Seven Reasons to Move Your Former Employer Retirement Plan to an IRA Rollover
by Dan Federman, CFP®
Many people who switch jobs or retire often leave their retirement plans with the old employer. In most cases, it is more beneficial to move these assets into an IRA Rollover. Here are some of the reasons to consider.
1. 401k expenses may be high, or may not be transparent
Under a 401k, the average annual administration fee charged to your account is 0.50 percent. Most IRA rollover accounts do not have any administrative fee associated with them and this represents an immediate saving. In addition, because you can choose where to invest with an IRA account, you’ll get to take advantage of funds that typically have lower expense ratios than funds available through your 401k. Furthermore, it is extremely difficult for an individual plan participant to determine exactly what fees and expenses they are paying.
2. Investment choices
When you move your 401k assets to an IRA in your name, you have an unlimited choice of investments in mutual funds, exchange traded funds, stocks, bonds, options,etc. compared to the limited choices available in most 401k plans.
3. Consolidate your assets.
By consolidating your retirement assets with one custodian, it makes it easy to track your investments, simplifies paperwork, and eliminates administrative hassles of dealing with multiple account registrations.
4. Required Minimum Distributions (RMDs)
When it’s time to make mandatory withdrawals by April 1st of the year after you turn 70 ½, the IRS does not allow RMDs to be made out of an IRA in lieu of a 401k RMD. They each have separate rules, so you may be required to withdraw from your 401k account and any Traditional IRA you have open at that time. By having it at one location, it much easier to determine your RMD, and more likely to avoid penalties.
5. Easier Asset Allocation
With one account for consolidating your retirement assets, you’ll be able to more readily see the mix of investments in your portfolio and adjust the balance as necessary to stay on track with your retirement goals.
6. Estate Planning – Manage the tax burden on your beneficiaries.
A Rollover IRA is better from an estate planning view. If you die before taking minimum distributions at 70 1/2, your named non-spousal heirs have the option to take your IRA assets and move them into IRA accounts under their name and extend the minimum distributions to their life expectancy. This gives your heirs the power of tax deferral over their lifetimes. There is no such opportunity with a 401k account held at the time of your death.
7. Option to convert to a Roth if it makes sense for your situation
A Roth IRA provides some advantages such as tax-free withdrawals, no minimum distributions at age 70 ½, and no penalties for certain early withdrawals.
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2011 Second Quarter Commentary – April 1, 2011
2011 Second Quarter Commentary - April 1, 2011
The stock market advanced over the past nine months without a significant pause or price decline, supported by continuous massive fiscal and monetary stimulus. The 2011 U. S. deficit is estimated at $1.7 trillion and the Federal Reserve is making direct market purchases of securities in the amount of $600 billion. We are in an era of unparalleled federal intervention in the private market sector. Thus, government policies are especially important in financial planning and investment analysis. What happens when quantitative easing ends in June?
Our recent report, “WEALTH OF NATIONS”, (See our website – http//2020insight.com/wealth-of-nations/ or call 703 683 8488 x 104 for a copy) compiled the many strengths and abundant assets available to the U. S. to solve financial and budgetary problems. When we consider our system of laws and a resilient political system, the nation’s wealth of natural resources and human resources, augmented by a tradition of solving problems; it is only prudent to remain constructive on the United States as political leaders work through very real issues. Winston Churchill observed: “You can always count on Americans to do the right thing – after they have tried everything else.” This statement can be applied to the democratic process which is designed for deliberation, not quick solutions. The investment community and the general public know that the solution to financial problems currently faced involve living within our means, i.e. reduction in spending on entitlements and benefits promised by political leaders in the past, to a level supported by sound tax policies. The political will to address spending issues appears to be growing and it is not too late to do the right thing.
THE DEFICIT
The current government spending problem looms large as the fiscal 2011 federal deficit is projected to reach $1.7 trillion. In addition, $2.7 trillion in U. S. Treasury debt is coming due and must be rolled over along with $200 billion in interest expenses, resulting in a total funding requirement of $4.6 trillion. If tax revenues come in at the estimated $2 trillion level, the remaining $2.6 trillion will be financed through the sale of Treasury notes and bonds. In other words, the Treasury must sell over $200 billion in new debt securities every month. We have passed the point where investors and foreign governments are purchasing 100% of bond auctions (only 62% in the last auction) and the rest is funded by “printing new money”, albeit via bookkeeping entries rather than by running the presses. Nonetheless, some of this new money will work its way into the economy and contribute to rising inflation. Many economists believe the run up in commodity prices has been caused by printing money to financing the deficits and emerging nations claim that the U. S. policies are exporting inflation. Even a nation as large and as strong as the U. S. cannot sustain deficits at the current level for a prolonged period without igniting inflation and impacting markets.
INFLATION
The attached Chart A shows a more realistic measure of real inflation than the government’s CPI numbers indicate. The money supply, Chart B, shows a trend reversal to a rising rate of growth in the money supply which confirms a growing economy. Thus, the Fed is succeeding in defeating deflationary forces and the fundamentals are in place for inflation to broaden beyond commodities, oil and stock prices. The CPI rose 0.5% in February – 6% annual rate. The Producer Price Index (PPI) rose 1.6% in February for a 19% annual rate. Import prices were up 1.4% in February. Food and energy increased 4% and 1.6% respectively in latest monthly report and inflation expectations are at the highest level since 2008. If markets were free from government intervention, interest rates would be considerably higher than the 3.5% range. Two prominent Federal Reserve governors have voiced concern over further quantitative easing and suggested that less stimulative policies would be considered at the next Fed meeting. We believe that moderate economic growth can continue with less government intervention and that the recovery will be self sustaining.
STOCK PRICES
Stock prices have risen strongly during the past two years and the price rise since August 2010 has been one of the longest in history without so much as a 5% to 10% correction. The recent sell off, sparked by the Japanese earth quake and Middle East political turmoil, took the S&P 500 Index down 3.6% before investors moved in to buy the dip. The sweet spot for stock prices appreciation that currently prevails has traditionally occurred during the period after recession has bottomed, but while interest rates remain low to foster the recovery. If economic growth continues to be moderate, but not so strong as to cause the Fed to start tightening credit, growth in corporate earnings should support stock market stability despite political instability in various parts of the world. In addition to robust earnings, S&P 500 companies hold $3.4 trillion in cash reserves available for capital expansion as end demand recovers. Equally important is the flow of funds into the market. Mutual funds that are invested in U.S. stocks had inflows of $19.71 billion in January and $12.97 billion in February, the fourth month in a row of positive inflows. It is always prudent to follow the money flows which determine the direction of stock price movements.
In view of improvement in the economy and rising inflation expectations, this is a good time for you (or friends and family) to review your investment goals and we would be happy to provide any assistance that you feel would be helpful.
As always, we welcome your questions and comments.
Robert E. Long, CFA Dan Federman, CFP®
Chairman & CEO Managing Director
Chart A Chart B
| inflation-charts | money-supply-charts |
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Managing Cash Flow in Retirement
Key Points
- Tools for the Task
- Regular Monitoring
- What to Look For
- How Will You Prepare for Retirement?
- Points to remember
Except for the fortunate few who don’t have to worry about money, the ultimate goal for most retirees is making sure their assets last as long as they live. Once a person or household no longer can rely on earned income to pay the bills and save for the future, balancing income and expenses becomes the primary focus of financial planning. And because of increasing longevity, managing cash flow is more critical than ever. A typical American electing to retire in his or her mid-60s may expect to live 20 or more years after retirement.
While many variables come into play depending on each person’s mix of income, lifestyle, and health, there are a number of planning moves that can help retirees live within their means and make appropriate adjustments in response to changes in income and expenses.
Tools for the Task
If you are retired, or about to retire, you will need to gather and organize key information before you can tackle the ongoing tasks of monitoring and managing your cash flow in retirement. The purpose is to give you a clear and complete picture of your current financial situation, as well as of any significant changes you expect. Two sources will provide this information:
- An up-to-date net-worth statement, which provides a snapshot of your assets, debt, and cash reserves.
- Your monthly or annual budget, with itemized breakdowns of your income and expenses. If you haven’t retired yet, it’s a good idea to prepare a projected budget of your retirement income and expenses.
Be sure to account for all expenses, including those that occur infrequently, such as insurance bills, college tuition, membership fees, and investment management fees. They should be reflected in your monthly budget on a prorated basis. If you need assistance creating your net-worth statement and budget, you may want to consult a financial advisor, a book on the subject, or resources that are available online – for example, the Financial Planning Toolkit at CCH Incorporated.
Analyzing this information will reveal any major problems that you need to overcome, such as insufficient cash reserves for an emergency or an income shortfall compared with current or projected expenses. It may also point up areas for improvement. For example, you may be able to free up cash by reducing debt or eliminating nonessential expenses.
Regular Monitoring
Plans and projections are always subject to change. Even with reasonable assumptions about investment returns, inflation, and retirement living costs, it’s likely you will encounter numerous changes to your cash flow over time. Frequent monitoring of your income and expenses will detect changes that you can address in a timely fashion to prevent significant problems down the road. Experts often recommend a monthly review of your budget, as well as a comprehensive annual review of your financial situation and goals. While you can keep track of your situation with paper and pen, specialized software may make the task easier, especially if your finances are relatively complex.
What to Look For
What should you look for as you monitor your finances? Following are potential developments that could affect your cash flow and require adjustments to your plan.
- Interest rate trends and market moves may result in an increase or decrease in income from your savings and investments. For example, if interest rates decline, you may have to reduce your expenses if you are periodically withdrawing a fixed percentage from your investment assets. Alternatively, you might consider altering your investment mix to pursue other sources of income, aside from traditional fixed-income investments – equity dividend income investments, for instance.
- You may also encounter changes in federal, state, and local tax rates and regulations. This factor may come into play if you relocate after retiring. The state you move to may impose higher income or property taxes, for example. Other factors that could have a bearing on your retirement cash flow include changes in Social Security and Medicare benefits or eligibility, as well as those affecting employer-provided retiree benefits and private insurance coverage.
- Inflation and health care costs are two other variables that can have an impact on living costs and, hence, your retirement planning assumptions.
- Life events – such as marriage, the death of a spouse, and the addition or loss of a dependent – may also affect your cash flow. Cash flow is also a matter of personal preferences and decisions, and here you will be in control of the many small and large choices likely to be made over the course of retirement. How much you spend on travel, entertainment and recreation and whether you live in a lower or higher cost locale are examples of factors that can have a significant effect on cash flow – and how long your retirement assets are likely to last.
That’s why it’s worth paying close attention to cash flow, making sure you budget carefully, monitor income and expenses frequently, and take action whenever you see significant changes in income and expenses.
Points to Remember
- Due to increasing longevity, managing cash flow has become a critical task for retirees seeking to ensure that they do not outlive their assets.
- An up-to-date net-worth statement and monthly budget providing itemized breakdowns of income and expenses are the basic tools used to monitor and manage cash flow.
- Interest rate trends and market moves may result in higher or lower income from savings and investments.
- Other factors that can alter cash flow include changes in inflation, health care costs, tax rates and regulations, and Social Security and Medicare benefits.
- Lifestyle choices – such as preferences for housing, travel, and entertainment – also affect cash flow.
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© 2011 McGraw-Hill Financial Communications. All rights reserved.
March 2011 — This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by Dan Federman, CFP®, a local member of FPA.
For a free portfolio review or to learn more about Ariba Asset Management, call 1-800-808-7488 x101 or visit www.aribaasset.com
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Seven Habits of a Highly Effective Investor
by Dan Federman, CFP® (a take-off of Seven Habits of Highly Effective People by Stephen Covey)
Habit 1.
Be Proactive. Start a financial plan. Meet with your adviser. Instead of worrying about the world’s problems, high oil prices, inflation, or if now is the time to buy gold, take a look at your own financial situation. Examine your spending habits, your overall expenses, take inventory of your assets, loans, wills, trusts, insurance coverage, asset registration, beneficiary designation, asset allocation,etc.
Habit 2.
Begin with the end in mind. Once you’ve taken inventory of where you are now, think about the future and how you would like it to look. By envisioning the lifestyle you’d like to lead and the major expenses involved such as college, new home, weddings, vacations, pet care,etc, you will have an “end in mind” to shoot for. By quantifying costs to these goals, you will also have a goal for investment returns required from your portfolio.
Habit 3.
Put first things first. “organize and execute around priorities.” What are your priorities? In terms of putting a savings plan together, contribute to your company retirement plan first (if eligible); set up a plan to contribute to a college savings fund if applicable; if you have credit card debt, set a plan to pay this down. This should come 2nd to the retirement plan and college savings because time is of the essence in terms of meeting these goals. third, establish 12 months of cash reserves (a function of your monthly expenses); fourth, set aside additional cash for any major expenses within the next 1-3 years; fifth, add to additional savings and long-term investments. Make saving a “habit.”
Habit 4.
Think Win Win. By working with an adviser who guides you to financial security, you both benefit. You achieve financial security, he/she receives an advisory fee for his/her guidance. You free up personal time to live your life. This is a win win. By managing your finances without a professional, you can also “win,” but it may come at the expense of lost personal time, or worse, costly mistakes.
Habit 5
Seek First to Understand, then to be Understood. Your investment adviser should seek first to understand where you are coming from. They should understand your risk tolerance, your financial needs and concerns, goals, and your attitude, knowledge, and emotions about markets and money. Be wary if your adviser touts the benefits of a financial product without regard to your personal situation.
Habit 6
Synergize. “Two heads are better than one.” By working with an adviser, you can bounce ideas off of him/her and perhaps come up with a better solution than either one of you could have developed on your own. Hopefully your adviser also works with his/her own team, too. Synergy is about teamwork, open-mindedness, and the adventure of finding new solutions to old problems.
Habit 7
Sharpen the Saw. Stay fresh. Continue to stay educated about personal finance topics. A static financial plan becomes outdated over time. Similarly, a desired asset allocation fluctuates over time and needs to be reviewed and rebalanced as your situation changes. You can experience a vibrant life with financial abundance, or you can procrastinate and miss out on the benefits of accumulated wealth and compound interest.
For a free portfolio review or to learn more about Ariba, please visit www.aribaasset.com or call 1-800-808-7488 x101
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What is a Financial Plan?
By Dan Federman, CFP®
At its very basic level, financial planning is a process that begins by assessing your current financial situation (net worth, income, monthly expenses, medical and other insurance coverage, employee benefits, tax returns, and estate planning). This type of data gathering is an effort in itself, but it really gets the ball rolling in terms of looking at where you stand today. Digging in deeper, it may also lead to additional questions such as “have you looked into refinancing your mortgage?” “what are the terms of your stock ownership agreement?” and “what is your overall attitude toward the financial markets?”
Once you have an idea of where you stand financially, a logical next step is to think about where you’d like to be. It’s a good time to think about the vision you have for your life and what you hope to accomplish (i.e. your goals) in the near-term, in 5 years, 10 years, etc.
- Newlyweds just starting a family will want to look at life insurance policies, disability income insurance, setting up a will, contributing to retirement and college plans, if possible, and making sure they have ample cash reserves (9 to 12 months of spending) in the event of job loss or a medical emergency.
- For most people, building up enough retirement savings is the primary long-term goal. By examining your monthly expenses you can get an idea of how much you can save each month into your 401k or your Individual IRA or Roth IRA. A good general goal is to save 10-15% of your annual income. Obviously, if you can afford to save more, save to the maximum amount possible.
- Those who have reached retirement age may be interested in income strategies from their investments to supplement social security, pensions, and other income sources they may have.
- Retirees who do not need income from their investments may be interested in investing with their children and grandchildren in mind. Alternatively, they may be interested in leaving a legacy by setting up a donor advised fund in their name.
The habit of saving on a regular basis is so much more important than choosing the “right investment.” The reason for this is because the more time you have to let your investments grow, the more you will benefit from compound (exponential) growth provided by a globally diversified portfolio of stocks, bonds, real estate, precious metals, oil & gas pipelines,etc.
The bottom line is that anything involving a “$” sign should be thought of in the context of one’s overall financial plan.
For a free portfolio review contact Ariba Asset Management Inc. at 1-800-808-7488 x101.
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