Regardless of where you fall on the retirement timeline, we can help you make the most of your current situation and the opportunities available to you. A plan, focused on your values and goals, will help keep you on track.
There has been a great deal of media attention surrounding the Department of Labor’s (DOL) recent ruling regarding the “Fiduciary Standard,” and with good reason. Tony Robbins, self-help author and motivational speaker, recently asked random people walking down Wall Street, “What is a fiduciary?” With the exception of one individual, the answer was, “I don’t know.”
This made me wonder – Do our clients understand the benefits of working with a fiduciary?
When Smedley Financial Services, Inc.® began back in 1982 as a registered investment advisor, we became a fiduciary. We have always believed that putting our clients’ interests before our own is the best way to create a lasting partnership with the people we serve.
What is the Fiduciary Standard?
The Fiduciary Standard requires that we avoid conflicts of interest. Our recommendations must meet your needs and be in your best interest.
In contrast, financial professionals such as brokers, insurance salespersons, and other advisors operating under the “suitability standard” are merely required to ensure an investment is suitable for a client when purchased. There is little obligation to offer a better investment nor a requirement to monitor those investments in the future.
Why the big concern?
As company pension plans have diminished, Americans now must set aside more of their income to help supplement their own retirement income. This can be a daunting, time consuming task.
At the same time, the retirement investment landscape has only grown more complicated. Lack of investor savvy and awareness regarding retirement account types, not to mention the emerging number of investments available within those accounts, has led investors to rely on the counsel of professionals.
Unfortunately, not all professionals are alike. The new DOL rule seeks to level the playing field, requiring all financial professionals to follow the new Fiduciary Standard. Isn’t it sad that a law must be put in place forcing financial professionals to do the right thing?
Will the rule protect investors?
The new DOL rule will require more work for financial professionals, but hopefully it will also protect investors saving for retirement.
The DOL also states that cheaper is not always better. Price cannot be the only determining factor when making a decision, especially one as important as your financial future.
Consider what you are getting for the fee you are paying. Does your fee include an advisor that will help you determine your financial goals, prioritize those goals, and design a plan to help reach your goals? Will you get ongoing monitoring of your goals and the investments you are making? What if something changes? Who will be there to help address the changes in your life that may impact your financial destiny? What will happen during periods of increased market volatility and who will help you determine if your investments are too aggressive or too conservative?
These are just a few of the concerns that must be considered, but are often overlooked when the primary focus is having lower fees.
You are our primary concern. We invite you to call or come in and sit down with us anytime you have questions. We welcome your call.
There are some four-letter words that cause parents and financial advisors to cringe. Unfortunately, you may have been exposed to these words and had to cover your ears so you did not have to hear the profane language.
At the risk of damaging your sensitive ears or eyes, I will share with you some sentences and/or scenarios where those words might be used and how you can combat them with positive four-letter words.
Picture this: A young couple just moved into a brand new home in your neighborhood that seems to put all of the other homes to shame. Not only that, but there is a new boat parked behind a new truck on the RV pad. You wonder how in the world these young people can afford to live like this. This four-letter word is called “debt” and often goes along with “shop.” The truth is that many of these people can’t afford to live like that for long.
Many in the young generation believe they can have everything now and they don’t have to work for years to accumulate wealth like their parents did. Unfortunately, there are many established adults that have fallen into the same debt trap. As they near retirement, they still have a large mortgage, car payments, and worst of all, credit card debt.
To combat this, we need to introduce two positive four-letter words, “work” and “save.” Many young people believe that “work” is a bad four-letter word, but they are wrong. As Colin Powell said, “A dream doesn’t become reality through magic; it takes sweat, determination, and hard work.”1 Both young and established can learn to “save” rather than spend. It isn’t always easy to set money aside, especially when others around you may seem to have so much. Just remember that you should “live like no one else, so later you can live like no one else.”2
A four-letter word often muttered in frustration by parents is “kids!” This word often makes financial planners frustrated as well, especially when parents put their own retirement at risk in order to help “kids” out.
In the early years, parents may fail to put contributions into their retirement plans because they are taking care of their “kids.” In later years, parents may take out too much money from their savings to help their “kids” out.
To save parents from their kids, the parents must create a “plan” and learn to stick to it. In the early years, stay dedicated to saving your money in your “401k” or “Roth” IRA. Use the opportunity to teach your kids about saving and planning.
In the later years, learn to “give” responsibly. Allowing your kids to struggle can be highly beneficial. You don’t need to help them out of every tight jam or it might teach them learned helplessness.3
One big four-letter word that people seem to ignore during good times is “risk.” Most people want to get a good return, but “only when the tide goes out do you discover who’s been swimming naked.”4 We have seen too many people get caught by a “scam” and “lose” their shirt because they ignored the warning signs.
Be sure to take a balanced approach with your investments based on a solid “plan.” Some of your investments can be on the riskier side, but you should always have some money with less “risk.”
Now, wash your mouth out with soap and stop saying the bad four-letter words. To feel financially prepared, focus on the good four-letter words: work, save, 401k, Roth, give, and plan.
One of the most common questions we get at SFS is “How should I invest my 401(k)?” This is a critical question, especially considering that 18% of retirement assets are tied up in these accounts (source: Investment Company Institute). Managing your 401(k) may be the most important place to place your financial focus after managing your spending.
First things first—start saving now. Starting early is the best way to get compounding rates of return to work in your favor. Remember, Albert Einstein called compounding rates of return the “8th wonder of the world.”
Next, take advantage of free money by getting the full match your employer offers. Not all 401(k) plans include a match, but if yours does, then make sure you get the full benefit. The rate at which you save is far more important than the rate of return you get. So, keep saving for the future.
Now let’s get into the investing nitty-gritty. Every person must decide how much risk to take in his or her savings. Your risk tolerance should be based on your ability, willingness, and possibly your need to take risk. It will be different than that of your friends and coworkers. It may even be different than that of your spouse.
Your ability to take risk includes factors like your overall financial situation and your time horizon. The more savings you have, the more risk you can take. The longer you plan to invest, the more risk you can take. Why? Your chances of positive returns in stocks go up the longer you invest.
Willingness to take risk is more difficult to determine. The essential question is how well will you be able to handle a drop in the value of your investments? If you view a fall in the stock market as an opportunity to buy more then you may have a high tolerance for risk.
When it comes to picking investments, the easiest route is to find an investment that approximates your retirement date. These all-in-one solutions provide some diversification. While diversification is far from a guarantee, it is still a good way to help manage risk. The pitfall of the retirement date choices is that these don’t take into account your personal situation (health, income, assets, debt, etc.) and they may not even disclose exactly how they are invested.
If you choose to select your own mix, be careful. Selecting the hottest performer last year can get you in a lot of trouble. Distributing your account balance evenly into each option is certainly not the way to go either.
This is where a little research and help from a professional can help. Give us a call. We can help you navigate the 401(k) maze.
It is hard to believe 2014 is swiftly drawing to a close. At this point, what can you do to better manage your taxes? Here are several ideas you can consider:
Maximize retirement contributions.
All contributions to your traditional 401(k) or other tax deferred retirement accounts are made before taxes are calculated. This means that if you make a maximum $17,500 contribution to a 401(k) your taxable income is reduced by $17,500. So, why not pay yourself rather than Uncle Sam? Generally speaking, you can modify your contributions at any time during the year, but check with your benefits office to be sure of your plan’s rules.
Harvest tax losses.
After several years of market growth you may want to lock in some of your investment gains. The downside is you will also trigger a tax on any growth over your initial investment. Consider dumping some of your portfolio losers. This will allow you to offset your taxable gains with losses resulting in a zero tax bill if the numbers are the same. Keep in mind you can only offset long-term gains with long-term losses. The same applies to short-term gains and losses. We can help you identify any tax harvesting opportunities in your portfolio.
If you have control over when you will receive income, consider deferring some of your income until next year. This generally applies to those earning commissions, bonuses, consulting fees, or self-employment income. A quick exercise to determine where you are tax-wise and how much income should be deferred to prevent you from hitting the next marginal tax bracket is recommended. This can be done by consulting with your tax professional. Some programs such as Turbo Tax allow you to run a pro-forma tax filing to get an idea of where you stand.
Make up tax shortfalls.
If you have not paid enough withholding or estimated tax throughout the year, there is still time make up the difference before the year ends. Increasing your tax withholding or making an estimated tax payment will help avoid any underpayment penalties.
Bunch itemized deductions.
Retirement brings with it some unexpected tax situations. For many there are not enough deductions each year to itemize on Schedule A of the tax return, in effect minimizing any tax advantages. By bunching deductions every other year, you can itemize one year and take the standard deduction the next year. This could be applied by prepaying state taxes every other year, making charitable donations every other year, moving up or pushing back a non-urgent medical procedure, and much more. Your tax professional can share ideas that fit your specific situation.
Make stock donations.
If you have held taxable investments for more than a year and they have increased in value, you can donate the stock directly to a qualifying charity. This avoids any capital gains you may owe on the growth of your investment. Nevertheless, you can still itemize the full value of the donation. Even better, the receiving charity pays no tax on the gift. You are then free to invest the cash you would have donated, creating the opportunity for future stock donations.
Be generous to charities.
Gifting cash to a qualified charitable organization also has tax perks. You can deduct the cash donation on Schedule A when you file your return. (Be sure to keep receipts for all cash donations.) You also get the benefit of helping others, while this may be a completely intangible outcome; the good feeling of making a difference in the world goes well beyond any tax advantages.
Maximize gift tax exclusions.
If your estate is growing considerably, you may want to gift something to your children and grandchildren while you can watch them enjoy the gift. You can give $14,000 annually to as many people as you wish. Neither you nor the happy recipients will pay gift taxes or estate taxes. If you are married your spouse can gift the same amount. Get double tax benefits by gifting appreciated stock and avoiding the capital gains taxes. The capital gains basis will transfer to the recipient, who is most likely in a lower tax bracket.
Schedule a financial checkup.
Throughout the year there may have been changes to your personal situation. This is a good time to review beneficiary designations, retirement plan contributions, estate planning options, and investment strategies. Your advisor can make you aware of and help you take full advantage of a wide range of planning opportunities.
For more information and ideas on how to maximize year-end planning opportunities, contact one of our wealth management consultants or your tax professional. Don’t wait too long; there is a deadline for getting everything finalized and some of our suggestions take time.