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Retirement Planning During A Global Pandemic

One of the benefits of financial planning is proactively preparing for periods of financial instability and chaos. Clearly, we are in such a period as all of us are experiencing the full range of anxiety and insecurity caused by: The health risk to ourselves and our loved ones. The sense of isolation and disruption. The financial impact on our income and investments. The fear of the unknown; this is unprecedented! Let’s acknowledge that the specific nature of the pandemic and the emotional impact of being isolated were not factors that many folks anticipated or planned for. And while it is impossible to avoid the emotional discomfort, we can gain some measure of security by applying logic, research, and smart strategy to the things we can control, especially within our finances. The economic impacts of this crisis have been experienced before and a good financial plan can address these periods of instability and...

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The Difference Between Tax Preparation and Tax Planning

In the first quarter of each year, much of America turns their attention to filing tax returns. It’s not something we relish, but necessary to comply with the tax code.  So this year, while you are forced to think about taxes and perhaps have all the important documents in front of you, make a decision to also do some tax planning. So what’s the difference between tax preparation and tax planning?  That is an important distinction.  Tax preparation requires us to look back upon the past year and provide an accounting to the IRS about the amount of tax we owe.  While your tax preparer will use every technique to minimize this amount, the opportunities to improve your tax picture for the past year are somewhat limited. Conversely, tax planning is forward looking to the coming tax year and beyond.  It’s quite understandable that your tax preparer may not be in a...

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Medicare and Tax Planning: Managing The Premium Surcharge

In a previous blog post (Converting Your Retirement Nest Egg to Income), I argued that higher income individuals must juggle a far more complex and unique set of variables in retirement than they faced in their working years, if they hope to be as efficient as possible with their accumulated wealth.  Many of the variables are tax related and interrelated, in that a change to one may change the others. While complicated, a holistic, forward-looking planning process pays big dividends in tax efficiencies that can stretch your retirement nest egg.  This post will focus on one specific variable; the Medicare Premium Surcharge, called the Income Related Monthly Adjustment Amount or IRMAA. Wait, what does Medicare premiums have to do with retirement tax planning?  At the risk of oversimplifying, here is a quick summary explanation (for those interested, here’s a more detailed look from the IRS): Medicare is our system of retiree health...

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Converting Your Retirement Nest Egg to Income

The moment you realize you don’t actually know how to make your savings last.

Let’s assume that you’re completing a solid career, have earned a good income and through thrift and discipline, accumulated a significant nest egg for retirement.  Sounds good so far, right?  But as you approach retirement, the thought may occur to you: “I don’t really know how to convert this nest egg into retirement income when I stop working”. Well, you’re not alone.  In our experience, there is a fair amount of angst that accompanies this much anticipated life event, and for good reason.  Compared to the working years, there are many unique moving parts and complexities to consider in retirement that most individuals have never had to think about.  Building wealth while earning a healthy income is pretty one dimensional. For most individuals, it’s about setting aside regular long term savings and investments in the most tax effective manner possible.  With relatively high marginal tax brackets, individuals tend to build their retirement nest eggs with pretax contributions first; usually through contributions...

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Social Security Timing: Choosing the Right Strategy

For most retirees, Social Security is an essential component of financial security.  It is estimated that Social Security benefits account for one-third of all retirement income each year.  Despite its significance, it appears that many retirees are not optimizing their benefits and losing out on substantial income over their lifetimes.  The Social Security claiming options are complex and there is no one strategy that is the right fit for everyone; however, one of the common errors is claiming too early.  Only 4% of retirees wait until age 70 to claim the maximum retirement benefit.  A recent study estimates that US retirees would generate an additional $111,000 of income on average over their retirement years if they optimized their Social Security benefit selection.   Many factors may influence the decision to claim early, with poor health and a reduced life expectancy being the most common. There is a break-even life expectancy calculation that is important to consider: how long must I live before the maximized age 70 Social...

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What is an inverted yield curve and why does it matter?

If you have been tuned-in to the financial press recently, you will have noticed a great deal of attention surrounding the concept of an inverted yield curve.  Why all the excitement and alarm?  While the topic can be quite complex, here is a quick primer. The Yield Curve:  This is an important metric to economists.  It is a simple graph that plots the yields of U.S. Treasury obligations of all different maturities.  Remember, Treasuries (bills, notes and bonds) are debt instruments issued by the US Government; it’s how they borrow money.  The Treasury’s “maturity” describes how long before the bond is repaid and ranges from 1 month to 30 years.  The vertical axis of the graph measures the % yield paid by the bond.  The horizontal axis measures the length of all the maturities. Normal Yield Curve:  Under normal conditions, the curve created by plotting the points on the graph is upward sloping.  It indicates that interest rates increase with each longer maturity.  At the most basic...

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Secure Act: What You Need to Know

It appears that concern over the retirement readiness of American workers has reached a point where both Houses of Congress are poised to pass new legislation with broad bipartisan support.  The House version of the legislation is called the SECURE Act and has twenty-six individual components impacting either an employer’s ability to offer retirement benefits to its employees or an employee’s ability to save more easily and effectively for retirement.  Here is a quick summary of the more impactful provisions: Employer related: Multiple-Employer Plans (MEP’s)- Small employers are often discouraged from offering retirement plans due to the corresponding cost and administrative burden.  The SECURE Act expands on previous efforts to allow small employers to band together to form Multiple-Employer Plans thereby sharing costs and admin duties.  The act broadens and liberalizes the rules allowing small firms that do not share a common geographic area, trade, industry, or profession to join the...

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Chasing Investment Winners: Good intentions, Bad outcome

We often hear some variation of the following question: “Some of my investments outperformed all the others; why don’t I put more of my money in the investments that did really well?” For example, if we look at 2017, we see that large company growth stocks, especially those in the technology sector, performed exceptionally.  So why wouldn’t we overweight our portfolio with these types of investments? The Answer Is: if we could accurately predict this in advance and then concentrate all or more of our investments into the best performing investment type with a sufficient probability of success, we would.  But we can’t.  Lots of people try, but the historical evidence is clear.  It can’t be done in an efficient and predictable manner.  And here, with a minimum of investment jargon, is why: The investment performance of each type of investment (or asset class), relative to all the other types, is purely...

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Retirees Often Have Problems Managing Their Life Savings

With the growth in popularity of 401k plans, it’s common for employees to accumulate large account balances through disciplined savings and the power of compound investment growth.  Much of the attention over the years has centered around the habits and skills needed to effectively create a significant retirement nest egg. But, as retiring employees are discovering, accumulating the nest egg is only half the challenge.  The other half is all about how you distribute income from your nest egg once you retire.  The more efficient your plan, the longer the money lasts.  There is growing evidence and concern that employees aren’t well prepared for the task of converting a lump sum of money into an income stream that lasts for their lifetime. Here are the primary issues: Ideally, preparation should begin well before retirement in the preretirement working years. The “optimal plan” requires different and specialized tax and investment techniques coupled with some actuarial...

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Small Business Owner? What’s the right retirement plan?

In a previous post, we discussed the issues faced by business owners seeking to extract profits from their firms on a tax-advantaged basis through a qualified retirement plan and discussed the Safe Harbor 401-k Plan design.   In this blog post, let’s look at additional plan design opportunities well suited for self-employed business owners with few or no employees. This business could be someone’s primary occupation or a lucrative side business.  In either regard, a number of options exist that allow the business owner to shelter income from taxation and invest for retirement.  In our experience, individuals often do not look past the obvious choices and miss out on some interesting opportunities. A common default choice is the SEP IRA.  A self-employed business owner may contribute 25% of their net profits to a SEP IRA plan up to a maximum dollar amount of $54,000 in 2017.   It is a very simple plan...

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