth until he took over most of his business affairs and kept that up until 1938, three years after Ruth had retired from baseball.

In 1927 Ruth had run out of money as a result of high living, record fines and suspensions and an inability to keep money in his pocket. Walsh loaned Ruth money and in turn had Ruth turn over much of his incoming funds to Walsh. That year Walsh set up a trust for Ruth at the Bank of Manhattan and had Ruth put all of his non-baseball earnings into the trust. By the early 1930s, the trust grew to over $200,000.

Despite the stock market euphoria, the bank invested the trust conservatively with seventy percent in bonds and thirty percent in dividend paying stocks. Even at the peak of the stock market in 1929, bond interest rates and stock dividend yields were attractive by today’s standards. Government bonds yielded close to 3 percent as did Blue Chip stocks while corporate bonds yielded 5 percent. During the worst years of the Depression, while economic activity plunged and unemployment soared, Ruth’s trust continued to have positive returns.

Eventually the bank returned almost half a million dollars in principal and earnings to Ruth. Left in his own hands, the money surely would have vanished with hardly a trace. At that time and for decades later, ball players usually ended their careers with little or no money left and having to enter new careers to support themselves.

Ruth was able to enter retirement having played in the first two All Start games and as a charter member of the new Baseball Hall of Fame with no concerns about money. Ruth could spend his time golfing and fishing with no money worries although he continued to earn money from endorsements and appearances for the rest of his life. He died at age 53 of cancer, having been one of the pioneers of chemotherapy and as a result having a short remission of his cancer.

In an age of heroic sports heroes and supportive sports writers, Ruth’s star shined the brightest. And through his fortuitous relationship with the pioneering agent Cristy Walsh, Ruth was also successful for himself and in breaking barriers for other players. Ruth often lived to excess and not all of his life was admirable but despite his humble roots he starred on the grandest stages and brightened the lives of many people around the world.

Much of the information for this story comes from The Big Fella by Jane Leavy, the Wikipedia article on Ruth and other stories available on the Internet about Ruth and books and stories on the financial conditions before and after the stock market crash of 1929.

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Easy Peasy

By Larry Luxenberg  

Many people think there is nothing difficult about personal finance. Listen to a few gurus on TV and maybe scan a magazine or two.

That may have once been the case (I would argue not) but it’s certainly not the case after the passage of the Secure Act last December, which was followed quickly by the CARES Act and the possible Heroes Act.

Couple that with other changes to RMDs, add in QCDs, QLACs, IRMAA (Income Related Monthly Adjustment Amounts), partial Roth Conversions, pension options, tax loss harvesting, asset allocation, tax aware investing, market timing and the Social Security formula (the simple part — 35 years of monthly inflation adjusted earnings).

If you’ve got all that, knock yourself out and do your own planning and hope you don’t run out of money in retirement (See Monte Carlo simulations).

If you can’t sort your way through that alphabet soup and want help with ETFs, ETNs, open end mutual funds, closed end mutual funds, ADRs and plenty more, how about turning to a CFP (Certified Financial Planner), CFA (Chartered Financial Analyst) or CSA (Certified Senior Advisor) or better yet someone with all three.

We don’t know all the answers, but we do know a lot of the right questions and a lot of the places to start looking for answers.

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There’s Never a Good Time to Get Gas

By Larry Luxenberg  

I never feel pumped to get a gas fill up for my car. I’m always in a hurry or tired or it’s unpleasantly cold or rainy outside.

But I also don’t like it when the light goes on with the dire warning that I’m running on fumes.

It’s also like this about personal financial planning. There’s never a good time to straighten up the mess of your financial affairs. It takes energy and gumption to deal with the reality and the complicated forms and ideas that determine your financial fate.

But if you don’t do it, just as if you don’t get gas, dire consequences await.

Your financial affairs may be complex and daunting but you don’t have to do everything at once. It’s better to start small than not at all.

And it’s better to start now that waiting for whatever your current excuse is to pass.

The key thing in investing and personal finance is time. The younger you start, the easier things are. Investment returns compound over time and the longer you invest, the more money you will have.

It may not be pleasant to tackle financial planning but it can be very rewarding.

There’s never a good time to start, so just do it soon.

 

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What You Keep

By Larry Luxenberg  

The easy thing to do when you are investing is to look at how much your portfolio is going up or down.

But that’s not what’s really important. What’s important is how much of your investment portfolio, you get to keep and how much goes to Federal, state and local taxing authorities.

For example, an IRA defers taxes until you take the money out. Under current law, once an investor turns 70 1/2, he has to start taking money out of the IRA. This is called a required minimum distribution.

When an investor takes money out of the IRA, he has to pay ordinary income taxes on the withdrawal. This can be a third in combined taxes or even more.

If he has a Roth IRA and is over $59 1/2 and the Roth has been open five years, he probably won’t owe any taxes.

If he has a regular taxable account — no retirement savings vehicles — and owns mutual funds, he may owe taxes even if he doesn’t do any trading himself for the year. Mutual funds must distribute most of their income each year to avoid saddling their shareholders with double taxation.

In a strong stock market, like the market this year, gains accumulate in actively managed mutual funds and taxable distributions can be quite high.

Investors need to be aware not just of their investment returns but of how much of those gains they will keep. That makes a huge difference in long-term financial well being.

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Paying for a Child’s Retirement for the Price of a Car

By Larry Luxenberg  

One of the best presents you can give a child is to fund their retirement. And it costs about the same as a modest car. The key to the gift is time. Having a long time to invest is critical but it costs you nothing but patience.

First let me explain how this works and then the four ways it could go wrong.

The initial step is to fund a Roth IRA. A child must have earned income but you can contribute an equivalent sum up to $5,500 a year to the child’s Roth. A Roth provides no deduction on the way in but if you hold it until age 59 1/2, there’s no tax on the way out. A $5,000 contribution to a Roth at age 20 and invested 100 percent in a diversified stock fund, earning the long-term return of stocks, would be worth $587,000 at age 70.

This sounds too easy so what could go wrong?

First, Congress could change the law so that the withdrawal would be taxed.

Secondly, inflation could eat up some or all of the returns. At the 3 percent inflation which has been the U.S. average in recent years, inflation would drive down the purchasing power by a third. Still, it would be a nice bundle to have in retirement.

Third, stocks could have disappointing returns. The longer one owns a diversified fund of stocks, the more likely that returns will be good but there are no guarantees in the stock market.

Finally, the child could mess things up in a variety of ways: invade the account early, change the investing approach or some other, unanticipated way.

Still, for the price of a regular car or less than a full semester at a good college, a parent could prepay a child’s entire retirement. An interesting idea and one I believe in strongly enough to try it.

 

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Digital Assets

By Larry Luxenberg  

Digital assets are usually dismissed as a futuristic concern. But every estate I’m involved with now has at least some digital components and they are usually needlessly troubling. We spend much of our lives now in the digital world whether it’s on email or Facebook, Instagram or Twitter.

If we have a small business or a profession, some of the value of our business is certainly wrapped up into the digital world.

Last night I spoke to the Rockland County Estate Planning Council (http://www.rocklandcountyepc.org/   about the growing importance of planning for digital assets.

With many of us this might be small — airline points or deposits at paypal — but for many estates this could already be a big number. Most of us have trouble from time to time accessing our digital accounts. Imagine how difficult it will be for an executor to do this.

A good first step is to make an inventory of your digital assets and accounts and then figure out how an executor might access them. You can give such a person separate authority to act on your digital accounts.

This is not accepted in every jurisdiction but in the fast changing digital world, this is a good first step.

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Preparing Your Estate

By Larry Luxenberg  

Prosperity and cyberspace have combined to make dealing with estates more difficult than in previous times. Rather than leaving a mess behind — the proverbial shoebox of unorganized documents  — one can make the task of heirs a lot easier some simple and easy steps. Put together a list of all of your financial accounts, the institutions where they are held, current balances and contact information. Add to that list the professionals you deal with and relevant passwords. Many people accumulate a hodgepodge of accounts, insurance policies and other assets, some with small balances, and it’s easy for someone not familiar with these accounts to overlook some. The guesswork at an emotional time to piece together someone’s financial life can be daunting even if you do manage to find everything. Many do not. Evidence of that is in every state capital where abandoned or lost accounts total in the billions. Some simple steps can space loved ones a lot of grief so don’t put this off and leave a mess behind.

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Savings and Tax Time

By Larry Luxenberg  

In a month, personal income taxes are due. You still have time to fund a Regular IRA or a Roth IRA for calendar year 2015.

IRAs are a good way to save for retirement and everyone who can afford to fund an IRA, should consider doing it. There are different eligibility rules for each and which one you should use depends on many factors.

Among the key factors for picking between an IRA and a Roth are your current and future tax rates, when you’ll need the money and where it’s going.

If your tax rate is low now and may be higher in retirement, you might be more inclined to fund a Roth. If your tax rates are the reverse — high now, and low later — you’d be more likely to do an IRA.

Except for higher income people, contributions to an IRA are deductible but taxable on withdrawal. Roth contributions get no deduction but aren’t taxable if taken out after the account has been open for five years and the holder is over age 59 1/2.

If some of your money might go to a charity, a Regular IRA would be good since you won’t owe tax on the distribution (up to $100,000) if you are older than 70 1/2.

If you are younger than 50, you can contribute $5,500 to an IRA or Roth as can your spouse. Those older than 50 can contribute an extra $1,000 annually.

The younger you are, the more time your investments have to work for you. Regular contributions to IRAs or Roths can be a key part of your retirement savings.

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