Financial Advisors Archives -

February 4, 2013

59% of Retirees Make this Mistake

The Society of Actuaries found that roughly 59% of Americans surveyed underestimate their life expectancy after retirement. As a retiree or an individual approaching retirement, this miscalculation could put your future quality of life at risk when you need it most.

The report begins by explaining a trend that many know but fail to fully understand. Americans are living longer. In the past 50 years we have seen the life expectancy of men increase from 66.6 years in 1960 to 75.7 years in 2010. For women, life expectancy is also up from 73.1 years in 1960 to 80.8 in 2010.

It is important to understand that these are averages and that the people that die decades before their retirement actually bring these averages down. This means that the older you are, the higher the probability of you having a higher than average life expectancy. As the report notes, “By age 65, U.S. males in average health have a 40 percent chance of living to age 85 and females more than a 50 percent chance. The survivor of a 65-year-old couple is more than 70 percent likely to reach 85”.

The results from the Society of Actuaries survey shine a light on a number of issues that should raise concerns about the risks in a financial retirement plan. The main concern is the short planning horizon of many of the survey respondents. This is a very serious issue, especially for people that fail to recognize how just a couple of unplanned years at the end of our lives can put tremendous stress on our financial security and that of our loved ones.

In many cases, working with a financial advisor that understands the risks associated with outliving your money can help mitigate some of the concerns raised by the survey results.

You should consult with a financial advisor if you have any questions or concerns about your life expectancy assumptions and/or retirement strategy.

For a copy of the report, please visit the Society of Actuaries website www.SOA.org.

source: Society of Actuaries (www.soa.org) photo credit: Guerrilla Futures | Jason Tester

February 2, 2013

Doctors Make These 4 Financial Mistakes

Doctors are amongst the highest earning professionals in the U.S. but when it comes to personal financial management, many are ill prepared and unnecessarily sacrifice portions of their wealth .

Here are four areas you may want to consider taking a closer look at if you are a physician.

1. Mismanaging Debt:
Medical school loans, mortgages, auto loans, and credit cards eat away at your wealth by taking away from your savings. Having a simple budget could help you set your living expenses and spending habits to a level that will help you avoid using credit, reduce your debt and will help you accumulate more wealth early on.

2. Misaligning Investments and Goals
From purchasing a second home to buying mutual funds or stock in Apple – it’s very important to understand both the risks underlying each investment as well as the expenses associated with each. Many physicians are unaware of how exactly the professionals involved in guiding their investment decisions and transactions get compensated for their recommendations. Start with your specific goals and their respective time horizons then research or work with an independent, objective financial advisor to find the best way to meet them.

3. Tax Management:
Maximizing your retirement plan contribution amount is likely the first and easiest action you can take toward minimizing your tax liability. With the help of a professional, you’ll also realize opportunities for tax-loss-harvesting, the use of charitable contributions, and other tax deductions. Many physicians earn high wages and pay more than they may need to in taxes.

4. Insurance:
Most doctors are painfully aware of the costs associated with liability and malpractice insurance, however many lack adequate coverage in other areas. Term-life insurance and disability insurance for instance can be very important.

Regardless of your profession, we all have different investment objectives, debt, time horizons, and risk tolerance levels. It is best to always consult with an experienced financial advisor, attorney or CPA for professional help in making decisions that are most suitable for you.

photo credit: Alex E. Proimos

February 1, 2013

Changing Jobs? Don’t Make this 401(k) Mistake

The average US employee switches jobs 11 times before retiring. That means you could potentially participate in 11 different 401(k)s or other retirement savings plans during the course of your career.

If you’re starting a new job or looking to change careers, you’ll have to make a decision about your 401(k). The good news is – 401(k) plans are portable. You could consider moving it to your new employer’s plan if the plan accepts transfers. You could move your assets to an individual retirement account (IRA) or withdraw the money as a lump sum. Or you may be able to leave the account where it is. Before making a decision, know that each option has its own unique benefits, risks and penalties.

If you leave the money where it is or roll it over into a new plan or IRA – you won’t lose the contributions you’ve made, your employer’s made (if you’re vested) or earnings you’ve accumulated in the old 401(k). Your money will maintain its tax-deferred status until you withdraw it.

If you do instead decide to withdraw the money – beware of the penalties.

Believe it or not, many people make the mistake of asking their employer or plan administrator to cut them a check after they leave their job, without considering all the consequences. Doing so can be extremely costly.

First, your employer will withhold 20 percent of your account balance before cutting you a check, just to prepay the tax you’ll owe. Also, the IRS may consider your payout an early distribution meaning you could owe a 10 percent penalty for early withdrawal in addition to paying federal, state and local taxes. After all is said and done, you could lose more than 50 percent of your account value this way.

Lets also not forget the the opportunity cost involved. If you took $10,000 out of your 401(k) instead of rolling it over into an account earning 8 percent tax-deferred earnings, your retirement fund could end up more than $100,000 short after 30 years.

If you can, keep your money in a 401k or IRA somewhere. It will allow it to compound tax deferred.

Regardless of which route you choose, always remember to evaluate your new plan closely before deciding to move your assets over. Make sure the new plan has plenty of investment choices, includes all the options you prefer, and that the fees aren’t too high. If you’re unhappy with the options provided by your new employer’s 401(k), consider a rollover into an IRA. If you’re unsure, talk to a trusted professional that is licensed to offer suitable advice on such matters.

By law, you must have at least 30 days to decide what to do with your 401(k) when you switch jobs, so you have time to consider all your options before making a move.

Sources: US Securities and Exchange Commission. Financial Industry Regulatory Authority, Inc.  Photo credit: Dave Dugdale