Top Tips to Prepare for Retirement

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Brian and Bo cover different strategies and steps to take when preparing for retirement and review features that are available in your 401k. The motivation for this show is two articles that finance blogger Dana Anspach recently released about 401k’s and other retirement accounts, 7 Things I Wish People Knew About 401k Plans, and 7 to-do’s before you turn 59.

First, the guys give you their view on Dana’s 7 Things I Wish People Knew About 401k Plans article:

  1. Rollovers are accepted - If you leave you can roll your retirement assets out of your 401k. This is especially important when your 401k investment lineup is limited.
  2. Automated portfolios work - Target date funds are great choices and capture a ton a diversification with professional investment management all wrapped into one holding.
  3. Stable value funds can be a great choice – If you are nearing retirement you need to start moving some of your holdings into more liquid and secure investments. These stable value options often pay solid interest rates which are typically much higher than what the bank will offer you on your savings account. Dana recommends having your first two to three years of retirement expenses in these holdings (and we completely agree).
  4. Age 55 is special! 401k’s allow distributions when you leave your employer after you reach age 55 without being subject to the 10% early withdrawal penalty. However, you will still owe ordinary income taxes on the distributions. Also, if you took the advice in the 1st step and rolled your 401k into an IRA, we suggest you have a plan for the age 55-59½ “donut hole.”
  5. Credit Protection – That’s right, if your get sued your Qualified Plan assets are protected, even from bankruptcies! OJ Simpson is always a major example when he was sued but was able to save some of his wealth due to the ERISA protection regulations.
  6. Roth options inside your 401k are great - There are pros and cons to this option. You forgo the tax deduction that you would have received for normal pre-tax contributions, but you do get the advantage of tax free growth if executed correctly. Remember, it is good to have tax diversification also. No one knows what future tax laws may hold. Therefore, it makes sense to have different “pots” of money (see our last podcast) set aside for the future.
  7. NUA treatment is nice, if it makes sense - If your employer offers company stock, you can get special tax treatment on distributions at retirement, called Net Unrealized Appreciation. When you take a lump sum of the company stock, the contributions you received (basis) are taxed as ordinary income and any growth in that company stock receives capital gains treatment, if certain holding requirements are met. You can also roll the other non-company stock portion of your 401k into a Rollover IRA.

The second article that Brian and Bo cover from Dana is, 7 to-dos between 55 and 65 for a better retirement:

  1. Prioritize values – Would you prefer to retire early and have less or work longer and have more?
  2. Know your net worth – We push for everyone to complete a Net Worth statement at year end. It is a great feeling when you put everything together and are able to high five over the leaps and strides you have accomplished over the past year, two or ten, and longer.
  3. Estimate your benefits – Review any pensions that are you expecting and try your best to estimate your Social Security payments. These factors are huge when trying to calculate your current savings goal for your future use.
  4. Get a handle on healthcare – We see this far too often when people tell us they would like to retire early, but do not have a plan for healthcare. Medicare coverage does not start until 65 and most of the time you will need additional coverage’s like: Medicare part B, C, D, Medigap, Long-Term Care, etc… Make sure you have options lined up before your decide to retire early.
  5. Make an income timeline – Run your personal finances the same way that you would operate a business. In actuality, you are a business and your success depends on your planning. Set income and savings goals and make sure that you are doing everything possible to insure your future success.
  6. Outline options - Explore what income sources are available at retirement. Part-time jobs are usually great because they keep you busy and keep your savings untouched to grow a little bit longer.
  7. Determine your level of engagement – What responsibilities are you going to take care of and what makes sense to outsource? Everyone’s situations are different and complex, but you need to have a basic understanding of how things change when you near retirement and what new risks you face.

Check back in two weeks for our next show!

Knowing When to Go Pro

Hiring a professional financial planner could possibly be the key that unlocks the door to your financial success.  At the same time, choosing the right advisor to work with is an important decision that can often seem overwhelming.  In today’s show, we discuss the services that planners will and will not provide as well as key things to look for when hiring a pro.

In the March edition of MoneyAdviser, Consumer Reports outlined what typical fee-only planners will and won’t do for their clients:

What they will do:

  • Help you figure your net worth:  Typically, a planner will have the client gather the necessary data and then create a statement to uncover other planning opportunities, such as insurance analysis or estate planning.  (Do-it-yourself tip:  Collect current statements for all assets and liabilities and use an online net worth calculator, such as Mint or Yodlee, to determine your net worth each year.)
  • Advise you on 401(k) investments:  Your planner should be looking at all the pieces of your financial puzzle, including your 401(k) to ensure that your saving and investing goals line up across the board.  (Do-it-yourself tip:  See if your 401(k) plan sponsor offers access to investment guidance or check out the online retirement-planning program, Financial Engines, for additional support.)
  • Help you invest a lump sum:  A planner should be able to offer tax-efficient investment advice to their clients, as this is a core activity of financial planning.  (Do-it-yourself tip:  Use Morningstar software to research mutual funds and stocks for your portfolio.  Also, check out Bo’s Money-Minute about investing in a lump sum vs. dollar cost averaging.)
  • Determine if you’re properly insured:  Your planner should be able to evaluate your insurance needs, as well as refer you to an agent that can provide the coverage.  (Do-it-yourself tip:  Do as much research as possible and shop around for the best rates.)
  • Assess if you’ve got enough to retire:  A planner can determine whether you are on track for retirement or if you need to explore other options, such as working longer or changing your lifestyle.  (Do-it-yourself tip:  Assess your potential income sources, including Social Security, and use an online tool to calculate where you stand.  Consumer Reports recommends T. Rowe Price’s Retirement Income Calculator and Analyze Now’s Free Retirement Planner.)
  • Coordinate your retirement income:  Planners can determine the best method for drawing funds from your various retirement accounts, while considering tax consequences.  (Do-it-yourself tip:  Consumer Reports advises that unless your retirements consists entirely of Social Security and a pension, you might want to consult a professional on this one.)
  • Help you plan for college funding:  A planner can guide you on the best ways to finance your child’s education.  (Do-it-yourself tip:  Visit www.collegeboard.com, www.savingforcollege.com, and www.finaid.com for additional resources.)

What they won’t do:

  • Help you pay down debt:  As a general rule, fee-only financial planners refer such clients to a debt counselor or a bankruptcy attorney.  (Do-it-yourself tip:  Contact the National Foundation for Credit Counseling if you need help with debt.)

The gray area:

  • Help you control your spending:  While many planners recommend following a budget, it’s not cost effective for you or the planner to spend hours together developing a detailed budget.  Most planners are interested in overall cash flow and will recommend cutting back if needed.  (Do-it-yourself tip:  Create a spreadsheet or utilize budgeting software like Quicken, Yodlee, or Mint.)
  • Create an estate plan for you:  Planners can help you decide the structure and tax efficiency of your estate, but an estate-planning attorney will be needed to draw up wills, trusts, and end-of-life documents.  (Do-it-yourself tip:  Contact an attorney to prepare or review your documents.)

If you decide that hiring a financial planning professional would be beneficial for you, the following credentials should stand out to you:

  • Certified Financial Planner (CFP):  holder has passed a 10-hour exam, has at least three years’ financial planning experience, and has completed an approved course of study.
  • Chartered Financial Consultant (ChFC):  requires eight college-level courses in financial planning and 30 hours of continuing education every two years.
  • Certified Public Accountant/Personal Financial Specialist (CPA/PFS):  CPA with specialized training in personal finance.
  • NAPFA – Registered Advisors:  holder meets strict education and professional requirements for membership in the National Association of Personal Financial Advisors, for fee-only planners.
  • Chartered Financial Analyst (CFA):  holder completes a series of three six hour exams and has four years of qualified work experience.

Hopefully this information will be helpful if you are considering hiring a professional to guide your finances.  Check us out on Facebook, YouTube, and please leave any questions or comments below!

 

Links to other things mentioned in today’s show:

Is This the End of Popping Vitamins?
On the Job, Beauty Is More Than Skin-Deep