www.sperosfinancial.com Tip of the Day!

Why Millennials Need to Start Saving for 

Retirement Now!

 

 

By STACY FRANCIS 

As a professional 20-something, everyone wants a piece of your paycheck, but are you potentially missing out on a big opportunity?

It may be difficult for 20-something professionals to contemplate saving for retirement while they’re just embarking on their careers. However, there are numerous reasons why contributing to your employer’s retirement plan is a fantastic place to start. First, many employers offer matching 401(k) contributions in the 3% to 5% range. At many large companies, this is the equivalent of an annual salary increase, and yet a vast majority of 20-something professionals fail to take advantage of this money by not contributing.

While the free money is nice, there may be an even better reason to start contributing to your employer retirement plan right away. When you re-route a certain amount of your paycheck each month, it feels like you never had it in the first place. This effectively forces you to live below your means in a relatively pain-free way, a powerful habit that will get you started off on the right financial foot.

As Richard Thaler and Cass Sunstein wrote in the book “Nudge,” the feeling of losing something (like seeing a reduction in your paycheck) makes us twice as miserable as gaining the same thing makes us happy. In other words, starting now to save for retirement via your employer-sponsored plan is a lot easier, psychologically speaking, than trying to start later on, after you’ve become accustomed to your full paycheck. Some employer retirement plans even have a feature that will annually adjust your contribution level. Setting the date of your contribution increase for around the same time of year that you receive your annual salary adjustment will automatically increase your contribution amount each year, without ever impacting your paycheck.

 
Perhaps the best argument for participating in your employer retirement plan, however, is something that the Millennial generation has become known for: job hopping.

It’s no secret that Millennials chase after their dreams when it comes to employment. This includes potentially making one or several dramatic career changes over the course of their employed life. Contributing to a retirement plan in your 20s gives you substantially more freedom to pursue other opportunities down the line. The money you put into your retirement plan in your 20s will continue to grow exponentially year after year, regardless of whether you continue to contribute to it.

For example, let’s say you invest $5,000 annually in your employer-sponsored retirement plan starting at the age 22 (the age at which many college graduates enter the workforce) until you turn 30. Assuming 7% growth compounded annually, you’d have approximately $55,000 by the time you reach 30. Even If you were to stop contributing, your money will have grown to over $108,000 by the time you turn 40.

Bottom line: If you’ve built up a sizable savings in your 20s, you’ll have more freedom to take financial risks in your 30s–like taking a substantial drop in salary to pursue your dream job.

Many factors contribute to a solid financial future, and there’s no denying that 20-something professionals have a lot of responsibilities competing for their limited financial resources. However, contributing to an employer retirement plan is an important piece of the puzzle and those who get this piece right will find that they have increased flexibility, options and freedom in the future.

Stacy Francis is president and CEO of Francis Financial, a fee-only boutique wealth management and financial planning firm.

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The New Rules for Making Your Money Last in Retirement

Philip Moeller March 3, 2015

 In today's longevity economy, retirement as we know it is disappearing. Here's what to do now.

Are you ready to live to age 95—or beyond?

It’s a real possibility. For an upper-middle-class couple age 65 today, there’s a 43% chance that one or both will reach at least age 95, according to the latest data from the Society of Actuaries.

Living longer is a good thing, of course. But there’s a downside—increasing longevity may mean the end of retirement as we know it.

Problem is, a long lifetime in retirement is a huge financial challenge. As Laura Carstensen, head of Stanford Center on Longevity, said in a recent presentation, “Most people can’t save enough in 40 years of working to support themselves for 30 or more years of not working. Nor can society provide enough in terms of pensions to support nonworking people that long.” Instead, Carstensen argues, we need to move toward a longer, more flexible working life.

Carstensen is hardly alone here. Alicia Munnell, head of the Center for Retirement Research at Boston College and a co-author of “Falling Short: The Coming Retirement Crisis and What to Do About It”, has long warned about the nation’s lack of retirement preparedness. Following the Great Recession, Munnell has pounded away at the reality that continuing to work is the only feasible strategy for many people if they wish to have any hope of affording even modestly comfortable retirements.

For many retiring Baby Boomers, the notion of working longer has appeal—not only for the additional income but as a way of staying involved and giving back. That’s what spurred Marc Freedman, founder of Encore.org, to encourage older workers to use their skills for social purpose. Chris Farrell, a Money contributor, captures this movement in his recent book, “Unretirement: How Baby Boomers are Changing the Way We Think About Work, Community, and the Good Life.”

Still, to afford a longer life, Americans will have to rethink their savings and withdrawal methods too. Right now, most retirement calculators default to no more than a 30-year time horizon. What if you want to keep your retirement income going past age 95? Fidelity’s planners suggest three alternatives that can help:

*Stay on the job longer. Say you are a 65-year old woman who earned $100,000 a year, and you have a $1 million portfolio. You’ll also receive a $30,000 Social Security benefit ($2,500 a month) and you plan to withdraw an initial $50,000 a year from your portfolio. All told, you’ll have $80,000, or 80% of your pre-retirement income. If inflation averages 2%, and the portfolio grows by 4%, your savings will likely last for 25 years, or until age 90. After that, odds are the money will run out.

But if you instead work four more years, until age 69, and keep saving 15% of your income, your portfolio will grow to $1,240,000. That would be enough to provide income for eight more years—until age 98.

*Postpone Social Security. Another move is to work two more years and defer claiming Social Security till age 67, which means your monthly benefit will rise from $2,500 to $2,850. That would replace 35% of her income, instead of 30%, and her portfolio would need replace just 45% of your pre-retirement earnings vs 50%. By age 67, your portfolio will total $1,110,000, which will deliver retirement income till age 98.

*Consider an annuity. You could purchase an immediate annuity, which would give you a lifetime stream of income. The trade-off, of course, is that your money is locked up and payments will cease when you die (unless you add a joint-and-survivor option, which would reduce your payout). Many advisers suggest using only a portion of your portfolio to buy an annuity—you might aim to cover your essential expenses with a guaranteed income stream, which would include Social Security.

A 65-year-old woman who invested $200,000 in an immediate annuity with a 2% annual inflation adjustment would receive guaranteed monthly payments of about $870 a month, or $10,440 a year, according to Income Solutions. Added to Social Security, this income would replace roughly 40% of a $100,000 salary, which will allow the rest of the portfolio to keep growing longer.

But make no mistake. This is a big decision, and many investment experts oppose locking up money in an annuity, given today’s low interest rates. But longevity investing raises the appeal of guaranteed streams of income, and annuity payouts will become more attractive if and when interest rates slowly rise toward historical norms.

Philip Moeller is an expert on retirement, aging, and health. He is the co-author of “Get What’s Yours: The Secrets to Maxing Out Your Social Security,” and a research fellow at the Center for Aging & Work at Boston College. Reach him at moeller.philip@gmail.com or @PhilMoeller on Twitter.

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Personal Finance: Unique Planning Opportunities Using Social Security Survivor Benefits

Joe Alfonso, GoLocalPDX Contributor

Most of us are aware that Social Security is at its core a retirement program whose purpose is to replace a portion of our career earnings once we are no longer working.  In addition to retirement benefits, Social Security also provides benefits for the surviving spouse in a marriage.  In this regard, Social Security acts as a form of life insurance by ensuring that the surviving spouse receives a lifetime income payment based on the work record of the higher earning spouse in the marriage.  

The rules governing survivor benefits differ from those governing Social Security retirement and spousal benefits.  These differences present special planning opportunities for surviving spouses who are also eligible for their own retirement benefit.

I was recently reminded of the unique planning opportunities made possible by survivor benefits while working with a client, whom I will call John.  John is 65 years old and still working.  He was married to a woman 15 years younger than him who unexpectedly died two years ago at the age of 48.  John qualifies to receive a retirement benefit based on his work history.  As a result of the death of his wife, he is also eligible for a survivor benefit.  John asked my help in deciding how to coordinate his benefits in order to maximize his lifetime Social Security income.  

In analyzing John’s situation I learned that his projected retirement benefit starting at his full retirement age (FRA) of 66 is approximately $2,150.  In comparison, his projected survivor benefit at FRA is $2,340.  John plans to continue working indefinitely and estimates annual earnings of about $80,000.  He is in good health.  

I analyzed John’s claiming options in light of the following key considerations:

1.) Taking either a retirement benefit or the survivor benefit before FRA results in a benefit reduction

2.) Delaying retirement benefits past FRA results in an 8% annual credit until age 70.  In John’s case, delaying to age 70 would result in a 32% benefit increase compared to the FRA benefit, making his age 70 benefit worth approximately $3,130 (before inflation adjustments, known as COLAs).

3.) Survivor benefits do not receive delayed credits so there is no benefit to delaying these beyond FRA

4.) Unlike in the case of spousal and retirement benefits, where a decision to claim either benefit before FRA also results in a reduction of the other, survivor benefits are immune from other benefit claiming decisions, and vice versa.  One can therefore claim a spousal or retirement benefit early and still receive a full survivor benefit as long as the survivor benefit is claimed at FRA.  Conversely, it is possible to claim an early survivor benefit and then switch to a full retirement or spousal benefit at FRA.

5.) Any benefits claimed before FRA, while earning employment income in excess of an annual maximum, results in a withholding of benefits. In 2015, the “Earnings Test” wage limit is $15,720; for every $2 earned in excess of the limit, $1 of Social Security benefits are withheld.  The Earnings Test does not apply once FRA is achieved.

The best strategy to follow when “dually entitled” to a retirement and a survivor benefit is to take the higher benefit last, factoring in the fact that retirement benefits earn delayed credits while survivor benefits do not.

In John’s case, if he had not been working and therefore not subject to the Earnings Test, his optimal strategy would be to claim a reduced survivors benefit immediately and defer taking the retirement benefit until age 70.  While the survivor benefit would be reduced for early claiming (by 4.5%) to about $2,240, by waiting to claim his retirement benefit to age 70 he will have maximized it and thereby ensure that he will earn the maximum cumulative income over the course of his life.

By not waiting to FRA to claim the survivor benefit, he would earn an additional year of income that more than offsets the impact of the resulting benefit reduction.  He would continue to collect the reduced survivors benefit until age 70, at which time he would switch to his retirement benefit, which by then would have grown to $3,130.  

The fact that a decision to claim the survivor benefit early does not result in a reduction of his retirement benefit makes this the optimal strategy.  It also illustrates how the decoupling of the respective claiming decisions in the case of survivor benefits makes creative planning possible.

Of course, John is in fact working and earning well in excess of the Earnings Test limit.  This means that it does not makes sense for him to claim early benefits since they will be withheld in their entirety.  

John’s optimal claiming strategy therefore, given his specific situation, is to claim an unreduced survivor benefit of $2,340 at his FRA and delay his own retirement benefit to age 70.  Since he will be past FRA, the Earnings Test will not apply and none of his survivor benefits will be withheld.  By claiming the survivor benefit at FRA he is guaranteed to receive the maximum benefit possible.  And by delaying his retirement benefit until age 70 it will grow to $3,130 as a result of delayed credits.  The net result of this strategy is that John will earn the highest lifetime cumulative income to which he is entitled.

My calculations, assuming a 2% annual COLA, showed that the cumulative income through age 85 yielded by the combined survivor and delayed retirement benefit would total $818,000.  In comparison, the cumulative income for just the retirement benefit would be $638,000, assuming it was claimed at FRA.  Cumulative income would be $700,000 if the retirement benefit was delayed to age 70.  

Clearly the survivor benefit makes a huge difference in John’s case.  While the loss of his wife at such a young age was certainly tragic, this sad event results in a valuable legacy to John that will benefit him for the rest of his life. 

Joe Alfonso, CFP®, ChFC, EA regularly writes on financial topics and is an expert on Social Security planning. He is founder of the Fee-Only financial planning firm Aegis Financial Advisory in Lake Oswego, Ore., and is the principal advisor for the firm. Joe is a CERTIFIED FINANCIAL PLANNER™ professional and an Enrolled Agent, admitted to practice before the IRS to represent taxpayers at all administrative levels for audits, collections, and appeals. He is a member of The National Association of Personal Financial Advisors (NAPFA).

Vasilios "Voss" Speros Financial Tip of the Day!

Money Matters: Savers beware, it’s time to rethink retirement planning

--------------------------------------------------------------------------------------------------------------------------Being able to afford your lifestyle and goals means going down new and unfamiliar paths. There’s no better time to get organized than the present.

Read more here: http://www.kansascity.com/news/business/personal-finance/article12474521.html#storylink=cpy

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BY PETER HARTWICK AND CHANEL JONES

FINANCIAL PLANNING ASSOCIATION OF GREATER KANSAS CITY

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We believe in the American Dream — the pathway albeit maybe not quite as apparent in present times, than in the past.

The notion of working, improving one’s self, and saving for future endeavors, such as retirement, is not obsolete. However, there have been significant changes in the world that have adjusted “how” and “when” many will retire.

If you currently work with a financial advisor, planner or wealth manager, you more than likely have been inundated with financial disclosures and disclaimers, such as “Past Performance is not an Indicator of Future Results, so on and so forth.”

If you set aside the reference made regarding a disclaimer and take a moment to consider the simplistic meaning of the phrase, ponder the environment in which we currently invest in and how it differs from prior years and decades. Furthermore, consider the impact of low interest rates, demographics, government regulations and the ensuing stock market (even temporary) volatility, how it has changed how retirement is afforded, the ability to changes jobs, and financial planning for lifelong goals and objectives.

Imagine back 20 to 30 years ago when you or your parents retired - a very simple and feasible strategy was to migrate a large portion of savings into bonds and CDs to generate retirement income. This plan of action was viable then, but is arguably dangerous now.

Since the early 1980’s, interest rates have been steadily declining. Using the US 10-year Treasury note as a general proxy, interest rates have been declining to the present day rate of 1.68% at the time of this article. This has been detrimental to savers, whose paradigm was to invest in bonds for income. Without monitoring and making amendments to this long-held thought process investors and savers are almost guaranteed a lower standard of living, as the current interest rate is below long-term inflation rates.

Demographics are another factor impacting how people plan and retire like never before. The aging populations in US, Japan and Europe for example, will impact demand for retirement income and health care in ways that current interest rates cannot support. Retirees are in a sense “checking out” and retiring early, late-life career changes, and longevity have increased the need to think about income planning differently. Simply put, people are living longer and may have multiple careers over their lifetime.

A major factor that isn’t on everyone’s radar and should be is - longevity! People are living longer and a foreseeable issue is the fact that the retirement age hasn’t adjusted to the increasing life expectancy. Equally or possibly more importantly peoples’ mindset needs to shift. For the next fifteen years, 10,000 baby boomers a day will turn 65, they still want to retire in their 60’s, but the increased life expectancy potentially can cause the reality of outliving their money, if adequate planning and monitoring isn’t in place and actively monitored by a professional.

With the historically low interest rate environment, we have witnessed a shift in client’s mindsets over the years to work past the age of 50. This is typically in a field they enjoy as a part time “job” and also volunteering their time. This is in stark contrast to prior generations’ view of working and retirement. Being able to afford this lifestyle change requires a fundamental change in how one plans and thinks about their finances.

“Old habits die hard.” People tend to find it challenging to change behavior and habits that have been engrained.

This is especially true with regards to one’s personal and business finances, which have formed over many years and some have been passed down from prior generations. The parable described in best selling book, “Who Moved My Cheese” by Spencer Johnson is very applicable to the financial times we now live in.

Our income cheese has been moved!

Being able to afford your lifestyle and goals means going down new and unfamiliar paths. There’s no better time to get organized than the present. Each day that goes by becomes the past and you cannot get that time back. Taking a quote from Warren Buffett, “The chains of habit are too light to be felt until they are too heavy to be broken.”

Chanel F. Jones - Associate Wealth Manager; Peter J. Hartwick - Private Wealth Manager

Securities offered through LPL Financial, member FINRA/SIPC. Investment Advisory Services offered through Personal Financial Group, Inc, a registered investment advisor and separate entity from LPL.

" The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. No strategy assures success or protects against loss. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price. Government bonds are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. CDs are FDIC insured and offer a fixed rate of return if held to maturity. Investing involves risk including the loss of principal. “

Read more here: http://www.kansascity.com/news/business/personal-finance/article12474521.html#storylink=cpy

Vasilios "Voss" Speros Financial Tip of the Day!

Five tips to get you planning for retirement

by Curt Zaske a business banking manager and market president for Wells Fargo

As a small-business owner, it might seem like you spend a lot of time on day-to-day planning. Your planning time today might consist of setting next month's sales appointments, placing orders for this quarter and projecting expenses for the year ahead. But how much time have you dedicated to developing and maintaining your retirement plan?

When it comes to retirement, the earlier you start planning, the better off you will be long term. According to the Wells Fargo/Gallup Small Business Index, more than half of business owners said they aren't ready to sell their business or quit working and 55 percent are worried that they will not have enough money in retirement. As the economy continues to improve, however, more business owners might feel that retirement isn't as far off in the future as it once seemed.

Today, more than ever, there are many retirement planning resources and tools available to small-business owners. The size of your company will play a role in determining your personal and business retirement strategy, including whether or not you finance retirement plans for employees, but the good news is there's likely a plan that can meet your needs.

Here are five tips to help you start thinking about retirement planning:

•Define what retirement means to you. For business owners who aren't ready to face full-time retirement, a scaled back role might be the ideal way to slowly step back from the business. There are many advantages to this approach, including building additional income and delaying Social Security benefits, but it's important to establish clear parameters that will support this plan. Take time to outline what retirement means for you, and build that into your plan.

•Set retirement goals and objectives. Explore business and personal goals, and set a target retirement date that makes sense for you and your business. This can include learning more about your personal financial situation, identifying business transition options and, if you have employees, understanding who will be affected by your retirement.

•Get familiar with available contribution plans. Fortunately for small business owners, there are a variety of retirement plans available to help with future planning. From profit-sharing plans that offer you and your employees a portion of your annual profits to IRAs and 401(k) plans, there are many choices. Make time to meet with your financial adviser and your tax adviser to find a plan that works for your business.

•Create a retirement income plan. The money you save now needs to be enough for 20 to 30 years of retirement. Take advantage of catch-up rules, which allow people in their 50s to contribute an additional amount. Work with a financial adviser and a tax or legal adviser to determine how much money you should put away now and when you should plan to start withdrawing your savings.

•Review strategies for financing the transition into retirement. In the Wells Fargo/Gallup survey, 59 percent of owners said they plan to either sell their business or transition it to a family member. Most of these transitions will involve some form of financing, and oftentimes, sources and uses of available funds can determine or limit an owner's options. Do you have a succession plan in place? Does your business carry any debts? Will you have funding from an equity sponsor, such as a commercial bank? These are important questions to ask as you develop your retirement plan. Meet with your banker to learn more about your financing needs and product choices.

While planning for retirement can be complex, it doesn't have to be a difficult or stressful experience. After you've developed a retirement plan, take time to review and update it annually to ensure you're staying on track.

Vasilios "Voss" Speros Financial Tip of the Day

5 benefits of a capital gains retirement strategy

If you’re self-employed with a sizable capital-loss carryover, you may want to skip retirement contributions.

by Robert Klein CPA, PFS, CFP, RICP, CLTC, MBA, MST

One of the incentives for saving for retirement for self-employed individuals is the tax deduction for retirement plan contributions. A popular choice is the simplified employee pension, or SEP, plan. Deductible contributions of up to 25% of net self-employment income, with a limit of $52,000 for 2014 and $53,000 for 2015, may be made to this type of plan.

Suppose you're self-employed and you have a sizable capital-loss carryover, should you contribute to your retirement plan or should you do something different this year? One possibility is using a portion, or perhaps all, of the funds to invest in nonretirement plan growth investments. This may include, but isn't limited to, a diversified investment portfolio and/or real estate.

Why would you do this? Here are five reasons:

1. Generate capital gains to free up capital losses

While the tax law allows a generous inflation-adjusted deduction for contributions to retirement plans for self-employed individuals, the historical tax treatment of capital losses is quite different. The amount of capital losses in excess of capital gains that can offset other types of income in any year has been limited to $3,000 since 1978. Any surplus losses must be carried forward to future years.

Given this limitation, you need to generate capital gains to use any meaningful portion of a capital-loss carryover. If you're like many self-employed individuals who use all of their available funds for retirement plan contributions, you may have minimal nonretirement investments. By investing in these types of assets, you create the opportunity for future capital gains.

2. Use 100% of capital losses during your lifetime

Although you can carry forward unused capital losses to future years' tax returns as long as you live, it's possible that you may not use all of your capital-loss carryover during your lifetime. This is likely if you have a large carryover and either you don't create sufficient capital gains or you incur additional capital losses in future years.

To the extent that you sell appreciated assets, you may be able to realize capital gains to offset 100% of capital-loss carryovers during your lifetime.

3. Eliminate taxation of capital gains

If you realize a gain on nonretirement assets that you sell after holding them for more than a year, you're entitled to favorable long-term capital gains treatment. To the extent that you have a capital-loss carryover that can offset your capital gains, you can eliminate taxation of those gains.

4. Reduce taxation of retirement plan assets

100% of retirement plan contributions, as well as appreciation and earnings, will be taxed as ordinary income at unfavorable tax rates beginning no later than April 1 of the year following the year that you turn 70-1/2. You can reduce your future tax liability by redirecting a portion of funds that would otherwise be used to make retirement plan contributions to nonretirement plan assets.

5. No limit on investment amount

Unlike retirement plan contributions, there's no limit on the amount that you can invest in nonretirement plan assets.

Summary

Are you self-employed and have a sizable capital-loss carryover? If so, you may want to forego part or all of the contribution to your retirement plan for a potential opportunity to realize capital gains in a future year that can be used to offset your capital-loss carryover. This can be a single- or multiyear strategy depending upon the amount of your capital losses.