To Rent or Buy That Vacation Home?

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The snow is flying, and thoughts of a warm weather vacation are heating up. This leads some to the debate over whether to buy or rent. The decision can be confusing but must be what is right for you. So, let’s pause a bit and go through the advantages and disadvantages of owning.

When you buy a home with a mortgage, you are taking money that could go into investments and placing that in a down payment. When you calculate the costs of owning, the opportunity costs of what that down payment could potentially earn in the stock market should be included. You also have other costs of owning a home such as property taxes, upkeep, maintenance and insurance. To determine your annual home costs, you need to add up the opportunity costs, the maintenance and repairs, insurance and the after-tax costs of property taxes and mortgage interest.

Every month, you pay principal and interest on your mortgage; as you pay principal, your ownership percentage of your home’s purchase price grows, and the bank’s percentage of ownership diminishes. In the long run, owning may give you a financial advantage due to increased equity. However, that is only if you stay in the home long enough to recover the costs of selling, and there is no guarantee that the value of the home is going to appreciate.

On the other hand, owning a home has some non-financial advantages to consider. You have more control over your housing future because, while property taxes may rise, you don’t run the risk of management changing or aggressively raising rents. While you can build a community renting, it is often more transient than the community you establish when you own. You also retain more authority over the things you want to do to your home.

But homes are also anchors — psychologically and financially. You may not feel like you can leave a home that has dropped in value. You may end up dissatisfied with your purchase, and now feel stuck. Here is where you can’t treat a home like an investment. If you are unhappy in your home, then figure out how to get out. The financial costs of leaving may be far less than the psychological costs of staying.

Second homes are more perplexing. These are discretionary purchases, similar to a trip. There are rarely financial advantages to a second home. Using the same exercise in cost counting, you would take your total costs and divide by the expected annual nights you will be there. When you do this, most of the time you will find that you could have been financially better off renting or staying in a hotel.

We have had clients who have purchased second homes before they discovered that ownership was not a good fit for them and extricating themselves was costly. If you are serious about spending considerable time in another area, then I encourage you to rent before you buy. This gives you an opportunity to test drive the next stage of your life before fully committing.

The opinions expressed in this article are those of author and should not be construed as specific investment advice. Any tax advice contained herein is of a general nature. Further, you should seek specific tax advice from your tax professional before pursuing any idea contemplated herein.  Fee-Based Planning offered through W3 Wealth Advisors, LLC – a State Registered Investment Advisor – Third Party Money Management offered through ValMark Advisers, Inc. a SEC Registered Investment Advisor – Securities offered through ValMark Securities, Inc. Member FINRA, SIPC – 130 Springside Drive, Suite 300 Akron, Ohio 44333-2431 * 1-800-765-5201 – W3 Wealth Management, LLC and W3 Wealth Advisors, LLC are separate entities from ValMark Securities, Inc. and ValMark Advisers, Inc.

Mutual Funds + December = Capital Gains?

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Imagine this; your friend is preparing his tax returns and is confused as to why he owes taxes on a mutual fund position that he hasn’t sold, and it went down in value from the purchase price.

He bought $100,000 worth of a mutual fund on October 1st at $10.00 per share in a taxable brokerage account. On December 1st he received a capital gains distribution from the mutual fund. At the end of the year the mutual fund was worth $9.90 per share.

He didn’t sell any shares of the mutual fund and the price per share has gone down in value since the purchase. So why could he owe taxes in this scenario?

A potential reason taxes could be due is because a mutual fund realizes a capital gain when it sells an investment in the fund for more than its purchase price. Even though your friend didn’t sell any of his shares of the mutual fund, he still owes taxes for the net capital gains of the underlying holdings of the fund. These net capital gains are distributed to all shareholders of the mutual fund who own the fund on a certain date (this is the distribution that occurred on December 1st in our example).

Even though no mutual fund shares were sold, the shares did receive a capital gains distribution from the mutual fund. This distribution is a taxable event for the owner of the shares since it is owned in a taxable account.

It is possible that these capital gains occurred in the fund earlier in the year before the owner even bought the fund. The owner still owes taxes on these gains because they owned the fund when the distribution was paid.

Note that the fund owner owes taxes for this distribution regardless of whether the market value of the mutual fund shares is higher or lower than the purchase price of those mutual fund shares.

If this mutual fund regularly makes significant capital gains distributions, the fund’s owner could consider holding the fund in a tax deferred account such as an IRA.

The share owner could also consider a managed account solution where they would own the underlying holdings of a strategy but have a cost basis for each position that is unique to the account. Finally, the investor could also potentially take advantage of loss harvesting opportunities in a managed account where he could seek to offset realized gains with realized losses in his account and potentially reduce any capital gains taxes or even end up with a loss and owe nothing.

When wrestling with mutual funds and capital gains one should also seek advice from a tax professional who has experience with investment accounts and their taxability.

Any tax advice contained herein is of a general nature. Further, you should seek specific tax advice from your tax professional before pursuing any idea contemplated herein. Fee-Based Planning offered through W3 Wealth Advisors, LLC – a State Registered Investment Advisor – Third Party Money Management offered through ValMark Advisers, Inc. a SEC Registered Investment Advisor – Securities offered through ValMark Securities, Inc. Member FINRA, SIPC – 130 Springside Drive, Suite 300 Akron, Ohio 44333-2431 * 1-800-765-5201 – W3 Wealth Management, LLC and W3 Wealth Advisors, LLC are separate entities from ValMark Securities, Inc. and ValMark Advisers, Inc.

It’s Not Your Father’s Stock Market

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This is the “Age of Accelerations,” according to Tom Friedman in his new book Thank You for Being Late. In the book Friedman is referring to the dramatic pace of change in the age of the internet and cloud technologies. As most of us have noticed, the dramatic pace of change is affecting everything in our lives. It has affected our vocations and our avocations, how we travel, how we learn, our methods of communication, and how we shop.

We also see this pace of change reflected in the nature of the businesses that are leading our economy.  This can be seen through the shift in the largest companies in the S & P 500 which is an American stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ.

One cannot help but observe that in 1980, 7 out of the top 10 were oil/oil services companies.  Just 25 years later we were down to one oil company and even more interestingly, only one company that would have been considered a “tech” company – Microsoft.

Today, 6 out of the top 10 are considered “tech” companies or at least spawned by the technology of the internet. (Alphabet A & B are what was Google) Only one made the lists in all 3 periods, ExxonMobil.

The acceleration driven by continually faster computing power cannot be missed over the past 10 years. If the accelerations continue, what will the top companies be in 10 years or even five years?

So, this is not your father’s stock market in many ways. What does this mean for investors in this dynamically changing world? In our opinion it means some type of dynamism is needed to manage ownership of stocks.  Whether one’s assets are invested in mutual funds, individual stocks, or even bonds, investors want to make sure they capture the long-term growth today’s companies will hopefully provide.

Do those stocks you inherited from your father offer you that opportunity? Does that stock you are holding onto because you are waiting for it to come back before you sell have a future? Is your portfolio diversified properly for future growth? In this fast-changing investment landscape it might be worth a check-up.

*ETF Database Mitre Media

The opinions expressed in this article are those of author and should not be construed as specific investment advice. All information is believed to be from reliable sources, however, no representation is made to its completeness or accuracy. All economic and performance information is historical and not indicative of future results. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Diversification cannot assure a profit or guarantee against a loss. Indices are unmanaged and do not incur fees. One cannot directly invest in an index.
Fee-Based Planning offered through W3 Wealth Advisors, LLC – a State Registered Investment Advisor – Third Party Money Management offered through ValMark Advisers, Inc. a SEC Registered Investment Advisor – Securities offered through ValMark Securities, Inc. Member FINRA, SIPC – 130 Springside Drive, Suite 300 Akron, Ohio 44333-2431 * 1-800-765-5201 – W3 Wealth Management, LLC and W3 Wealth Advisors, LLC are separate entities from ValMark Securities, Inc. and ValMark Advisers, Inc.

What Should I Be Asking My CPA About My Investments?

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The IRS Tax Code is, as you know, not a small document, nor is it one that remains static year over year.  Given the rapid pace of regulatory changes, many people elect to employ a tax professional to annually help navigate the process and make sure that deductions afforded to you are being taken advantage of.  While many of your tax professionals have probably already asked you the following questions, we thought it would be helpful to remind you of some good topics to discuss.  If you haven’t had a discussion with your CPA about these items, it may make sense to ask and see if there’s any additional tax savings available to you:

  • Can/Should I be Contributing More to A Retirement Account? We often get the scenario where a client has some excess money built up in their savings and asks us what to do with it, and often the first place we like to look are retirement accounts.  The benefits of tax-advantaged retirement accounts are hard to pass up, and the IRS Code around who can contribute, when, and how much is not the easiest thing to understand.  Your tax professional will be able to evaluate your situation, what plans you have access to at work, whether there’s an opportunity to fund an IRA or SEP/SIMPLE IRA (for the Self-Employed), and whether you’re “phased-out” from making any contributions.  Often times, they can run a simulation for you showing the difference between contributing and not contributing, which can redirect money from Uncle Sam’s pocket into yours.
  • Is There An Opportunity For Me To Take Advantage of A Lower Capital Gains Bracket? While this is not as common, in some cases individuals might find themselves in fairly low tax bracket in years between retirement and starting social security income.  Individuals who choose to delay their social security benefit and live off after-tax assets in the meantime could take advantage of light taxable income years by selling low-basis investments they’ve been hanging onto.  If they can stay at the 15% tax bracket, their capital gains tax rate is 0%.  It’s difficult to pull off, but with good planning it can be a fruitful exercise.
  • Are There Other Tax-Advantaged Tools I Should Be Taking Advantage Of? It’s always good to have a quick refresher, particularly around benefits enrollment time in Oct/Nov, of what company benefits are available to you and whether they can help your tax situation.  Having access to benefits like a Health Savings Account (HSA) and Dependent Care Flexible Spending Account (FSA) are ways to re-route money that would otherwise get taxed and spent on medical and dependent/childcare into a tax-free manner if used appropriately.
  • Are My Investment Advisory Fees Deductible? If you itemize on your taxes, some fees may be deductible. The IRS is very specific about which fees paid on your investments can be used as a deduction, but some indeed are. It’s not as common for fees within IRAs to be deductible, but fees paid directly to investment advisors from after-tax (“non-qualified”) investment accounts may be.  Most fees that exist in mutual funds are buried in the expense ratios, which are not usually deductible.
Any tax advice contained herein is of a general nature. Further, you should seek specific tax advice from your tax professional before pursuing any idea contemplated herein. Fee-Based Planning offered through W3 Wealth Advisors, LLC – a State Registered Investment Advisor – Third Party Money Management offered through ValMark Advisers, Inc. a SEC Registered Investment Advisor – Securities offered through ValMark Securities, Inc. Member FINRA, SIPC – 130 Springside Drive, Suite 300 Akron, Ohio 44333-2431 * 1-800-765-5201 – W3 Wealth Management, LLC and W3 Wealth Advisors, LLC are separate entities from ValMark Securities, Inc. and ValMark Advisers, Inc.

Comparison: The Killer of Contentment

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I think that wealth, much like temperature, is relative. One person might feel wealthy making a certain amount of money while another person, making the same amount of money, might feel like they’ve only got pennies to their name. Some of us might scoff when a doctor or lawyer says they don’t make enough money and are living paycheck to paycheck. When this happens, we wonder how someone making six figures can spend so much money.

But if you look at where they live, who they hang out with, and what type of persona they project to others, you can begin to identify how this can happen. A successful professional living in a high end neighborhood, surrounded by other successful professionals, is probably going to feel like they need a ton of stuff in order to keep up with everyone around them. You can’t drive an old car when everyone else around you drives a new one. And you can’t live in a modest house when everyone else has a giant house. Keep adding all that stuff up and suddenly, you might make six figures and just not feel all that wealthy, though in the traditional sense, you are.

Since we know that wealth is relative, we can all take steps to make ourselves feel wealthier. All we need to do is make sure that we’re living in the right places and comparing ourselves to the right people. If we remember that important fact – that wealth is relative – we can make ourselves feel a lot happier and content with what we have.

Where You Choose to Live Matters

I’ve come to the conclusion that where you choose to live has a huge impact on how wealthy you feel. If you live in a wealthy neighborhood, there’s pressure to keep up with your neighbors. You’ll need that perfectly manicured lawn and nice car in the driveway. If you’re not the richest person in your neighborhood, you’ll feel less wealthy, even if your income is higher than most. It’s hard to be satisfied with what you have when the neighbor next door to you has the fancier house and the nicer car.

One solution is to be the big fish in the small pond when it comes to your neighborhood choice. Wealth is relative, right? You’ll feel much wealthier when you’re not surrounding yourself with wealthy people.

Who You Compare Yourself to Also Matters

A new professional snags their big paycheck and feels inclined to get themselves a high end, luxury apartment instead of sticking with a normal apartment. After a few years, this person then goes out and gets themselves a huge house. Maybe they buy a luxury car. They go on fancy vacations. And suddenly, all of that income doesn’t feel like very much. The problem is that these people are comparing themselves to other people who are also making (or at least spending) a ton of money.

If you remember to keep your wealth in perspective, you can be much happier with the stuff you have. I feel pretty wealthy. How wealthy do you feel?

The opinions expressed in this article are those of author and should not be construed as specific investment advice.
Fee-Based Planning offered through W3 Wealth Advisors, LLC – a State Registered Investment Advisor – Third Party Money Management offered through ValMark Advisers, Inc. a SEC Registered Investment Advisor – Securities offered through ValMark Securities, Inc. Member FINRA, SIPC – 130 Springside Drive, Suite 300 Akron, Ohio 44333-2431 * 1-800-765-5201 – W3 Wealth Management, LLC and W3 Wealth Advisors, LLC are separate entities from ValMark Securities, Inc. and ValMark Advisers, Inc.

Pride and Investing

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“Pride of opinion has been responsible for the downfall of more men on Wall Street than any other factor.” –Charles Dow

 

 

Society places a high value on confidence and most people identify it as a key element for success in life. But does it necessarily hold true for successful investing?

In daily life when we talk about confidence we are referring to the degree of certainty that we hold in the validity of our knowledge, predictions about the future, or decisions. Self-confidence reflects our opinion about our own abilities. However, not everyone is realistic about their limitations and their abilities.

People that lack confidence are at one end of the spectrum. They underestimate their understanding of the facts and their ability to make sound decisions. This often leads to over-analyzing situations and even paralysis in making decisions.

Overconfident people, on the other hand, overestimate their predictive and problem-solving abilities. Experts have long known that people in general, and men in particular, tend to overestimate their abilities in a wide variety of areas from driving a car, solving problems and investing their money. When they decide on a course of action, it is done with a high degree of certainty that it is the right one. In reality, however they may have failed to seek clarification and expert counsel, consider all the available facts, or identify the potential consequences of their decisions. These oversights often result in poor choices that can come at a heavy price. Overconfidence and its ramifications has been an important area of study for behavioral economists, especially in the area of investing. This tendency to overstate what they know about a particular investment, the financial markets or the overall economy can wreak havoc on their finances in several ways:

Taking on unnecessary and excessive risk by concentrating their investments in a few industries or companies that they expect will outperform. By definition, concentrated portfolios are less diversified and expose investors to greater risk of loss.

Excessive trading in an effort to time the financial markets. This has proven to be a strategy for failure even when executed by the most sophisticated investors in the world. The research in this area is broad, deep, and clear. Market timing results in investors earning only half of what they otherwise could have earned by simply sticking with a well constructed long-term portfolio. When the effects of trading costs and taxes are introduced the results are even more disappointing.

Reliance on intuition or “gut-feelings”. There is no substitute for facts, logic, and common sense when it comes to successful investing. It requires a commitment of time and effort and the application of sound investing principles.

Not adequately preparing for the future. Believing they have a sound plan to reach their financial goals and actually having one are two different things. While most Americans list a comfortable retirement as their highest priority and largest liability, fewer than half have a plan in place to reach that goal.

There is no question that confidence is an admirable quality and the foundation for optimism, motivation, and success. It is overconfidence, which is the belief that we know more than we do, and acting on that belief, that can undermine your financial future.

The opinions expressed in this article are those of author and should not be construed as specific investment advice. All information is believed to be from reliable sources, however, no representation is made to its completeness or accuracy. All economic and performance information is historical and not indicative of future results.
Fee-Based Planning offered through W3 Wealth Advisors, LLC – a State Registered Investment Advisor – Third Party Money Management offered through ValMark Advisers, Inc. a SEC Registered Investment Advisor – Securities offered through ValMark Securities, Inc. Member FINRA, SIPC – 130 Springside Drive, Suite 300 Akron, Ohio 44333-2431 * 1-800-765-5201 – W3 Wealth Management, LLC and W3 Wealth Advisors, LLC are separate entities from ValMark Securities, Inc. and ValMark Advisers, Inc.

Retired? It May Be Ok to Spend Some of That Savings

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Many people who manage to save enough for retirement find it agonizing to start spending that money when the day finally comes. As a result, they needlessly deny themselves the simple pleasures and occasional splurges that can make the difference between a dream retirement and a dreary one.

More Americans face the opposite dilemma, of course. According to the 2013 Retirement Confidence Survey from the Employee Benefit Research Institute, nearly 3 out of 10 people have virtually nothing saved for retirement, and 57% have less than $25,000 in total savings and investments.

But at the other end of the savings spectrum are those frugal retirees who have been prudent or lucky enough to set aside a serious pile of cash. For them, the challenge is shifting from saving mode to spending mode once they retire. And, perhaps not surprisingly, it’s often the very best savers who have the greatest trouble doing that.

If this sounds at all like you, here are some ideas that might help you spend your money.

Ask yourself what you’re afraid of. There are probably both rational and irrational reasons to be reluctant to spend.  A rational reason might be to have enough money to cover a lengthy nursing home stay. Another one might be to send a grandchild to an expensive college someday. Less rational is hoarding assets simply because you can’t bear to see your net worth decline.

Consider your cash flow. Many of us grew up believing we should never touch our principal. And while that philosophy can serve us well during our working and saving-for-retirement years, it can also become so ingrained that it’s hard to change.  If your goal is not to leave a large estate, inevitably, you will have to spend principal.

Evaluate your estate goals. Some of those desirous of leaving inheritances tend to hesitate to spend anything because they have a dollar figure in mind that they want to leave as an inheritance. That’s all well and good unless it reaches the point where you’re living on cold cereal so your heirs can someday gorge themselves on Chateaubriand. If your heirs really care about you, chances are they’d rather see you living comfortably now than get a few more bucks from your estate when you’re no longer around. And if they don’t really care about you, you might as well start ordering Chateaubriand for yourself.

Don’t equate spending with squandering. Sometimes it’s more prudent to spend your money than to save it. If your car is running up big repair bills, laying out the cash for a new one might be cheaper in the long run. If your house is ready for a new roof, it’s likely to be more cost-effective to replace it now than wait until you start seeing water damage on your ceilings. If you want to go back to school in retirement to prepare yourself for a new career, think of it as an investment in your future rather than an extravagance.

Other big expenditures, such as new furniture or a dream vacation, can be a harder sell to the super-savers. But consider whether you’d get more happiness from a slightly bigger bottom line on your mutual fund statement or, let’s say, a once-in-a-lifetime cruise around the Mediterranean. Some hesitant retirees find that consulting a financial planner and running detailed simulations showing what can comfortably be spent delivers that last bit of verification by way of professional advice from an unrelated party.

The opinions expressed in this article are those of author and should not be construed as specific investment advice. All information is believed to be from reliable sources, however, no representation is made to its completeness or accuracy. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Diversification cannot assure a profit or guarantee against a loss.
Fee-Based Planning offered through W3 Wealth Advisors, LLC – a State Registered Investment Advisor – Third Party Money Management offered through ValMark Advisers, Inc. a SEC Registered Investment Advisor – Securities offered through ValMark Securities, Inc. Member FINRA, SIPC – 130 Springside Drive, Suite 300 Akron, Ohio 44333-2431 * 1-800-765-5201 – W3 Wealth Management, LLC and W3 Wealth Advisors, LLC are separate entities from ValMark Securities, Inc. and ValMark Advisers, Inc.

Is Your Investment Rate of Return the Most Important Thing to You?

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Our industry sometimes focuses too narrowly on rate of return. It makes sense when you consider that a percentage is the best way to compare how your investments are doing against the broader market, other investment strategies being deployed, or your friends at the water cooler. But we should remind ourselves that we don’t spend a percentage; we spend the account value. While an investor should certainly consider rate of return as a measure for how an investment is performing, one should also be aware of investment strategies that exist not solely to generate the highest rate of return, but rather are designed to result in the most spendable money in one’s life. After all, isn’t that why we’re doing this?

I’ve found the easiest way to explain this principle is to walk through a hypothetical example. Investor A has a traditionally invested $1,000,000 portfolio. If that account loses 10% in Year 1, the investor now has $900,000. Now, assume in Year 2 the investor has a +10% return. Even though that client’s average return over the first two years is 0% (-10% in year one, +10% in year two), their account would have recovered 10% on a lower number, and their account would end only at $990,000, down $10,000 from where they started. If you repeat that logic on Investor B with a down and up swing of only 5%, maybe because the investor had a strategy designed to manage the portfolio’s volatility, they would have dropped down to $950,000 after Year 1, and recovered back up to $997,500. Same average rate of return (both 0%), but the account with less volatility ends with more money (difference of $7,500).

Now, let’s compound that problem with the fact that the investor is withdrawing money. Imagine if after that first year drop, each investor needs to withdrawal $10,000. Investor A (our 10% scenario) only recovers back up to $979,000 where Investor B (5% scenario) ends at $987,000. You’ll notice that the difference between the two approaches widen when withdrawing. This is why, especially in situations where investors are withdrawing from an account, a portfolio with less volatility (and even a lower rate of return!) may end up with more money for that investor.

The moral of the story: While rate of return is important, it can sometimes mislead investors into chasing strategies that don’t fit their goals, and ultimately result in less money in their lives. Many people choose to engage an investment advisor to understand their rates of return relative to risk. Monitoring these facts over time can make for much more comfortable savers and retirees.

The opinions expressed in this article are those of author and should not be construed as specific investment advice. All information is believed to be from reliable sources, however, no representation is made to its completeness or accuracy. All economic and performance information is historical and not indicative of future results. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Diversification cannot assure a profit or guarantee against a loss.
Fee-Based Planning offered through W3 Wealth Advisors, LLC – a State Registered Investment Advisor – Third Party Money Management offered through ValMark Advisers, Inc. a SEC Registered Investment Advisor – Securities offered through ValMark Securities, Inc. Member FINRA, SIPC – 130 Springside Drive, Suite 300 Akron, Ohio 44333-2431 * 1-800-765-5201 – W3 Wealth Management, LLC and W3 Wealth Advisors, LLC are separate entities from ValMark Securities, Inc. and ValMark Advisers, Inc.

New Report Illustrates Financial Fragility for many American Families

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As Certified Financial Planners we are committed to encouraging savings for a rainy day, whether that is an emergency fund or for retirement. A new report released by the Economic Policy Institute last month further brought into focus the current financial preparedness of the median American family.*  Most statistics seem to quote averages which is not always the most informative number. The median on the other hand is the midpoint of numbers by frequency, or the most common midpoint, and is not skewed by smaller numbers of people with larger account balances.

According to the study the average savings of all working-age families, defined as those between 32 and 61 years old, is $95,776. A closer look shows us that the median savings for the same group is just $5,000.  That number is beyond discouraging, it’s dismal.

In our opinion, the current state of financial unpreparedness requires immediate actions if families are to have the assets needed for emergencies, let alone retirement. The trends exhibited in the report paint a picture of increasingly inadequate savings and retirement income for successive generations of Americans—and growing disparities by income, race, ethnicity, education, and marital status. Women, who by some measures are narrowing gaps with men, remain much more vulnerable in retirement due to lower lifetime earnings and longer life expectancies.

The issue does not only strike less affluent populations. Those with six figure incomes can also have to deal with the inability to pay for unexpected expenses. ** Volatility in spending needs from month to month, coupled with the lack of sufficient savings, can create enormous stress about having enough to make monthly payments.

Our charge as Certified Financial Planners is to always make sure our clients are as prepared as possible for emergencies. We know the financial challenges each family faces can be very different, however, it is vital to start addressing financial concerns in a realistic way based on one’s circumstances. Rules of thumb can be helpful, but do not always layout easy to follow paths to reach goals. Focusing on goals you cannot realistically reach can be discouraging. Reading you should have ten times your annual income saved to retire can be overwhelming. Starting with realistic/achievable goals and successfully hitting, say six months of living expenses for an emergency fund can be much more productive than spinning your wheels.

Most investors have built their sums up over time with discipline. Those that are fortunate enough to inherit assets know that the family member that left them the assets did it bit by bit too. Doing the math and understanding how much one can realistically save based on realistic rates of return is the first step to building a sustainable financial future.

 

*Economic Policy Institute March 3, 2017
**Farrell, Diana and Greig, Fiona. “The Monthly Stress-Test on Family Finances.” JPMorgan Chase Institute, 2017.
Fee-Based Planning offered through W3 Wealth Advisors, LLC – a State Registered Investment Advisor – Third Party Money Management offered through ValMark Advisers, Inc. a SEC Registered Investment Advisor – Securities offered through ValMark Securities, Inc. Member FINRA, SIPC – 130 Springside Drive, Suite 300 Akron, Ohio 44333-2431 * 1-800-765-5201 – W3 Wealth Management, LLC and W3 Wealth Advisors, LLC are separate entities from ValMark Securities, Inc. and ValMark Advisers, Inc.

Starting Strong: Having a Strategy to Spending Your Money in Retirement

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The irony of it all is that you’ve done the hard part already! Maybe you’ve sacrificed a little from every paycheck to save for retirement and now you’re practically here.

If you are like many Americans approaching retirement or recently retired, you too may be finding the decisions you must make on how to spend your money to be overwhelming.  The decisions you make on how to generate retirement income can have substantial consequences. Studies have shown that while the value of a financial planner is often narrowly associated with their ability to “beat the market”, it’s their analyses and advice on these key decisions where they can really deliver for their clients.  In fact, in 2013 Dave Blanchett and Paul Kaplan of Morningstar Research published in The Journal of Retirement the concept of “Gamma”, which they defined as the additional value that can be achieved by an individual investor from making more intelligent financial planning decisions.  They found that a retiree can expect to generate 22.6% more income in retirement by using a more efficient retirement income strategy.

In English, that’s more money for you to enjoy in retirement if you make good decisions.  While a good strategy is designed with your unique life goals and risks in mind, many Americans can make the mistake of glossing over numerous decisions, including:

  • Income Streams (Social Security and Pensions): Nearly half of all Americans opt to take their social security benefits at the soonest possible time, age 62.  By doing so, 25% of their benefit @ Full Retirement Age is lost.  At odds with that fact is that we know one of the more common risks facing the average retiree is outliving their money, something by which a decision to delay one’s social security benefit would in theory help mitigate.
  • After Tax vs. Pre-Tax money: Understanding how to navigate distributions from investment accounts and leveraging after-tax money along with pre-tax (retirement accounts) to reach an optimal taxable income can be quite valuable.  A withdrawal strategy can help one take advantage of all tax deductions and exemptions while staying in lower tax brackets and extending tax deferrals.
  • Understanding Income Guarantees: Some individuals have utilized guaranteed income investments like annuities as part of their investment strategy, but those guarantees can be complex and rife with opportunities to misstep.  Owners of these investments will want to make sure they completely understand the investment or engage a professional that does, so that there is no room for misinterpretation and the guarantees are being maximized.

These are just some examples, but they articulate fairly well how one’s approach to generating income can change their retirement experience…for better or worse.

The opinions expressed in this article are those of author and should not be construed as specific investment advice. All information is believed to be from reliable sources, however, no representation is made to its completeness or accuracy. All economic and performance information is historical and not indicative of future results. Any tax advice contained herein is of a general nature. Further, you should seek specific tax advice from your tax professional before pursuing any idea contemplated herein.
Fee-Based Planning offered through W3 Wealth Advisors, LLC – a State Registered Investment Advisor – Third Party Money Management offered through ValMark Advisers, Inc. a SEC Registered Investment Advisor – Securities offered through ValMark Securities, Inc. Member FINRA, SIPC – 130 Springside Drive, Suite 300 Akron, Ohio 44333-2431 * 1-800-765-5201 – W3 Wealth Management, LLC and W3 Wealth Advisors, LLC are separate entities from ValMark Securities, Inc. and ValMark Advisers, Inc.