Retirement

The Effect of Taxes on Stock Returns

Key Takeaways:

  • Tax rates remain low historically speaking.

  • But, tax rates tend to have little empirical effect on stock market returns.

  • Whenever tax rates change, there’s an opportunity for investors, retirees and their advisors to arrange their portfolios in a tax-efficient manner and to create valuable tax savings. 

In theory, the much ballyhooed reduction of taxes on both the personal and corporate level would seem to be great for the economy and for investors, but history suggests that tax rates have little impact on investor returns.

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Figure: Tax Rates and Stock Returns. Sources: Standard & Poor’s, Bloomberg, Tax Foundation

The chart above plots both the maximum federal income tax rate by year and the average annual return of the S&P 500 for the past five years, both through the end of 2012. These returns are smoothed over five years to make the trend easier to see and to help us focus on longer-term effects. A number of interesting patterns emerge from the figure.

First, you’ll notice that tax rates were much higher in the past. If you believe in mean reversion, as is often the case with investment management, then tax rates could be going higher. Indeed, we have seen higher rates this year, and there is talk of further increases. Even after the latest increase, however, rates are still low compared to where they have been. And no one is discussing increases of the magnitude that would bring tax rates to where they were in the 1950s through the 1970s.

Another thing to note from the figure is the relation between tax rates and stock returns. In particular, there is not much of a relation at all. Correlations are actually slightly positive, although not statistically significant. Rather, we have had both high and low stock returns when taxes were higher and high and low stock returns when taxes were lower. While it may seem intuitive that higher tax rates are a threat to stock returns, the historical evidence simply does not back this up.

What the trends mean for advisors

The effects of taxes are not just financial; they contain emotional and political ramifications as well. Emotionally, investors may complain and worry about the impact of higher tax rates at the personal, corporate and estate level. While nobody likes having more money taken out of their paychecks, remember that rates are relatively low, historically speaking. You should also note that stocks can do quite well during periods of higher tax rates, too. One should generally be wary of discussing politics, but note that tax-efficient techniques are found on both sides of the aisle.

Another crucial point is that investors generally did not pay the highest tax rates seen in the chart. Instead, they used tax shelters and other tactics to keep their effective tax rates much lower. While the tax reform that brought about lower rates also ended many of the tax shelters that were used, there are still a variety of techniques that investors can utilize to lower their taxes. These techniques include:

  • Tax-sensitive investments in taxable accounts.

  • Funding tax-deferred and tax-exempt accounts and using them for effective asset location.

  • Integrating tax considerations in decisions such as estate planning and charitable contributions.


Conclusion


If you or someone close to you has concerns about the implications of tax reform on their investments or tax situation, we’d be happy to discuss with you please click here to schedule a call.


Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

 

Four on the Floor

With many Americans routinely living 25 to 30 years into retirement—or more—it’s time to rethink planning horizons.


Key Takeaways:

·         Successful retirees know how much they need to maintain a reasonable lifestyle; how much they need to save to get there; and how much they can reasonably withdraw from investment accounts each year.

·         The long-standing 4-percent drawdown rule may no longer be a viable benchmark.

·         Retirees must manage three types of risk as they age: investment and portfolio risk, consumption and inflation risk, and, finally, mortality and longevity risk.

 

The American College launched a doctoral program in retirement planning to help academicians and practitioners look more closely at the coming retirement crisis and help identify possible solutions. Much has been written in the past few years regarding the new thinking that has emerged regarding safe withdrawal rates and floor income.

At the core of retirement planning are three key questions:

  • First, how much capital is needed at retirement in order to maintain a reasonable lifestyle until death?

  • Second, how much should be saved to reach this goal?

  • Third, how much can be reasonably withdrawn from an investment account to sustain this lifestyle without running the risk of depleting the investment portfolio?

 

Embedded in these questions are issues of significant importance. Without a keen understanding of the possible answers and their ramifications, you and your advisors could run the risk of making poor decisions that will not be discovered until it is potentially too late. Yet it’s easy for retirees to be lulled into a false sense of security and ambivalence from which they might never recover.

Is the 4-percent drawdown rule still viable?

 

At the core of this problem is the four percent rule first proposed in 1994 by William Bengen, CFP. His historical analysis of rolling returns concluded investors could withdraw an inflation-adjusted four percent annually from their portfolios with impunity. This soon became the benchmark for distribution planning for nearly two decades. It took the lost decade (2000 to 2009) for many people, including experienced financial advisors to realize that markets are potentially dangerous to a retiree’s wealth.

Dr. Moshe Milevsky, Dr. Wade Pfau and other researchers, using Monte Carlo simulations (that’s not gambling, but a sophisticated financial scenario planning tool), have questioned whether this conclusion is as bulletproof as Bengen suggested. Their research and modeling show a high probability of failure due to “sequence risk”—caused by an unfortunate cycle of down markets. If this happens during the first few years of your retirement, there is virtually no way to recover. You could find yourself in a downward spiral with no way to escape.

Don’t let this happen to you.

Three phases of retirement and risk factors

The investor life cycle has built on three phases:

1. Accumulation,

2. Transition and

3. Decumulation.


In each phase, you must be aware of how these risks will impact your investment and portfolio risk, your consumption and inflation risk, and finally, your mortality and longevity risk. Early models for retirement planning treated all three phases the same. Additionally, there was little thought given to whether the “go go” years of early retirement required the same amount of income as the “slow go” or “no go” years later in your retirement years. Is there an optimum “glide path” for distributions instead of a straight upward slope including inflation? Should you ask your advisor about growth strategies for your portfolio if you are in your 80s, retired and have no legacy intent?

Strategically, does it make sense to grow your portfolio as large as possible, with no eye toward a safe withdrawal rate. Or, should you instead have a floor of real income that cannot be outlived? Dr. Wade Pfau has invested hours of research and effort to show options and ways for retirees to evaluate an optimal divestiture strategy. With no bailout strategy or floor income, a retiree could be heading off the proverbial cliff without an escape route.

What is being termed the Fourth Generation of retirement planning has moved past this prehistoric thinking and is now more focused on a guaranteed income by utilizing a floor to prevent total devastation in the no-go years. Longevity planning is becoming more and more relevant as retirees routinely live 25 to 30 years past retirement.

New strategies include longevity insurance, building this floor with bond ladders and Treasury Inflation Protected Securities (TIPS) or annuities (using mortality credits). Other studies focus on lifestyle “glide paths” that allocate more income in the go-go years of retirement instead of using constantly inflating income assumptions with no practical consideration of age-based spending (not forgetting long-term-care risks). The amount allocated to the floor portion of the portfolio is based on the amount of wealth and income needed. Any surplus would be invested in the capital markets.

Factors that need analysis include risk tolerance, age and bequests considerations. In addition, wise retirees and their advisors will build a “sequence risk” buffer into their portfolio to protect against the dreaded market crash in a capital market portfolio, guarding against a crash during the first six years of retirement (the most vulnerable period). Asset allocation for retirement takes on a whole different meaning from how a portfolio is structured—large and small cap, domestic and international, value and growth.

Conclusion


Retirement planning has entered a new phase of analytics that will both retirees and those who advise them. Be on the lookout for new thinking and strategies to help you and your advisor build sustainable and personally rewarding income streams that will last a lifetime (and beyond).

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Incorporating Philanthropy into Your Financial Plan

Tools, techniques, and philosophies you can use today

 

Key Takeaways:

  • While corporate tax deductions for giving are limited, corporate social responsibility is on the rise.

  • Making giving into a family activity can also be helpful in preparing heirs for the responsible use of wealth.

  • Make sure your advisor understands your family’s values and goals. Philanthropy is not just about tax and estate planning.

 

Purposeful philanthropy is the art of thoughtfully, intentionally and purposefully integrating the passion, spirit, and commitment of philanthropy into the fabric of our family system. With record numbers of boomers reaching retirement age and with a new generation of younger people looking to make gifts with social impact, the landscape of philanthropy has changed dramatically.

If you are a decision-maker or influencer at your company, consider this: Corporate giving grew by 12 percent over the past year to nearly $18 billion—but represented just 0.7 percent of corporate profits. Is that really enough? What needs to change to incent corporations to share more with those in need?


Experts say corporate tax deductions for giving are limited. This is part of the reason for lower giving rates. But corporate social responsibility seems to be on the rise, and shareholder/consumer pressure is the best way to raise corporate awareness about community involvement and responsibility.

Also, experts say charities need to do a better job of addressing the ROI a corporation receives when it is a strong donor. For instance, some companies donate heavily to education in every community in which they have a presence. They do this for two reasons:

·         First, they believe a strong community and an educated workforce are good for them.

·         Second, they want to be identified as a good, responsible member of the community. They view corporate philanthropy as a way to build good will.

The impact conversation needs to happen with businesses. Philanthropy does not have to be about giving it away, but instead can really be a two-way street.

Americans as a group historically give around 2 percent of their incomes to charity. Is that likely to change pro or con as record numbers of boomers enter retirement years and a record amount of wealth will transfer into other hands over the next 15 years?


Philanthropic experts say affluent families that make giving into a regular activity are better positioned to prepare heirs for the responsible use of wealth. The family members can explore giving options and report back. This can not only teach giving wisely, it can also bring the family closer together.

Whether you are not you give at least 2-percent of your income to charitable causes, the “percentage of income” ratio can be a poor metric. Instead, measure giving as a percentage of your assets. Americans have less cash than any other asset class today, and until Americans and their financial advisors understand this, the percentage won’t change. There are many more effective ways to give that are simply underutilized.

Biggest misconceptions about philanthropy

·         First, many more people would give if they knew they right way to do so, especially from a tax-advantaged way. If you don’t have experience with planned giving and you advisor is not able to help you, see if he or she can point you to a planned giving specialist within their network.

·         Second, it’s all about tax savings and estate planning. In reality, the key to unleashing your family’s generosity and increasing its satisfaction around the impact of giving lies in understanding your most deeply held values and interests. Make sure your advisors understand those values, too.

 

Ask about smart gifts such as Charitable Remainder Trusts, Charitable Lead Trusts and Donor Advised Funds, etc.

Follow these three lessons from donors on effective giving:

1. Give with a warm hand. Donors who have the most impact and feel the greatest satisfaction are, first of all, ALIVE. They are actively, directly and personally deciding the use of their funds, matching their most compelling interests to the compelling needs of the institutions that best address causes they are [concerned] about.

2. Give with a warm heart. This, of course, is about the passion donors feel for the cause, the mission, their personal quest. It’s core DNA for them; it embodies both the soul and heart of their values. My gift is for the benefit of ________, where it is essential for each person to fill in that blank, however [he or she chooses].

3. Give with a cool head. Give smart, not just with your heart. Use your advisors and encourage them to talk to each other on your behalf. If you want your giving to achieve balance, use your smart parts. Be strategic, and understand how and why to give, not just when. Invest in your philanthropic plan. Not just with CRTs, CLTs, CGAs, insurance, all the rest that pay at death, but with a stream of more modest gifts that can start up your plan while you are alive.


Conclusion

Planned giving is one of the most impactful things you can do with your hard-earned wealth. Just make sure you do your homework about where you decide to give, how you give, and who helps you give. You and your family will be glad you did.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Retirement Math: Save Early and Often

Plus sensible catchup strategies if you’re behind

By Robert Pyle

Key Takeaways

  • The money you sock away during the early years of your career will likely grow the most.

  • Do you know your income replacement rate?

  • Don’t get bogged down in the math—keep it simple.

  • Don’t panic if you’re behind in your retirement savings—there are plenty of ways to catch up.

 

A recent Transamerica study found that “running out of money” was the chief retirement concern for almost half of Americans. What’s more, only one-third of American workers (36%) said they were “very confident” about the ability to retire comfortably. Today’s workers change will jobs more often than their parents and grandparents did—and have more temporary disruptions to their retirement savings. But an even bigger hurdle for achieving a worry-free retirement is that people are simply living a lot longer than they used to. It’s not uncommon to have a retirement lasting three decades or longer. That’s a long time to support yourself after leaving the workforce--even before you factor in the ever-rising cost of healthcare and eldercare.


Keep it simple
You’ve had a successful career. You’re very good at making money. But, you’re probably not an expert in financial planning. Just don’t think you need to do it alone.

When clients ask me how much they should budget for retirement I always tell them to keep it simple. You don’t need to calculate how much your spending on cable TV, cars, groceries and dining out. It’s nice to know that information—and I’m sure you could economize--but all you really need to know is what your (net) paycheck is—i.e. how much are you putting in your bank account every month and then subtract any additional savings from that amount. Example: If your net paycheck is $5,000 per month after 401(k) contributions, that means you’re spending $60,000 per year. If you were saving $400 per month in a taxable account from your net deposit, your spending would be $55,200 per year.    

Example: I recently started working with a new 401(k) plan enrollee. He had a nice military pension and wanted to have $7,000 per month in retirement (i.e. $84,000 per year). I told him he’d need to accumulate 25-times that $84,000 a year in retirement -- $2.1 million—if he expected to have $7,000 per month in his golden years. How did we come up with 25x?  That the reciprocal of 4 percent (.04), the recommended annual drawdown rate for many people.


Just don’t let retirement math overwhelm you. Again, the simpler you keep it, the easier it is to follow. For instance, this back-of-the-napkin estimate can get you pretty far down the road:

      How much do you need in retirement? $7,000

      How much do you expect from Social Security? $3,000

ANSWER: You’ll need $4,000 per month (i.e. $48,000 per year) from sources other than a paycheck and Social Security. Multiply that $48K by 25 and you get $1.2 million. That’s how much you’ll need to accumulate in retirement savings before taxes. This took less than a minute to calculate.

How do I know if I’m saving enough?

A good rule of thumb is to try to save one-sixth of your gross pay (16%) for retirement. I realize that’s tough when you might be savings for your first house and/or still paying off student loans. But look at ways to save. Do you really need the newest iPhone or other tech gadget every year? Could you eat at home more instead of dining out three or four times per week?

Do what you can. Your goal is to replace at least 40 percent of your pre-retirement income. Here are some recommended savings benchmarks:

Source: Dimensional Fund Advisors, How Much Should I Save for Retirement? By Massi De Santis, PhD and Marlena Lee, PhD, June 2013

Source: Dimensional Fund Advisors, How Much Should I Save for Retirement? By Massi De Santis, PhD and Marlena Lee, PhD, June 2013

For example, if you’re 65 and making $100,000 per year, you should have accumulated $1 million in your retirement accounts by now (10x $100K). If so, then you’d realistically be able to withdraw 4 percent of that nest egg every year (i.e. $40,000). The targets above are designed to replace 40 percent of your pre-retirement salary. Hopefully, your Social Security benefits will make up the rest, along with your spouse’s retirement savings and Social Security benefits. If not, you’ll need to set a higher income replacement rate.

See short video for more on income replacement rate https://videos.dimensional.com/share/v/0_r2tsjqhg or click on the video below:

 

According to Dimensional Fund Advisors, if you want to have a 90-percent probability of reaching your retirement goal (say 40 percent replacement of income) you would need to save 19.2% of your income every year if you start saving for retirement at age 35. If can start saving earlier in life--say age 30--you only need to save 15.4% of your income. If you can start at age 25, you only need to save 13.2% of your income.

I realize even 13 percent is a big chunk of your paycheck, especially when you are young. But, the data above shows how powerful compounding can be when it’s working in your favor.

 

Importance of saving early
I can’t stress enough the importance of saving early. Let’s look at three different savings scenarios: 

  1. Start saving $4,500 per year from age 18 - 25 and then no savings afterward.

  2. Start saving $6,000 per year from age 25 - 35 and then no savings afterward.

  3. Start saving $6,000 per year from age 36 – 65 without interruption.

    Assume an 8 percent annual rate of return under each scenario

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Clearly there is a big difference between in accumulated savings between Scenario 2 and Scenario 3. Under Scenario 3, you have $322,000 less in retirement savings with the same $6,000 annual contribution than you did under Scenario 2--even though you saved $120,000 more over your working life. This illustrates the power of compounding. Scenario #1 may not be realistic, but it further emphasizes the power of starting early.


Retirement savings catchup strategies

There are a wide variety of reasons that people don’t start saving for retirement until later in life. The reasons are too complex to go into in this article, but it’s never too late to play catchup. The simplest way to catch up is to max out your 401(k) by socking away $19,000 a year ($25,000 annually if you’re over age 50). Then set up an an IRA or Roth IRA for yourself (and your spouse) and make the maximum $6,000 annual contribution to each IRA ($7,000 each if you are over 50).

Your IRA contribution may not be deductible. But a non-deductible IRA will still grow tax deferred and you will pay tax on the gain only when you take it out of the IRA. Just note that with a nondeductible IRA, you aren’t allowed to deduct your contribution from your income taxes like you can with a traditional IRA.

Maxing out your 401(k) and contributing to an IRA could give you $31,000 to $39,000 per year. And, you can still contribute to a taxable account as well. The taxable account will grow partially tax deferred. You pay tax on the dividends and capital gains each year, but not on the price appreciation of the securities. Only when you sell the assets do you pay gains on the price appreciation of the securities.

The key to making any retirement strategy work is having an “automatic savings” plan in place. I can’t stress the importance of automating your retirement savings – i.e. automatic paycheck deduction—so you don’t have to think about it and so you can’t procrastinate.

Just make sure you don’t over-save. The risk with over-savings is that you don’t have enough ready cash available for your rainy-day emergency fund. We recommend having three to six months’ worth of living expenses on hand for your emergency fund—six to twelve months’ worth if you’re self-employed.

“Retirement age” likely to get pushed out

As record numbers of Boomers reach retirement age every day—and strain the Social Security system--policymakers continue to suggest raising the minimum age to receive full benefits. The minimum age is currently 66 years and 2 months for people born in 1955, and it will gradually rise to 67 for those born in 1960 or later. There’s a strong likelihood that the minimum age to draw full benefits will be pushed out to 70 by the time today’s young people reach retirement age. These changes are based on both increasing life expectancy and the government’s chronic mismanagement of the Social Security program. 

Bottom line: if you’re going to retire early, (say age 60), you’re going to be responsible for funding your own retirement longer--until your Social Security benefits kick in. By the way, the longer you can delay taking Social Security benefits the better. Did you know your benefit amount goes up by 8 percent a year for every year you wait between age 62 and age 70?


You don’t always get to decide when to stop working
Clients who are behind in their retirement savings tell me they’ll just keep working until they’re 70. Great, but you don’t always control that decision. Health complications can come out of left field at any time as you get older and sometimes your employer has the final say on when you stop working—not you. One of my clients who was intent on working till age 70 was forced into retirement at 67. Another who planned to work until 70-plus got an early buyout package at age 60. You need to be prepared for these scenarios. If you haven’t saved enough for retirement you have to keep your skills current and be prepared to switch careers late in life.

Conclusion

When it comes to saving for retirement, the variables are many and the math can be complex. If you take nothing else away from this article, start saving as early as you can and make your savings plan as simple and automatic as possible. If you or someone close to you has concerns about your retirement savings plan, please don’t hesitate to contact me.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.


Can I make a Backdoor Roth IRA Contribution?

The Roth IRA has one big advantage over the Traditional IRA: earnings are tax-free.  Unfortunately, there is one disadvantage over the Traditional IRA: it requires you to have a MAGI of $203,000 or lower in order to contribute to a Roth IRA.  There are some situations in which it makes sense to contribute to a Traditional IRA, and then immediately roll it over to a Roth IRA.  This is called a Backdoor Roth IRA Contribution.

Is your MAGI greater than $203,000 (married) or $137,000 (single)?

If your MAGI is lower than the amounts detailed above, you are able to contribute directly to a Roth IRA.  See the “Can I Contribute to my Roth IRA?” flowchart. If you are over the income limit, move on.

At the end of this year, will you be age 70.5 or older?

If you answered “yes”, you will be ineligible to make a contribution to a Backdoor Roth IRA Contribution.  If you are younger than 70.5 at the end of this year, move on to the next question.

Do you have an existing pre-tax Traditional, SEP, or Simple IRA?

If you answered “no”, you will be able to do a Backdoor Roth IRA Contribution.  If you do already have an existing pre-tax account, you will still be able to do a Backdoor Contribution, but you may be subject to aggregation and pro-rata rules.

Backdoor Roth IRA Contributions can have severe tax and penalty implications if they are not done correctly. Check out this flowchart to learn more.

If you would like to schedule a call to talk about the best strategies for Roth IRA contributions or retirement planning in general, please give us a call at 303-440-2906 or click here to schedule a time to speak with us.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Can I do a Qualified Charitable Distribution from my IRA?

Charitable contributions are a common financial goal.  One of the easiest and most tax efficient ways to do this is to do a Qualified Charitable Distribution (QCD) from your IRA.  In order to do this, you must meet specific requirements which include age, dollar amount, and the type of charities you can contribute to.  Read below to see if you qualify for making a Qualified Charitable Distribution from your IRA.

Do you have a traditional IRA, inherited IRA, inherited Roth IRA, SEP IRA, or SIMPLE IRA that is subject to an RMD?

If you do not have a required RMD, you will not be eligible for a QCD.  If you do have to take an RMD from any of the IRA types listed above, move on.

Are you at least 70.5 at the time you plan to make the Qualified Charitable Distribution?

Those under 70.5 will not be eligible to make a QCD.  This means even if you have an inherited IRA subject to RMDs, the QCD may not be available to you.  If you are over age 70.5, move on.

Is the IRA actively receiving any employer contributions (SEP IRA or SIMPLE IRA)?

If you answered “yes”, you unfortunately will not be eligible for the QCD.  If you are not still receiving employer contributions, move on.

Is the recipient a private foundation or donor-advised fund?

Qualified Charitable Distributions can not be done through a private foundation or donor-advised fund.  If your intended charity is not private or donor-advised, then you will be able to make a QCD.  The amount of the QCD cannot be greater than $100,000 per year ($200,000 for married couples).

Qualified Charitable Distributions have to be done correctly, else they can have large tax consequences.  Check out this flowchart to learn more.

If you have questions regarding Qualified Charitable Distributions or other general retirement planning advice, please give us a call at 303-440-2906 or click here to schedule a time to speak with us.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Retirement Choices - Eight Key Dilemmas That You and Your Advisor Should be Addressing

8 key dilemmas that you and your advisor should be addressing

By Robert Pyle

Key Takeaways

  • Even the affluent worry about running out of money in retirement and no one really knows how long they will live.

  • Some retirees have to increase spending in their golden years while others need to go on a budget.

  • Don’t wait too long to enjoy “bucket list” trips and other life changing experiences--or you may never get the chance.

 

If you worry about running out of money in retirement, you’re not alone. According to recent surveys conducted by the AICPA and Transamerica, about half of retirees cite “outliving their money” as their No.1 concern. That dovetails with the 2019 CPA/Wealth Adviser Confidence Survey™ which found that two-thirds of financial advisors believed their clients were “in danger of outliving their money” when they first came to see them. The survey of nearly 300 CPAs and wealth managers was conducted by CPA Trendlines, The Financial Awareness Foundation and HB Publishing & Marketing Company) this spring.

While these numbers are consistent with what I see in my practice, it’s important to understand that there’s no secret formula or magic algorithm to use when planning your retirement. It’s a complicated balancing act that is constantly changing as your life circumstances change.

As my practice has evolved over the years, I’ve seen eight common dilemmas surface time and time again for our clients. There are no quick and easy answers, but getting the issues out in the open, is a key step in devising solutions. How many of these sound like you?


Dilemma #1: Pay for all of your children’s’ education (or just part of it)
This dilemma really has two parts: First, is an out-of-state private college (say $60,000 per year) worth twice the financial hit as an in-state public school costing say, $30,000 per year? There are pros and cons to attending each type of college and no two students have the same needs and career expectations. Just keep in mind that if you go the out-of-state private college route, that’s an extra $120,000 over four years—and that’s before you factor in airfare, cabs and other travel-related expenses that aren’t deductible. Trust me, it adds up quickly. If your current spending is $10,000 per month, then that extra tuition hit is equivalent to 12 months of your normal spending. That means you’ll have to wait an extra year to retire for each child you send to an out of state private school.

The second part of this dilemma—regardless of which type of college your children attend—is paying the tuition 100 percent up-front or asking your children to shoulder some of the student loan burden after they graduate. Doing so will certainly make the young adults in your life financially responsible and may allow you to retire earlier—if you don’t have to help your recent grads with the student loan payments.

See. I told you it wasn’t easy.
That’s why we use MoneyGuide Pro, powerful financial planning software that helps us model a vast array of calculations and what-if scenarios for our clients.

 

Dilemma #2: Take trips now and work an extra year or so later 
When most people hear the word “retirement,” visions of leisurely travel to exotic locations fill their head. No more counting precious PTO days. No more checking in with the office every hour on a painfully slow Wi-Fi connection. No more red eye flights to get back to the grind on time. Sounds great right? But, if you wait until you and your spouse are 100-percent retired, you may not be healthy enough (mentally or physically) to travel extensively and fully enjoy the trip. That’s why many near-retirees start taking bucket-list trips about five years prior to their planned retirement date—and plan to remain employed an extra year or two--so they don’t spend their golden years muttering: “Shoulda Woulda Coulda!”


We recently modeled a retirement scenario for a couple who was about five years out from retirement.

They wanted to take a two-week overseas trip every year for the last five years of their working lives. They liked to take fairly high-end tours, so we budgeted $10,000 to $20,000 per trip per year. That’s $50,000 to $100,000 in after-tax dollars over five years. Since the couple’s normal living expenses were about $10,000 per month, we helped them see how staying in the workforce for a year longer than expected would provide the extra income they’d need to enjoy their yearly overseas trips without causing financial hardship.

Dilemma #3: Delay taking trips until after you retire
Here’s the opposite of Dilemma #2. If you save and save during the last years of your working life—and don’t go on any exotic trips--you’ll be able to retire a year or two earlier than the couple above, but one of you (or both) may not be healthy enough (mentally or physically) to start enjoying extended overseas travel.


Dilemma #4: What can go wrong?

Your health can deteriorate, a spouse can pass away unexpectedly, or one of you could suffer from dementia or Alzheimer’s disease. All of a sudden, your travel plans are out the door. All that money you diligently saved for travel during the final decade of your working years could easily go toward healthcare expenses instead of seeing the world.


Dilemma #5: Children may not be able to spend time with you later
When your kids are younger and still living at home, you may be swamped at work, but it may be the last chance you’ll have to go away together as a family for an extended period of time. Once your children are in college or in the workforce, they may have too many academic or career obligations (possibly young children of their own) to be able to go away with you on that trip to Europe, Africa or Australia that you always dreamed of.

Dilemma #6: When pinching pennies doesn’t make sense
I know this sounds counterintuitive, but sometimes we have to encourage clients to spend more in retirement, not less. For example, we work with one couple in their early 70s. They have no children or grandchildren; they’re in good health and they have about $1 million in investible assets which provides an annual income of about $120,000. They always talk to me about going to Europe, but they don’t want to spend the money. I bring up their Dream Trip every three months at their quarterly meeting, but they were brought up shortly after the Great Depression, and it’s psychologically very hard for them to splurge on non-essentials. Like many seniors, I also suspect they have lingering fears about running out of money if they may someday need say, $70,000 per year, for eldercare—for themselves or an elderly parent.

Sometimes we use our financial planning software to show clients how much they can spend every month for the next 20 years and still be okay. That can be just as much of an eye-opener as it is for clients who are spending too much. If they don’t use some of their hard-earned savings to enjoy life and I they have no one to pass it on to, then it’s all going to have to go to charity or back to the state when they pass on.

Dilemma #7: Cut back your spending
In financial planning there’s something called a “safe withdrawal rate,” typically 4 percent of their nest egg per year. If clients are spending 8 percent per year then they’re in danger or running out of money.

Over the years, we’ve had to sit down with clients occasionally and tell them to rein in their spending. This is not an easy conversation for an advisor. Clients could be spending on houses, new cars, trips or tuition for their children or grandchildren. For example, if a couple is in their mid-60s and spending $80,000 per year on a $1 million portfolio, this could easily outlive their retirement nest egg. It’s a big wakeup call for folks who’ve been affluent and successful their entire adult lives. By using MoneyGuide Pro, we can show them that if they keep spending money at their current rate, their money will only last them 10 to 15 years. Sometimes they have to see the illustration two or three times before it hits home that they could be out of money before they turn 80.

 

Dilemma #8: We don’t know how long we will live
It’s very important to be honest with your advisor and make sure they’re aware of all of your life goals and aspirations. You may want leave millions of dollars to your heirs and favorite causes when you pass on or you may want to enjoy your money while you still can and ideally pass away with an “empty financial tank.” No advisor, no matter how talented, can predict when clients are going to pass away. Most doctors can’t either.

Everyone knows a couple that retired and planned to take lots lot of trips before something came out of left field to derail their plans. One spouse could have dementia, or another could be diagnosed with cancer. As an advisor, I always feel terrible when this happens because in hindsight, I could have urged them to retire earlier and take more trips when they had the opportunity.


Conclusion

We live in a world of life hacks, rules of thumb and 24-hour door-to-door delivery. It’s temping to take the same quick-fix approach to our retirement dilemmas, but you’ll be sorry if you do. It’s on ongoing iterative process and it’s best to have an objective confidant by your side who can guide you through all the twists and turns along the way. Contact me any time if you or someone close to you is wrestling with life and money dilemmas like the ones discussed above.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

 

Can I Avoid Taking my RMD after Turning Age 70.5?

Most retirement plans have RMDs, or Required Minimum Distributions that you must begin to take by age 70.5.  The reason for this is that your investments have been growing tax-deferred, and the government is now ready to collect their share. If you do not need the money, it is generally beneficial to allow the money to continue growing tax-deferred.  Read below to see if you can delay your RMDs past 70.5. 

Did you turn age 70.5 last year?

If you passed age 70.5 in the last year, you must take an RMD by April 1st of the current year.  If you do not, you will have to pay a 50% penalty of the RMD amount in addition to the tax.

Are you still working past age 70.5?

If you plan to continue to work past age 70.5 and are not a greater than 5% owner in the business at which you work, you will be able to delay any RMDs from that 401(k) until retirement.  You will have to take RMDs from any other 401(k)s or Traditional IRAs that you have, unless you choose to roll those over into your current 401(k).  This can be a useful strategy if you have multiple retirement accounts but do not need any of the money currently. 

RMDs are calculated to make your retirement accounts be distributed over the rest of your life expectancy, but they can cause issues if you live longer than expected.  Check out this flowchart to learn more.

RMDs are important to keep track of, as the penalty for not taking them is 50% of the RMD amount.  It is easy to lose track of these if there are multiple accounts.  If you have questions regarding delaying RMDs or other general retirement planning advice, please give us a call at 303-440-2906 or click here to schedule a time to speak with us.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

How Smart Business Owners Plan for their Golden Years

Know the power of retirement plans

Key Takeaways:

  • Most business owners are not going to retire solely on the proceeds from the sale of their business.

  • You need to get up to speed on different types of retirement plans.

  • Business owns are interested in how much money they can save--not what’s a fair plan.



Most business owners have a dream. It’s to build a successful business, sell it for a zillion dollars and ride off into the sunset. The sad fact is that for the vast majority of business owners, this is just a pipe dream. In most cases, business owners will get less than 50 percent of their retirement income from the proceeds of the sale of their business—if they’re fortunate enough to sell it.

Many business owners have spoken with various advisors about diversification. Too often I see advisors warn owners how unsafe it is for the owner to have all of his or her assets tied up in the business. This conversation has merit, of course.

But, the conversation that resonates more is when I help owners understand that they won’t be able to leave their business if they think the business will provide all of their retirement income. This conversation always gets traction. If your client owns a business and employs fewer than 25 people, it’s very easy to design a retirement program that is almost irresistible for the owner.

It’s all about what the owner can get

The first rule of retirement plan design is understanding that it’s all about what you, the owner, can put in your pocket. Most owners I know are also happy to include their employees when it makes economic sense to do so.

Let’s assume you are in a 38 percent marginal tax bracket, as are most successful small-business owners. If that’s true, your plan only needs to cost less than 38 percent for the employees before it’ll make economic sense for you.

For example, if you want to maximize a 401(k) and profit-sharing plan, you will be able to defer $56,000 per year (for 2019). If the employee cost is less than $40,320, then the employer comes out ahead. The reason? If your client wants to save $56,000 in a taxable account, the tax cost would be $43,320.

When I’ve asked business owners if they’d rather give the government $40,320 or give their employees $40,320 while saving $56,000, it’s an easy answer. One hundred percent of the time the business owners will say they would rather give the money to their employees than to the government.

The proper question to ask


Now that you’ve seen the power of a qualified retirement plan, you need to figure out how much you will save. The proper question here is, “Since you have no limits on how much you can save, how much do you want to put in your plan every year?”

As advisors, we too often decide for our clients how much they can or should save. This is actually a question that YOU should answer. If you are over 50 years old and have a company that employs fewer than 25 people, it’s easy to design a plan in which you can save $200,000 per year in your account—or more. I’ve rarely met a business owner who wants—or could afford—to save more than that in a qualified account.

Four power options for business owners

Here are four plans that I’ve discovered business owners find interesting:

1. Simplified Employee Pension (SEP) plan—This is the simplest of all plans. It requires an equal contribution for all employees based on their salary. For tax year 2019, the owner can defer a maximum of $56,000 in this plan. From a tax/employee deferral analysis, it’s hard to make a SEP work with more than ten employees.

A SEP requires that you put the same amount of money away for each employee as a percentage of their salary. This will often cause the amount put away for employees to be larger than the owner’s deferral amount. Once a company reaches ten employees we start to look at 401(k) plans and profit-sharing plans as being more cost-effective for owner retirement savings.

2. 401(k) plan—This plan is best for owners who want to save up to $25,000 per year in their account. You will want to provide a safe-harbor plan for this account. This allows the owner to defer the maximum contribution with no plan testing.

3. Cross-tested profit sharing/401(k) plan—This plan uses age and salary as a method for putting together contribution amounts. The owner can defer up to $56,000 per year. Using a combination of a maximum 401(k) deferral and profit-sharing plan, the cost for all employees is often less than the tax breakeven point.

4. Cash balance—profit-sharing/401(k) plan—Say your owner wants to defer more than $56,000 per year and can reliably do so for at least five years. You can now consider a hybrid plan that combines a cash balance defined benefit plan with a cross-tested profit-sharing plan. Most owners will be able to defer over $200,000 per year, with a significantly lower amount for the employees.  This plan is the secret sauce for an owner who has not saved enough for retirement and has excess cash flow while running their business with little prospects for a great sale when they’re ready to transition their business.

Don’t forget your spouse

In many cases, the spouse of the company’s owner might be on the company’s payroll, too. If your spouse is over 50 years old, he or she can defer up to $25,000 in the company’s 401(k) plan. This brings a simple deferral to $81,000 for the owner of the company and their spouse.

If the owner’s spouse is not on the payroll, it’s pretty easy to justify adding the spouse to the plan for the amount that would be needed for the 401(k) deferral.

Conclusion

A financial plan is a crucial part of the private business planning process. I often do a rough plan on a legal pad to illustrate the problem the business owner has. I call it the four boxes of financial independence. Once I’ve gotten the attention of the owner we will then move to a formal financial plan.

I want to make sure you are moving in a direction that will get you to financial independence. A simple plan will help both of us understand that we’re making a wise decision. Please don’t hesitate to contact me any time to discuss.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Am I Eligible for Social Security Benefits as a Spouse?

Whether you are reaching your Full Retirement Age or your spouse has passed away, Social Security has spousal benefits that you may be eligible for. To see what spousal benefits you may be entitled to, read below.

Has your spouse passed away?

If your spouse is no longer living, see the “Am I Eligible for Social Security Benefits as a Surviving Spouse?” Check out this flowchart.  If not, move on to the next question.

Have you been divorced at some point?

If you have been divorced and not remarried, see the “Am I Eligible for Social Security Benefits as a Divorced Individual?” Check out this flowchart. If you remarried or are currently married, move on to the next question.

Is your spouse entitled to Social Security on their work record?

If your spouse is not eligible for Social Security benefits based on their own work record, you will be unable to claim any benefits.  If your spouse is entitled to Social Security, move on to the next question.

Are you 62 or older and have been married for at least one year?

If so, you can collect 50% of your spouse’s benefits or your own benefits, whichever is greater.  If you are younger than 62 or have been married for less than one year, you may still be eligible for benefits, but there are several more requirements. 

Collecting spousal Social Security benefits is complicated, and there are a lot of different requirements.  Check out this flowchart to learn more.

If you would like to schedule a call to talk about the best strategies for Social Security, please give us a call at 303-440-2906 or click here to schedule a time to speak with us.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Do I Qualify for Social Security Disability Benefits?

Social Security can provide benefits long before you are at Full Retirement Age (FRA) if you are disabled.  In order to qualify for Social Security disability benefits, you must have paid into Social Security (typically 10 years, but situations can vary).  Read on to see if you qualify for disability benefits.

Are you legally blind?

If you answered “yes” and earn less than $2,040 per month, you may qualify for full or partial benefits.  In order to see what your potential benefit might be, you must apply.  Wage earners who make more than $2,040 per month will not qualify for any benefits.  If you are not legally blind, move on to the next question.

Do you make more than $1,220 per month?

If you earn more than $1,220 per month, you will not be eligible for Social Security disability benefits.  If you earn less, move on to the next question.

Did you pass the “Recent Work Test” and the “Duration of Work Test”?

If you passed the two aforementioned tests and have been limited in your ability to do basic work (lifting, sitting, walking, or remembering) and are unable to perform gainful employment, you may be eligible for Social Security disability benefits.  You will have to apply to know for sure.  If you did not pass the tests, move on to the next question.

Are you a widow or surviving divorced spouse of a worker?

If you answered “yes” and are between ages 50 and 60 and your disability started within 7 years of the spouse’s death, you may qualify for benefits.  You will have to apply for benefits to see what your benefit might be.  If you answered “no”, then you will not qualify for any disability benefits.

 

Collecting Social Security disability benefits is complicated, and there are a lot of different requirements.  Check out this flowchart to learn more.

If you would like to schedule a call to talk about the best strategies for Social Security, please give us a call at 303-440-2906 or click here to schedule a time to speak with us.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

6 Keys to Comprehensive Personal Wealth Planning, Part 1

Key Takeaways:

  1. Accumulating wealth for retirement needs.

  2. Doing appropriate income tax planning.

  3. Planning for the distribution of the estate.

  4. Avoiding guardianships.

  5. Preparing for long-term health care costs.

  6. Protecting assets.

 

This article is the first in a series designed to help you and your advisor implement appropriate financial, estate and asset protection planning, regardless of your age, assets or income.

Personal and Wealth Planning Needs: 6 Keys

Everyone, regardless of their age, health, marital status, assets and income, should understand the six key planning needs for protecting themselves against personal, legal, tax and financial issues.

1. Accumulating Wealth for Retirement Needs

We all retire at some point in time. Retirement is when wealth accumulation normally tapers off and we begin to consume our accumulated assets in order to fund our retirement needs. Never overlook the importance of retirement income planning because, if ignored, retirement, aging and income cash-flow needs can significantly erode your wealth. Life insurance statistics show that a 50-year-old now has at least an even chance of living to 110!

Assuming an average retirement age between age 60 and 65, many of you realistically face the prospect of living 30 to 40 years AFTER your working life (i.e. wealth accumulation phase) has ended. In estate planning, we often talk about preserving wealth and passing it on to the next generation. But given the demographics of aging, inflation, health care needs, etc., it is easy to have your wealth run out before you do.

2. Appropriate Tax Planning Should Always Be Considered

You face a multitude of state and federal taxes (along with income tax issues and wealth transfer tax issues), which must be addressed at each stage of life as well as at each stage of the planning process.

3. At Some Point We All Die

It is critical that you have appropriate estate planning documents in place, including wills, trusts, appropriate beneficiary designations, guardian designations and more.

4. Avoiding Guardianships

Unfortunately, because of age, accident or illness, we all face the prospect of being unable to take care of our own finances or to make our own health care decisions. Therefore, proper documents need to be put in place NOW to allow someone else to make appropriate decisions on our behalf.

5. Long-Term Health Care Costs

Because of health and aging, everyone faces the prospect of financing long-term health care needs, including the possibility of assisted living and full skilled-care living. These costs can be financially devastating if they are not planned for.

6. Asset Protection Planning

Everyone should be concerned about protecting their wealth from divorcing spouses, lawsuits, family problems, business problems, taxes, creditors and predators that can ruin your long-term financial health. Failure to address any of these needs can result in significant financial loss and the accompanying emotional, psychological and family issues that all too often accompany the onslaught of life’s problems.

We can’t fight the aging process. We can’t prevent the unexpected events that impact our quality of life. However, proper planning and documentation can go a long way toward creating peace of mind when we have put in place the appropriate planning for financial, legal, tax and healthcare issues that are bound to occur during your lifetime.

Getting started

Regardless of your age, health, assets and income, everyone needs a well-drafted “financial durable power of attorney” and an appropriate advanced medical directive. Advanced medical directives normally include healthcare powers of attorney, living wills and more. If you are unable to attend to your financial, personal care or health care matters because of age, accident or illness, no one can make these decisions for you unless the decision making has been specifically designated in writing. 

Financial durable powers of attorney cover assets, income and dealings with other financial matters and government agencies. Advanced medical directives deal with personal care and medical issues, including surgery, placement, medication, assisted living, full skilled-care decisions and end-of-life decisions.

If you do not have these documents in place, unfortunately these decisions will have to be made under a court-supervised process known as a “guardian of the person” (for personal care and medical issue decisions) or a “guardian of the estate” (for financial matters). Guardianships are expensive, personally intrusive and perhaps the worst way to manage any of the decision-making processes.

The proceedings can be very traumatic and expensive. Guardianships of an estate or the person are easy to avoid if the appropriate documents are put in place.

Conclusion

A final word of caution: Be careful about using simple, generic estate planning forms. Simple forms often ignore many of the issues that will have to be made throughout the course of your lifetime. Many of the decisions that may be critically important to your family need to be specifically designated in the documents. Take the time to get your affairs in order while you are still in your prime health and income producing years. You’ll be glad you did.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Am I Eligible for Medicare Part A & Part B?

The Medicare program can provide healthcare for elderly or disabled individuals at a greatly reduced cost.  Medicare Part A covers hospital insurance, and Part B covers medical insurance.  Read below to see if you are eligible for Medicare.

Are you a US citizen and age 65 or older?

If you are under 65 and are not disabled, then you are not eligible for Medicare Part A or Part B.  If you are under 65 and disabled you may be eligible for Medicare benefits.  If you are over 65 and not disabled, move on to the next question.

Are you entitled to Social Security benefits (you have 40 work credits; about 10 years of work history)?

If you answered “yes,” you will be eligible for Medicare Part A & Part B.  If not, then you may still be eligible, depending on your spouse’s eligibility for Medicare and several other factors.

If you’ve made it this far, there is a good chance you are eligible for Medicare Part A & Part B.  Check out this flowchart to learn more.

If you would like to schedule a call to talk about planning strategies that incorporate Medicare, please give us a call at 303-440-2906 or click here to schedule a time to speak with us.

 

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Am I Eligible for Social Security as a Surviving Spouse?

Many clients think of Social Security only as a retirement benefit, but there are many ways one can qualify for other benefits that are available via the program.  If a spouse passes away, the surviving spouse may be eligible to receive a benefit.  This benefit helps alleviate the financial burden of losing an income earner or the home duties that the deceased spouse was responsible for previously.

Has your spouse (ex-spouse) passed away?

If you answered “yes”, move on to the next question.  If your spouse (ex-spouse) is not deceased, you may still be eligible for other benefits.  See the “Am I Eligible for Social Security Benefits as a Spouse?” flowchart here.

Did a divorced spouse pass away?

If your ex-spouse passed away and you have a child collecting dependent care benefits, or you did not remarry, you may be eligible for survivor benefits or an amount of your ex-spouse’s Social Security retirement benefit.  If you were not divorced, move on to the next question.

Were you married at least 9 months?

If you answered “yes,” move on to the next question.  If you were not married for 9 months or more, you would not be eligible for spousal survivor benefits.

Did you remarry?

If you did not remarry, you are eligible for Social Security benefits based on your deceased spouse’s earnings record.  If you did remarry before 60, you will not be eligible for benefits from your deceased spouse, but rather will likely be eligible for benefits from your current spouse’s record.

Collecting Social Security benefits as a surviving spouse can be crucial to alleviating your financial burden, and there are a lot of different requirements.  Check out this flowchart to learn more.

If you would like to schedule a call to talk about the best strategies for Social Security, please give us a call at 303-440-2906 or click here to schedule a time to speak with us.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Will I Avoid the Social Security Windfall Elimination Provision?

The Windfall Elimination Provision (WEP) applies to Social Security recipients who have their own retirement savings as well as a pension from an employer who did not pay into Social Security.  The purpose of WEP is to disallow for the collection of full Social Security benefits when a retiree has retirement savings and a pension from employers who opted out of Social Security (commonly local government).  Read on to see if you could have your Social Security benefits reduced by the Windfall Elimination Provision.

Have you worked for an employer that did not withhold for Social Security (such as a govt. agency)?

If you have not, then the WEP does not apply to you and will be eligible for full Social Security benefits.  If “yes,” then move on to the next question.

Do you qualify for Social Security benefits from work you did in previous jobs?

If not, then you will not be subject to the WEP.  If you have, move on.

Are you a federal worker in the FERS retirement system and first hired after 12/31/1983?

If you are a federal worker who meets the conditions outlined above, you will not be subject to WEP.  If you are not a federal worker or are a federal worker and do not meet the above conditions, you may be subject to the Windfall Elimination Provision.

The Social Security Windfall Elimination Provision is complicated and has a large influence on your retirement situation should it affect you.  Check out this flowchart to learn more.

If you would like to schedule a call to talk the Social Security Windfall Elimination Provision to see if it affects you, please give us a call at 303-440-2906 or click here here to schedule a time to speak with us.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Will My Roth IRA Conversion be Penalty-Free?

There are several situations in which a Roth Conversion could benefit your future tax situation.  Whether you have lower income this year or want to take advantage of low tax rates, you will want to make sure you avoid any penalties.  Let’s take a look:

Are you converting a Traditional IRA?

If your answer is “yes”, move on to the next question.  If you are converting a SIMPLE IRA, the answer is a bit more complicated depending on how long you have had the Simple IRA.  Check out our chart to learn more.

Are you expecting to take a distribution within 5 years of your conversion?

If you are far from retirement, then your answer to this will likely be “no”, then you can convert any amount.  Remember that any conversion amount is taxed as ordinary income and could increase your Medicare Part B & D premiums.  If you plan to take distributions within 5 years and are under 59.5, you may be subject to a penalty. If you are taking Required Minimum Distributions then you will have to take your RMD before any conversion.

Advantages of a Roth IRA

Roth IRA’s are particularly advantageous if there are changes (increases) in tax rates. Here are ways you could be subject to higher taxes in the future.

1.      The Government raises tax rates.

2.      One spouse passes away and now you are subject to single rates instead of married rates. When a spouse passes away, your expenses are not cut in half but the brackets are cut in half.

3.      Your expenses dramatically increase because you are in an assisted living facility or a nursing home.

If you’ve made it this far, there is a good chance you can make a Roth IRA conversion penalty-free.  Check out this flowchart to learn more.

If you would like to schedule a call to talk about the best strategy for converting a IRA to a Roth IRA, give us a call at 303-440-2906 or click here to schedule a time to speak with us.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Can I Delay the RMD from the Traditional IRA I Inherited?

Traditional IRAs allow the owner several tax advantages: it allows for an upfront tax deduction as well as tax-deferred growth.  Upon withdrawal of funds, the account owner is taxed at ordinary income rates. Inherited IRAs require the new account owner to begin taking withdrawals over their lifetime regardless whether or not they need the funds.  Why?  Because Uncle Sam wants to collect his share.  Here are some potential strategies for delaying RMDs from Traditional IRAs as long as possible.

Are you the beneficiary of a Traditional IRA from someone other than your spouse?

If you inherited a Traditional IRA from a spouse, you are likely able to delay taking RMDs until you reach 70.5 years of age.  Check out our “Should I Inherit my Deceased Spouse’s IRA?” flowchartIf you inherited the IRA from a non-spouse, move on to the next question.

Did the person pass away before their Required Beginning Date (April 1st, the year after turning 70.5)?

They have reached their Required Beginning Date

This allows you two options: electing the “5 Year Distribution Rule” or taking RMDs based on your life expectancy using the IRS Single Life Expectancy Table.  The “5 Year Distribution Rule” means all assets must be out of the account at the end of 5 years.  You could withdraw all funds immediately, spread them out over the 5 years, or take them all out just before the end of 5 years.  Keep in mind you will need to pay ordinary income tax on the whole amount distributed. 

If you take RMDs based on your life expectancy it will spread out the tax burden.

They have not reached their Required Beginning Date

You will be required to open an Inherited IRA and take RMDs based on your life expectancy according to the IRS Single Life Expectancy Table.  Depending if the deceased had satisfied their RMD for the year of their death, you may be required to take one this year.

If you’ve made it this far, you may be able to delay the RMD from your inherited IRA.  Check out this flowchart to learn more.

If you would like to schedule a call to talk about the best strategy for delaying RMDs from Inherited IRAs, give us a call at 303-440-2906 or click here to schedule a time to speak with us.

 

 

 Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

 

 

Time Is One of Your Most Valued Assets

Like any other asset you possess, you must be diligent about protecting it, managing it and sharing it

Key Takeaways:

  • Time management is a critical skill set required to achieve success whether you’re retired, in your peak earning years or aught in the Sandwich Generation.

  • Identify where you are spending your time each day that create the most success and happiness.

  • Identify and remove the time bandits that steal precious hours and minutes from the activities that create the most success and happiness.

  • Always heed the 4 D’s.

 

Overview


As many of you have just completed the annual rite of spring known as last-minute tax planning, procrastination and portfolio rebalancing, now might be a great time to hit the “pause” button for just a second.

Equity markets are at or near their all-time highs, interest rates are near their historical lows, inflation is in check and millions of Americans are expecting tax refunds. So why isn’t everyone racing out to purchase new yachts, cars and horses? Because they’re not all that secure, thanks to newfound uncertainty about trade wars, North Korea nukes the revolving door in the White House and interest rates poised to keep rising.

You probably don’t have time to go luxury good shopping anyway.

One of the most significant challenges we face in today’s fast-paced society is controlling our limited time. If you can develop better time management skills, you will have a leg up on your career, family relationships and/or retirement lifestyle. In addition to life coaches and time management experts, many wealth advisors can help you with time management as well—but it all starts with you.

Getting started on the right time management path

Good time management is a two-step process. First, you must clearly identify activities that only you can do and that add significant value to your day. Second, you must identify the time bandits that steal your limited time from the activities that really matter.

Top 8 time bandits


Here are some of the most common time bandits and remedies we see in our work among successful individuals and retirees.

1. Losing time due to lack of organization (specifically, prospect lists, meetings and personal calendars)
Plan and prepare for meetings, medical appointments media, even consultations with your tax and financial advisors with agendas, on-topic communication and hard stops for every meeting to respect everyone’s time.

2. Discussing market forecasts when all crystal balls are cloudy

As the old saying goes: “Everyone’s crystal ball is cloudy.” Why spend your limited time reading, viewing and participating in conversations related to forecasting?

3. Sending multiple emails instead of engaging in verbal communication
Ever notice a long chain of emails attached to one email? This is a great example of where a scheduled call could save time over a group of people typing email responses. Schedule the call and keep the time short. Avoid sending emails for every communication.

4. Losing time (and important information) to desk clutter
It is difficult to guess how much time is wasted by moving piles of paper around a cluttered office. Searching through piles of desk clutter for the critical information needed for a call or meeting requires time. The time-saver is to move toward an efficient paperless office with a system that still allows you to take files with wherever you go.

5. Browsing the Internet, including social media
Digital media usually starts out with a search for specific information, but it can quickly lead to a deep dark hole of distraction and procrastination. Instead, limit Internet browsing to a certain amount of time per day, much like a scheduled call or meeting. The way things are going, Facebook may be taking up less and less of your time.

6. Implementing technology tools before they are efficient
Attempting to use technology before it is fully installed or before your training is complete is a big time-waster. If it does not work properly, it is a time-waster. Using technology in this way could cause loss of data or excess data retrieval searching. This applies to everyone from busy professionals, to busy homemakers to retirees.

7. Completing administrative tasks
It is easy to drift away from your goals of the day by getting bogged down in administrative tasks that could be accomplished by someone else. I recommend avoiding these tasks by using the following four Ds:

  • Don’t do it if it is not worth anyone’s time.

  • Delegate it to someone else if it is worth doing, but not by you.

  • Defer if it can be done only by you, the wealth manager, but is also a task that can wait.

  • Do it now if it can be done only by you, but it must be done now.

The problem with administrative tasks occurs when we default to “do it now” without considering the other three options above.

8. Reading and replying to email on demand
Email has become one of our greatest tools—when it is properly used. If it is not properly managed, email becomes one of our greatest time-wasters. Successful people are not at their desks waiting to send the next email. I recommend setting aside scheduled time in the morning and afternoon to manage email. The same applies to text messaging. It doesn’t have to be instant! Also, I recommend the following approaches to managing incoming emails:

  • Delete the email without reading it if it is from an unwanted sender.

  • Scan the email if you are unsure of its content, then take the appropriate action.

  • Read the email and determine whether a reply is necessary.

  • Reply to the email only if required.

  • File the email only if it needs to be saved.

  • Save the email if it contains sensitive information.

Conclusion

There is a great deal of competition for your time and attention no matter what stage of life you are in. We have found that the happiest and most successful people determine the most valuable use of their time and avoid the time bandits that prevent their success.

 

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

 

 

Am I Eligible for Social Security if I’m Divorced?

Social Security has a spousal benefit which is intended to provide payment for the spouse in a household in which there is only one income earner.  This is essential for couples who have one stay-at-home spouse, as it allows them to still collect some amount of Social Security.  Often times, divorcees are surprised to hear that they still may be eligible for Social Security benefits based on their ex-spouse’s earnings.  Read on to see if you qualify for Social Security benefits from a previous spouse.

Is your ex-spouse alive?

If you answered “yes”, move on to the next question.  If your ex-spouse is deceased, you may still be eligible for survivor benefits.  See the “Am I Eligible for Social Security Benefits as a Surviving Spouse?” flowchart here.

Were you married to your ex-spouse for at least 10 years?

If you answered “yes”, move on the next question.  If your marriage lasted less than 10 years, you will not be able to collect spousal benefits.

Did you have more than one marriage that lasted more than 10 years?

If you answered “yes”, you will be able to pick the ex-spouse that provides the greatest benefit.  If not, your benefits will be based off the ex-spouse you were married to for longer than 10 years.  Either way, move on to the next question.

Did the divorce occur at least two years ago?

If your divorce was less than two years ago and your ex-spouse has not filed for benefits, you will have to wait until they file for Social Security before you are eligible for benefits.  If the divorce was greater than two years ago and you do not have plans to remarry (remember you must not remarry to be eligible for ex-spouse benefits), then you can claim benefits if you are at least 62 years of age.

Collecting Social Security benefits from an ex-spouse is complicated, and there are a lot of different requirements.  Check out this flowchart to learn more.

If you would like to schedule a call to talk about the best strategies for Social Security, please give us a call at 303-440-2906 or click here to schedule a time to speak with us.

 

 Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

 

Buy-Sell Agreements

20-plus issues for every closely held business owner to consider


Key Takeaways:

  • Buy-sell agreements come in three basic forms but must be individually tailored to suit the specific needs of your business.

  • Make sure the agreement meets your ongoing needs, including tax, retirement, insurance and funding issues.

  • Without appropriate “exit” plans in place, ownership changes can be worse than Hollywood divorces—bitter, expensive and devastating to all involved.



Almost all owners of closely held businesses put all of their time, effort and money into launching and growing their businesses. Tragically, they put little effort into protecting what they have built from devastation caused by one or more of the owners leaving the business. Without an appropriate “exit” plan in place, changes in business ownership can be worse than a Hollywood divorce—bitter, expensive and devastating to all involved.

Don’t be fooled! Changes in ownership happen every day in all types of businesses for a multitude of reasons: death, retirement, disability, divorce, voluntary and involuntary termination of employment, lawsuits, financial and economic setbacks, bankruptcy, and selling and gifting interests, just to name a few. The disruptions caused by these events usually result in severe financial consequences for everyone involved, including collateral damage to customer, supplier, banking and employee relationships as well as to long-term company goodwill.

Consider a buy-sell agreement from Day One


Perhaps the biggest tragedy is that most, if not all, of the aforementioned problems can be avoided by putting a well-drafted buy-sell agreement in place right from the start. That’s when all the owners are still in the “honeymoon” stage of the business and relations are most amicable. However, it is never too late to put a buy-sell agreement in place, and some honest thought and open communication will strengthen and protect the business and bring peace of mind to everyone involved. Remember, ownership changes are bound to happen, but having a plan in place to deal with those changes will always smooth out the road ahead.

Next steps


Now that you are convinced that a buy-sell plan is critical for the health and well-being of both the business and the individual business owners, where do you go from here? First, consult with an experienced business lawyer who can walk you through the process and help craft a plan that fits the specific needs of both the business and the individual owners. Second, understand that no two agreements are ever the same, although they generally fall into one of three categories:

1.      Cross-Purchase Agreements, which can be ideal for a business with a small number of owners. When a triggering event occurs, the remaining owners directly purchase the departing owner’s interests in the business.

2.      Stock Redemption Agreements, which can be simpler and easier to structure. Generally they can be better-suited for entities with more owners. With these types of agreements the entity purchases the ownership interests of the departing owner. The remaining owners receive an increase in the value of their interests, not in the number of interests they own.

3.      Hybrid Agreements, which are a combination of cross-purchase agreements and redemption agreements. Generally the entity has the obligation to redeem the interest of the departing owner, but the remaining owners have the option of directly purchasing the departing owner’s interests if the entity is unwilling or unable to do so.

In order to determine which type of agreement will best suit your needs, consider the following issues:

  1. How many owners does the business have today and will have in the future?

  2. Is the business family-owned or are third parties involved?

  3. What type of business is involved, and are there specific issues that need to be addressed relating to the entity’s business, such as professional licensing or trade issues?

  4. What is the legal structure of the business: corporation, S corporation, partnership, limited liability company?

  5. What is the age and health status of each business owner?

  6. Is each of the owners insurable?

  7. What percentage of the business does each owner hold?

  8. What is the value of the business, and how is that value determined?

  9. What are the tax implications of each type of agreement?

  10. What are the transfer implications of each type of agreement?

  11. What restrictions will be put on the transfer of interests?

  12. Will the interests be subject to rights of first refusal?

  13. How will the business be valued and the purchase price determined? How often will the business be revalued? Will the interests be valued differently depending on the specific transfer event?

  14. Will there be penalty provisions for violating the terms of the agreements and/or conduct damaging the business?

  15. How will the transfer of interests be funded? Will insurance such as life insurance and disability insurance be mandated, and if so, how will premiums be paid?

  16. How will the transfers be paid, all upfront or over time? If the payments are over time, what are the terms and the arrangements to secure payment?

  17. Is the agreement aligned with other important legal documents such as the entity organizational documents, employment agreements, business agreements and contracts, banking agreements, and the estate planning documents of the individual owners?

  18. Coordinate the agreement with related property that may be owned by each of the business owners. Examples include affiliated businesses, insurance policies, land and personal property, intellectual property, and leases.

  19. How will termination of the business be handled?

  20. How often will the agreement be reviewed? Doing so annually is a good idea.

  21. How will disputes related to the agreement be handled—litigation, mediation or arbitration?

The foregoing is not a complete checklist of every issue that needs to be considered, but it will give you a good platform to begin discussions between you and your legal counsel.

Conclusion


First, properly structured buy-sell agreements are critical to the survival of any closely held business; they are not an option. Second, these agreements must be tailored to the specific needs of the business. One size doesn’t fit all. Finally, businesses and relationships constantly change; consequently, buy-sell agreements must be reviewed and updated regularly. An out-of-date agreement is next to worthless.

 

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

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