High-Yield Bonds: The Pros and Cons

May 17, 2013 By Leave a Comment

Interest rates at historically low levels are great for those looking to refinance a mortgage or borrow money to start a business. However, people who rely on their investments for income have sought out a variety of alternatives to rock-bottom yields on U.S. Treasuries, including high-yield bonds. If you’re considering investing in high-yield bonds–sometimes called “junk bonds”–yield shouldn’t be the only factor in your decision.

What are high-yield bonds?
High-yield bonds are corporate bonds considered less than investment grade (a rating of BB or lower from Standard & Poor’s or Fitch, Ba or lower from Moody’s). A bond can fail to achieve investment-grade status for many reasons. A company may be in a turnaround situation; high-yield bonds have frequently been used as a way to finance large-scale leveraged buyouts, such as that of RJR Nabisco in the 1980s. Or the company might already have substantial debt on the books, or have a risky or untested business model. Whatever the reason, there is greater uncertainty about the company’s ability to repay its debt.

The advantages
So why would an investor be willing to face those risks? In a word, yield. The more uncertainty about an issuer’s ability to repay its debt, the higher the interest rate investors typically demand from its bonds. As of early November 2012, one benchmark index of high-yield bonds was yielding almost 4% more than a comparable index of corporate bonds, and almost 5% more than a 10-year Treasury.*

Because a junk bond’s yield is often more dependent on the quality of the issuer than on other factors, it can sometimes be less affected by interest rate changes than investment-grade yields. That difference can provide an additional level of diversification for a bond portfolio (though diversification alone cannot guarantee a profit or protect against potential loss). You can provide still another level of diversification by investing in a variety of high-yield bonds from different issuers in different industries.

Don’t forget that even high-yield bonds typically have precedence over common stocks in the event of a bankruptcy; that increases the odds that you would receive at least part of your original investment if the issuer went under.

Factors to consider
Not surprisingly, default rates on high-yield bonds tend to be lower when the economy is robust; renewed recession could mean more defaults by companies already on shaky ground. Also, remember that selling any bond before it matures could mean a loss of principal. While interest rates are expected to remain low for another couple of years, bond values generally are likely to fall when rates begin to rise. A credit rating downgrade of your high-yield bond also would likely reduce its market value. Finally, recent investor interest has boosted prices of high-yield bonds generally; consider getting expert help in deciding whether high-yield, investment-grade debt, or dividend-paying equities represent a better investment at current valuations.

If you’re a long-term investor, there’s another factor to consider. Bonds can have a call provision that lets the issuer redeem the bond before it matures. The lower current interest rates are, the more likely they are to trigger call provisions on bonds with a higher rate. If you rely on the interest from a high-yield bond and it gets called, you’ll be faced with the challenge of replacing that income.

Also, individual high-yield bonds can sometimes be less liquid than investment-grade bonds, so you might have some difficulty selling the bond at your asking price. And during periods of global uncertainty, high-yield bond values can drop as investors flock to less risky investments generally. As with any investment, make sure you’re being compensated for the level of risk you’re willing to take.

*Data based on yields reported for Merrill Lynch High Yield Constrained Index, Barclays Capital U.S. Corporate Bond Index, and daily Treasury yield curve rates as of November 7, 2012.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2013

Filed Under: Bonds, Investments

Changing Jobs? Take Your 401(k) and … Roll It!

May 10, 2013 By Leave a Comment

If you’ve lost your job, or are changing jobs, you may be wondering what to do with your 401(k) plan account. It’s important to understand your options.

What will I be entitled to?
If you leave your job (voluntarily or involuntarily), you’ll be entitled to a distribution of your vested balance. Your vested balance always includes your own contributions (pretax, after-tax, and Roth) and typically any investment earnings on those amounts. It also includes employer contributions (and earnings) that have satisfied your plan’s vesting schedule.

In general, you must be 100% vested in your employer’s contributions after 3 years of service (“cliff vesting”), or you must vest gradually, 20% per year until you’re fully vested after 6 years (“graded vesting”). Plans can have faster vesting schedules, and some even have 100% immediate vesting. You’ll also be 100% vested once you’ve reached your plan’s normal retirement age.

It’s important for you to understand how your particular plan’s vesting schedule works, because you’ll forfeit any employer contributions that haven’t vested by the time you leave your job. Your summary plan description (SPD) will spell out how the vesting schedule for how your particular plan works. If you don’t have one, ask your plan administrator for it. If you’re on the cusp of vesting, it may make sense to wait a bit before leaving, if you have that luxury.

Don’t spend it, roll it!
While this pool of dollars may look attractive, don’t spend it unless you absolutely need to. If you take a distribution you’ll be taxed, at ordinary income tax rates on the entire value of your account except for any after-tax or Roth 401(k) contributions you’ve made. And, if you’re not yet age 55, an additional 10% penalty may apply to the taxable portion of your payout. (Special rules may apply if you receive a lump-sum distribution and you were born before 1936, or if the lump-sum includes employer stock.)

If your vested balance is more than $5,000, you can leave your money in your employer’s plan until you reach normal retirement age. But your employer must also allow you to make a direct rollover to an IRA or to another employer’s 401(k) plan. As the name suggests, in a direct rollover the money passes directly from your 401(k) plan account to the IRA or other plan.

This is preferable to a “60-day rollover,” where you get the check and then roll the money over yourself, because your employer has to withhold 20% of the taxable portion of a 60-day rollover. You can still roll over the entire amount of your distribution, but you’ll need to come up with the 20% that’s been withheld until you recapture that amount when you file your income tax return.

Should I roll over to my new employer’s 401(k) plan or to an IRA?
Assuming both options are available to you, there’s no right or wrong answer to this question. There are strong arguments to be made on both sides. You need to weigh all of the factors, and make a decision based on your own needs and priorities. It’s best to have a professional assist you with this, since the decision you make may have significant consequences–both now and in the future.

Reasons to roll over to an IRA:
• You generally have more investment choices with an IRA than with an employer’s 401(k) plan. You typically may freely move your money around to the various investments offered by your IRA trustee, and you may divide up your balance among as many of those investments as you want. By contrast, employer-sponsored plans typically give you a limited menu of investments (usually mutual funds) from which to choose.

• You can freely allocate your IRA dollars among different IRA trustees/custodians. There’s no limit on how many direct, trustee-to-trustee IRA transfers you can do in a year. This gives you flexibility to change trustees often if you are dissatisfied with investment performance or customer service. It can also allow you to have IRA accounts with more than one institution for added diversification. With an employer’s plan, you can’t move the funds to a different trustee unless you leave your job and roll over the funds.

• An IRA may give you more flexibility with distributions. Your distribution options in a 401(k) plan depend on the terms of that particular plan, and your options may be limited. However, with an IRA, the timing and amount of distributions is generally at your discretion (until you reach age 70½ and must start taking required minimum distributions in the case of a traditional IRA).

• You can roll over (essentially “convert”) your 401(k) plan distribution to a Roth IRA. You’ll have to pay taxes on the amount you roll over (minus any after-tax contributions you’ve made), but any qualified distributions from the Roth IRA in the future will be tax free.

Reasons to roll over to your new employer’s 401(k) plan:
• Many employer-sponsored plans have loan provisions. If you roll over your retirement funds to a new employer’s plan that permits loans, you may be able to borrow up to 50% of the amount you roll over if you need the money. You can’t borrow from an IRA–you can only access the money in an IRA by taking a distribution, which may be subject to income tax and penalties. (You can, however, give yourself a short-term loan from an IRA by taking a distribution, and then rolling the dollars back to an IRA within 60 days.)

• A rollover to your new employer’s 401(k) plan may provide greater creditor protection than a rollover to an IRA. Most 401(k) plans receive unlimited protection from your creditors under federal law. Your creditors (with certain exceptions) cannot attach your plan funds to satisfy any of your debts and obligations, regardless of whether you’ve declared bankruptcy. In contrast, any amounts you roll over to a traditional or Roth IRA are generally protected under federal law only if you declare bankruptcy. Any creditor protection your IRA may receive in cases outside of bankruptcy will generally depend on the laws of your particular state. If you are concerned about asset protection, be sure to seek the assistance of a qualified professional.

• You may be able to postpone required minimum distributions. For traditional IRAs, these distributions must begin by April 1 following the year you reach age 70½. However, if you work past that age and are still participating in your employer’s 401(k) plan, you can delay your first distribution from that plan until April 1 following the year of your retirement. (You also must own no more than 5% of the company.)

• If your distribution includes Roth 401(k) contributions and earnings, you can roll those amounts over to either a Roth IRA or your new employer’s Roth 401(k) plan (if it accepts rollovers). If you roll the funds over to a Roth IRA, the Roth IRA holding period will determine when you can begin receiving tax-free qualified
distributions from the IRA. So if you’re establishing a Roth IRA for the first time, your Roth 401(k) dollars will be subject to a brand new 5-year holding period. On the other hand, if you roll the dollars over to your new employer’s Roth 401 (k) plan, your existing 5-year holding period will carry over to the new plan. This may enable you to receive tax-free qualified distributions sooner.

When evaluating whether to initiate a rollover always be sure to (1) ask about possible surrender charges that may be imposed by your employer plan, or new surrender charges that your IRA may impose, (2) compare investment fees and expenses charged by your IRA (and investment funds) with those charged by your employer plan (if any), and (3) understand any accumulated rights or guarantees that you may be giving up by transferring funds out of your employer plan.

What about outstanding plan loans?
In general, if you have an outstanding plan loan, you’ll need to pay it back, or the outstanding balance will be taxed as if it had been distributed to you in cash. If you can’t pay the loan back before you leave, you’ll still have 60 days to roll over the amount that’s been treated as a distribution to your IRA. Of course, you’ll need to come up with the dollars from other sources.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2013

Filed Under: 401(k) Plans

The “SEPP” Exception to the IRA Premature Distribution Tax

May 3, 2013 By Leave a Comment

In these challenging economic times, you may be considering taking a withdrawal from your traditional IRA. While you’re allowed to withdraw funds from your IRAs at any time, for any reason, the question is, should you?

Why you should think twice
Taxable distributions you receive from your IRA before age 59½ are generally referred to as premature distributions, or early withdrawals. To discourage early withdrawals, they’re subject to a 10% federal penalty tax (and possibly a state penalty tax) in addition to any federal and state income taxes. This 10% penalty tax is commonly referred to as the premature distribution tax.

However, not all distributions before age 59½ are subject to the federal penalty tax. For example, the penalty tax doesn’t apply if you have a qualifying disability, or if you use the money to pay certain medical, college, or first-time homebuyer expenses.

The SEPP exception to the penalty tax
But one of the most important (and often overlooked) exceptions, from a retirement income perspective, involves taking a series of “substantially equal periodic payments” (SEPPs) from your IRA. This exception from the federal penalty tax is important because it’s available to anyone, regardless of age, and the funds can be used for any purpose.

SEPPs are amounts that are calculated to exhaust the funds in your IRA over your lifetime (or life expectancy) or the joint lives (or joint life expectancy) of you and your beneficiary. To avoid the 10% penalty, you must calculate your lifetime payments using one of three IRS-approved distribution methods, and take at least one distribution annually.

Calculating your payment
If you have more than one IRA, you can take SEPPs from just one of your IRAs or you can aggregate two or more of your IRAs and calculate the SEPPs from the total balance. It’s up to you. But you can’t use only a portion of an IRA to calculate your SEPPs.

You can also use tax-free trustee-to-trustee transfers (or rollovers) to ensure that the IRA(s) that will be the source of your periodic payments contain the exact amount necessary to generate the payment amount you want based on the IRS formulas. This makes the SEPP exception a very important and flexible retirement income planning tool.

Modifying your payments
Even though your payments must be calculated as though they’ll be paid over your lifetime (or over you and your beneficiary’s lifetimes), you don’t actually have to take distributions for that long. You can change, or stop, your SEPPs after payments from your IRA have been made for at least five years, or after you reach age 59½, whichever is later.

But be careful–if you “modify” the payments before the required waiting period ends, the IRS will apply the 10% penalty tax (plus interest) to all taxable payments you received before age 59½ (unless the modification was due to your death or disability).

For example, assume Mary began taking SEPPs from her traditional IRA account three years ago, when she was 43 years old (using one of the three IRS-approved methods). Mary does not take a distribution this year. Because Mary’s payment stream has been modified before she turned 59½, the 10% penalty (plus interest) will now apply retroactively to the taxable portion of all her previous distributions.

The five-year period begins on the date of your first withdrawal, so you can’t make any changes before the fifth anniversary of that withdrawal. This is true even if you turn age 59½ in the meantime.

For example, assume John began taking SEPPs from his traditional IRA (using an IRS-approved method) on December 1, 2009, and that he also took payments on December 1 of 2010, 2011, and 2012. John turned 59½ on December 2, 2012. Even though John is over age 59½, he must take one more payment by December 1, 2013. Otherwise, he’ll be subject to the 10% penalty on the taxable portion of the distributions he took before he turned age 59½.

Caution: To ensure that your distributions will qualify for the SEPP exception to the premature distribution tax, be sure to get professional advice. The calculation of SEPPs can be complicated, and the tax penalties involved in the event of an error can be significant.

Also, if your state imposes a penalty tax on early withdrawals, be sure to determine whether any similar exemption from the state tax is available to you.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2013

Filed Under: Distributions, IRA

A New Retirement “Model” for Mid-Life Professionals

May 20, 2012 By Leave a Comment

You may recall that in my last blog, I wrote that some surveys conducted in recent years reported that the majority of Americans are not prepared for retirement(1). And I suggested that the reasons for this apparent lack of interest in the subject may not, in fact, reflect  lack of interest at all.

Instead, I suggested that the indifference was likely related to other factors, including the possibility that we, as a society, are thinking about retirement in the wrong way. The traditional notion of retirement – simply stop work at age 65 (or thereabouts) – might not be relevant to an increasingly large number of Americans.

In my last missive, I promised to provide a new context for retirement planning that would integrate more recent retirement trends (longer life expectancies and the desire to pursue meaningful work before retirement) into a framework that makes more sense for preparing for the next chapter in your life – financially and otherwise. A new approach may just be the tool that will help people become more interested in thinking about their long-term financial future!

In considering this “new retirement”, I have observed that more people now actually work during some of the years they are “retired”, which means they really have multiple “retirements”. The first one may include transitioning from your “traditional work” (whatever you have done for most of your professional life) to a new professional pursuit or even an entrepreneurial venture.

This shift could include consulting in your current field, pursuing a professional passion, or even working in a new occupation. Of course, for some, this stage of “retirement” may also include some pleasurable pursuits like golf, travel, gardening and/or other hobbies. These “extracurriculars” might (or might not) take up a greater percentage of your time than previously, but in this first stage of retirement, you are still involved with work, either because of financial considerations, your personal preference, or both.

Many people, even those who can afford to retire, want to remain active in their work and continue making professional contributions! But you might now want to work in a way that is different from what you did in the past – for example, professionals are increasingly making career choices that reflect both their professional passions and their personal values – even if it is the same field in which you have traditionally worked.

It is this deeper connection to work that can provide important psychological benefits during this first phase of retirement. In my opinion, these psychological and other non-financial considerations are just as important as considering your finances in making pre-retirement career choices. Professionals and entrepreneurs, particularly those in midlife, need to actually like their work!

Of course, the income you are continuing to generate during these years certainly provides another benefit which is to preserve (and potentially enhance) the financial resources you will need when you stop working. This may help mitigate one of today’s key retirement challenges which is also referred to as “longevity” risk – the possibility that you could run out of money during the years you are retired. For some of you, this period may last for 20 or 30 years, or even more.

The next phase of retirement – I refer to it as a “second” retirement – then includes the retirement we often think about – the time when we really have no earned income and are pursuing interests/activities not at all related to work.

This second phase of retirement also may eventually lead to the time when some of our physical capabilities begin to diminish and when we might not be able to live independently. There are many planning considerations for this phase, including the need to prepare for potentially higher medical costs and the additional expense of someone helping us with certain aspects of day-to-day living or even living in a nursing home.

You might want to use a “multi-phased” approach such as the one I have outlined as you think about your own circumstances and your planning. With the recent challenges in the economy, it might be wise to soon review your financial status and the timing of when you want to stop working (or when you think you will not be able to do so).

An effective review would involve estimating the income you will need when you stop working and determining whether you are on track to fund those future needs. However, if you wait too long to review your situation and you then learn you need to make adjustments, you might not have adequate time to improve the chances of meeting your goals.

If you need any help conducting such a review, I offer a complimentary consultation about your situation. Feel free to call me at (925) 301-4086 or email me at bill.pollak@lpl.com. Many people who have taken the time to develop a retirement plan often feel more confident about their financial future!

(1)       McKinsey Global Institute, November, 2008
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, please consult with your financial advisor prior to investing.

Filed Under: Retirement Planning

Navigating Retirement’s New Terrain

May 15, 2012 By Leave a Comment

I wanted to post a quick reminder about our upcoming retirement planning workshop in San Francisco on June 1, 2012! The challenges in the housing market, fluctuating stock prices, and US companies seemingly reluctant to bring on new workers are making people’s financial lives complicated! With uncertainty about the future value of retirement accounts and home equity, many Americans may not be able to retire when they want.

In this seminar, I will provide objective information that will help you determine your retirement income needs, manage and structure an effective retirement income distribution strategy, and properly allocate your assets to improve the chances of attaining your goals. This session is tailored to the needs of people who want to retire in the next few years or for people whose retirement planning is further in the future, but who want to begin to think about how to position their finances for their long-term future when they will no longer earn employment income!

Date and Time: Friday June 1, 2012 at Noon

Location: San Francisco Chapter of the American Institute of Architects (“AIA”)
130 Sutter Street, Suite 600
San Francisco, CA

Many attendees at this workshop will be AIA members. However, people from all backgrounds are welcome to attend since the planning approaches to be described apply to individuals from virtually any profession. To attend, please register on this page: http://www.eventbrite.com/event/3465223577

I look forward to seeing you there!

Filed Under: Retirement Planning

Thoughts on Retirement: This is not Your Father’s Oldsmobile!

May 13, 2012 By Leave a Comment

Some of you might remember the famous phrase from a General Motors commercial many years ago – “this is not your father’s Oldsmobile.” Well, for those of you considering eventually retiring, I have news for you: “This is not your father’s retirement.” Unfortunately, surveys conducted during the past several years have shown that the majority of Americans are financially unprepared for retirement and are not even aware of their predicament(1).  

I think a likely explanation for this situation is that there are both emotional and practical obstacles that make planning for this eventuality difficult, especially for people in mid-life for whom the need for planning is wise. Of course, the challenging mix of the tough job market and financial market volatility in recent years has understandably impacted many people’s retirement plans – and sometimes their willingness to take a closer look at this area of their lives.

And my conversations with clients, friends, and colleagues – especially those experiencing a career transition — lead me to believe that some people have completely given up on the idea because they believe you have to be a very wealthy to retire and/or they will never have sufficient resources to do so. This perception may or may not be correct, although for those who have not taken a closer look at their finances, their belief may likely become a self-fulfilling prophecy.

But I think there are also other important reasons that retirement is a difficult subject to tackle. America is undergoing important changes when it concerns retirement, yet much of what we read and what is discussed in the media approaches the subject from a very traditional perspective. The “old” retirement (your father’s “Oldsmobile”) was based on an assumption that we were supposed to stop working in our early or mid-60s.

Not only does the challenging financial and economic landscape make this view somewhat anachronistic, but other important changes in society also make it less relevant. Unfortunately, the mass media and our popular culture often continue to portray retirement in outdated ways that have become out of touch with our evolving world.

These factors – the combination of recent economic challenges and the continued portrayal of a retirement in outdated ways — makes it difficult for people to really think about this important part of their financial life. If there are not any relevant models that can help individuals approach such planning, it is perfectly understandable why many people have basically opted out of preparing for their long-term future.  

However, anyone in mid-life and thinking about the next chapter in their lives does need to consider their long-term financial needs in both their financial and even career decision-making. The remainder of this blog and my next installment will further discuss the recent trends that have changed retirement and more importantly what you should consider in your own planning.

One profound shift that is well known (but very frequently not discussed) is that life expectancies are significantly longer than they were for previous generations. This trend, which is likely to continue, has effectively “raised the bar” in terms of the financial resources needed to retire – even for people who have done a great job saving. Many studies today indicate that average life spans will take the average person into their eighties, and a smaller but significant percentage of people will live into their 90s.   

Even for those who have attained financial independence (either because they do not live an expensive lifestyle or through a high level of savings, or both), the traditional retirement “model” often does not makes sense because they actually want to remain involved in their profession, a new business interest or passion, or some other pursuit during what are supposedly their retirement years.

The reality for many individuals, regardless of their finances, is that they want to apply their years of hard-earned experience to continue to make an impact in their chosen line of work, while others may choose to pursue a new professional path that more closely reflects their values and/or passions.

For such individuals, withdrawing from their work is simply not an option because they have the energy and passion to stay involved in the world around them. Connection to work can provide important psychological benefits that in some cases are far more important than any positive financial benefit that comes from remaining involved in work into their late 60s or even longer.

In lieu of the traditional concept of retirement, I think there is a more contemporary model that more closely reflects today’s society. I will be writing about that very soon, and more importantly what you can do to enhance the quality of your life and also prepare yourself financially! Stay tuned for this next blog!

(1)       McKinsey Global Institute, November, 2008

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, please consult with your financial advisor prior to investing.

Filed Under: Retirement Planning

Feel More Confident about Your Financial Future by Attending Our Retirement Planning Workshop!

May 1, 2012 By Leave a Comment

Recent surveys indicate that many Americans are unsure about how and when they will retire. Although the economy is beginning to recover, the upturn has been slower than past recoveries, creating challenges for people who are trying to build a long-term foundation for their needs when they eventually retire. If you are a mid-life professional and feel uncertain about how to move confidently toward your long-term goals, then you are invited to attend this workshop. The session will help you determine and plan for your retirement needs, consider the role of Social Security, and educate you about the principles of asset allocation and how to consider investment strategies based upon your needs. This seminar will not be focused on product sales, and will offer objective, educational about planning for the time when you choose to no longer work, or will not be able to do so.

Date and Time: Friday June 1, 2012 at Noon.

Location: San Francisco Chapter of the American Institute of Architects (“AIA”)
130 Sutter Street, Suite 600
San Francisco, CA

Many attendees at this workshop will be AIA members. However, people from all backgrounds are welcome to attend since the planning approaches to be described apply to individuals from virtually any profession. To attend, please register on this page: http://www.eventbrite.com/event/3465223577

 

Filed Under: Retirement Planning

Retirement Plan Distributions: Don’t Let Fear Get the Best of You!

March 3, 2012 By Leave a Comment

Last week, I visited with the former employees of New United Motors Manufacturing (NUMMI), the Fremont car company which ceased operations in 2010. NUMMI recently notified its former workers that they would be receiving assets from the company’s now terminated Pension plan, and I was among a select group of financial professionals invited to help.

Imagine walking in the shoes of these employees! Many of them have vested pension account balances in the tens of thousands of dollars, and they have a relatively short period of time – 30 days – to select from among the many elections being presented. The choices are not easy and I met people afraid and uncertain about what they should do.

People faced with important financial decisions – especially when the choices involve a lot of money – often experience a range of emotions. And too frequently, fear and anxiety can make an already complicated set of options even more difficult to evaluate, leading people to make irrational decisions which may imperil their long-term financial situation.

So in this month’s blog, I thought I would share common errors to avoid and offer some tips to anyone faced with choices about retirement plan distributions. Here is what you can do to avoid unnecessary financial pitfalls and help optimize your financial situation at such an important time in your life:

1) Don’t take a cash, lump sum distribution and pay good old Uncle Sam a pile of money. You will be taxed by the Federal and State government and you will have to pay an additional 10% penalty if you have not yet attained age 59½. This advice may sound obvious to a good number of you, but if you are seriously considering it, don’t do it!

Even if you may need the money for near-term living expenses, you should still roll it over to an IRA – you can always keep the money in cash or cash-equivalents so that you can easily access it to pay bills. But if you immediately take the money now and then you later find other (non-retirement) money to sustain your short-term finances, you would have needlessly paid unnecessary taxes and penalties. That is because the decision to cash out is usually irrevocable.

So, put the money in an IRA and use the time to identify other sources of money that will help you avoid the need (or at least delay it) to take money from your retirement accounts.

2) For retirement assets that you will need to attain financial goals that are a few years or many years in the future, do NOT leave the majority of this money invested in cash or cash-equivalents. This might sound contradictory to the advice I gave above about keeping some of your retirement money in cash, but it really is not.

It is true that money you may or will need for living expenses over the next year should NOT be invested in the financial markets. However, any money not needed for such near-term living expenses should likely be invested in something, depending on when you will need the money and the risk level (low, moderate or high) that is appropriate for the goal.

I know there are some of you out there who are absolutely terrified of the markets, but the decision to stay in cash (again, for money that is ear-marked for medium and long-term goals) is one that will almost guarantee the erosion of your money’s purchasing power over the years. That’s one of the few guarantees available these days, but it is unfortunately not a good one!

That is because the money in a savings account earns about zilch in interest, and the “purchasing power” (or the amount of goods and services that your money can buy) is actually declining every day! Inflation is increasing the prices of everything that you will need when you begin to draw down your assets at some point in the future.

So, what should you do if you are concerned about your money losing ground to inflation, but you are also unsure about the volatility in the financial markets? One option is to allocate your money into investments that are NOT tied to the stock market.

Email me at bill.pollak@lpl.com if you are interested in learning more about these ideas! But, remember, doing nothing and leaving your money in cash is a choice, and the decision may expose your money to a risk that you may not have considered. You might feel that decision is a safe one, but you will be accepting the hidden but very real risk that your money might have less purchasing power in the long-term.

3)    Don’t make a hasty decision without getting advice and becoming informed. The rules about taking distributions from retirement plans are extremely complex. This is especially true for any of you in your 50s – there are some provisions in the tax code that can actually be very helpful (I’ll write about these in a future blog), but you can only benefit from them if you are informed about them before you take action!

Do not assume that the choices you have previously made a rollover is the correct strategy for today. A financial professional can assist you in clarifying the options specific to your situation.

The money in employer-sponsored retirement plans now represents a substantial percentage of most Americans’ long-term savings. My discussions with former NUMMI workers last week reminded me of the importance of developing a strategic plan for your retirement assets and of becoming properly informed about your options. Don’t let fear, anxiety or inertia lead you to a hasty and ill-conceived decision – instead take a deep breath and calmly take a close look at all of your options!

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, please consult with your financial advisor prior to investing.

Investing involves risk including loss or principal.

 

Filed Under: Retirement Planning

Now That’s Inflation!

January 5, 2012 By Leave a Comment

I don’t know about you, but I have become increasingly concerned about inflation over the past few years. And I make that statement not only as a financial advisor, but as a consumer who goes the supermarket, to the gas station and plenty of other stores. I have personally experienced the sting of higher prices on many items, especially those that seem essential for day-to-day living!

And though inflation since 2009, according to official government statistics, has been very tame, that might change in the years ahead. I was reminded of this possibility recently when I saw a press release announcing the results of a survey that found dramatically higher medical insurance premiums in the state during the past decade.

The cost of health insurance for California families rose 153% since 2002, more than five times the 29% increase in the rate of inflation, according to the study which was conducted by the California HealthCare Foundation and announced by Consumer Watchdog, a non-profit organization.

Those dramatic numbers reminded me that everyone should review their healthcare premiums and expenses from time to time and determine if there is a more cost effective way to take care of this important part of your life.

It may not be important to review your plan if you have medical coverage through an employer which subsidizes some of the cost. However, if you are self-employed (as I am) or if your employer does not offer such a subsidized plan, the search for quality coverage at an attractive price never stops!

One option is to consider a High Deductible Health Plan (“HDHP” as they are sometimes called). These plans often feature premiums that are lower – sometimes significantly so – than traditional health insurance plans. Of course, the trade-off with the lower premium is that you could incur much higher out-of-pocket expenses before you reach the higher deductible that is a part of such plans.

But sometimes these “HDHP” plans can make a great deal of sense, especially if you are in good health and are self-employed. You may also augment an “HDHP” with a Health Savings Account (“HSA”), which is a tax-advantaged savings account.

The money you put in tax-deductible, and withdrawals are tax free when used to pay for qualified medical expenses. Some of these tax benefits are more generous than a 401(k) plan which requires you to pay taxes on all distributions. If you are interested in this account, remember that you can only get the tax advantages of an HSA by enrolling in a “High Deductible Health Plan (“HDHP”).

So, if you think your healthcare expenses are too high, contact your financial advisor or go on the internet and seek out options! It could be a great step in beating the unrelenting inflation demon and stretching out your hard earned dollars!

Filed Under: Financial Services

Do You Need a Financial New Year’s Resolution?

January 3, 2012 By Leave a Comment

Welcome to my very first blog posting! Since I am launching this site at the beginning of the year, it seems fitting to post my recommendations for New Year’s resolutions. Of our many cultural traditions, the annual writing down of our self-imposed vows to improve or completely overhaul our lives is one of the most fascinating of our national past times!

I have to admit that I have never been a person too enamored with the “resolution” tradition. My lack of enthusiasm especially applies to recommendations commonly suggested by many financial websites. Much of this advice, while perfectly sound, could be offered and implemented at any time of the year and will likely not inspire you to really keep those promises during the upcoming year!

For this first blog, I found myself faced with a decision: Do I join the Financial “New Year’s Resolution” party and offer my own “top ten” (or whatever number of tips) for financial success to start 2012? Or do I become a financial “party pooper” and skip it all together? Fortunately, the choice turned out not to be that stark!

Do You Need a Financial New Year’s Resolution?It seems to me that the start of a New Year provides a chance to look at things from a broader perspective. I recommend an introspective approach to the New Year by looking at various parts of your life. Get out a pen and paper, ask yourself the following questions, and write out your answers:

  • Am I happier now than I was this time last year?
  • What goals did I achieve in the last 12 months?
  • Which goals did I fail to achieve?
  • How does my financial situation look compared to last year?
  • How satisfied am I with my career and my income?
  • What progress have I made in my career?
  • How good are my relationships with my people in my company? Business partners? Coworkers? Customers?
  • How fulfilled do I feel?
  • How is my relationship with my spouse/partner? With my children? With my friends?

Answering these questions will give you the chance to figure out where you stand and where you want to go. The purpose of the exercise is to not beat yourself up about what you didn’t accomplish, but to non-judgmentally understand what is working well and what could change in various aspects of your life.

After you write down your answers, think about and then document your personal, professional and financial goals for 2012. This process is especially important for people going through some sort of change because what you want may have changed.

You should separately write down your specific financial goals for the year, but I think you will find this process easier when they are created against the backdrop of other things that you want in life.

Think about this activity as your “resolution” for what you will do in 2012! This will be far more beneficial than if I were to advise you open an IRA account or to avoid spending $1,000 on buying Cafe Latte’s at Starbuck’s. Besides, if the Latte’s make you happy, I say drink ‘em (unless you are putting yourself in financial peril)!

Now about that IRA account……

Filed Under: Financial Services