Retirement Plans for Small Businesses

If you’re self-employed or own a small business and you haven’t established a retirement savings plan, what are you waiting for? A retirement plan can help you and your employees save for the future.

Tax advantages

A retirement plan can have significant tax advantages:

  • Your contributions are deductible when made
  • Your contributions aren’t taxed to an employee until distributed from the plan
  • Money in the retirement program grows tax deferred (or, in the case of Roth accounts, potentially tax free)

Types of plans

Retirement plans are usually either IRA-based (like SEPs and SIMPLE IRAs) or “qualified” (like 401(k)s, profit-sharing plans, and defined benefit plans). Qualified plans are generally more complicated and expensive to maintain than IRA-based plans because they have to comply with specific Internal Revenue Code and ERISA (the Employee Retirement Income Security Act of 1974) requirements in order to qualify for their tax benefits. Also, qualified plan assets must be held either in trust or by an insurance company. With IRA-based plans, your employees own (i.e., “vest” in) your contributions immediately. With qualified plans, you can generally require that your employees work a certain numbers of years before they vest.

Which plan is right for you?

With a dizzying array of retirement plans to choose from, each with unique advantages and disadvantages, you’ll need to clearly define your goals before attempting to choose a plan. For example, do you want:

  • To maximize the amount you can save for your own retirement?
  • A plan funded by employer contributions? By employee contributions? Both?
  • A plan that allows you and your employees to make pretax and/or Roth contributions?
  • The flexibility to skip employer contributions in some years?
  • A plan with lowest costs? Easiest administration?

The answers to these questions can help guide you and your retirement professional to the plan (or combination of plans) most appropriate for you.

SEPs

A SEP allows you to set up an IRA (a “SEP-IRA”) for yourself and each of your eligible employees. You contribute a uniform percentage of pay for each employee, although you don’t have to make contributions every year, offering you some flexibility when business conditions vary. For 2015, your contributions for each employee are limited to the lesser of 25% of pay or $53,000. Most employers, including those who are self-employed, can establish a SEP.

SEPs have low start-up and operating costs and can be established using an easy two-page form. The plan must cover any employee aged 21 or older who has worked for you for three of the last five years and who earns $600 or more.

SIMPLE IRA plan

The SIMPLE IRA plan is available if you have 100 or fewer employees. Employees can elect to make pretax contributions in 2015 of up to $12,500 ($15,500 if age 50 or older). You must either match your employees’ contributions dollar for dollar–up to 3% of each employee’s compensation–or make a fixed contribution of 2% of compensation for each eligible employee. (The 3% match can be reduced to 1% in any two of five years.) Each employee who earned $5,000 or more in any two prior years, and who is expected to earn at least $5,000 in the current year, must be allowed to participate in the plan. SIMPLE IRA plans are easy to set up. You fill out a short form to establish a plan and ensure that SIMPLE IRAs are set up for each employee. A financial institution can do much of the paperwork. Additionally, administrative costs are low.

Profit-sharing plan

Typically, only you, not your employees, contribute to a qualified profit-sharing plan. Your contributions are discretionary–there’s usually no set amount you need to contribute each year, and you have the flexibility to contribute nothing at all in a given year if you so choose (although your contributions must be nondiscriminatory, and “substantial and recurring,” for your plan to remain qualified). The plan must contain a formula for determining how your contributions are allocated among plan participants. A separate account is established for each participant that holds your contributions and any investment gains or losses. Generally, each employee with a year of service is eligible to participate (although you can require two years of service if your contributions are immediately vested). Contributions for any employee in 2015 can’t exceed the lesser of $53,000 or 100% of the employee’s compensation.

401(k) plan

The 401(k) plan (technically, a qualified profit-sharing plan with a cash or deferred feature) has become a hugely popular retirement savings vehicle for small businesses. According to the Investment Company Institute, 401(k) plans held $4.3 trillion of assets as of March 2014, and covered 52 million active participants. (Source: http://www.ici.org/401(k), accessed February 5, 2015.) With a 401(k) plan, employees can make pretax and/or Roth contributions in 2015 of up to $18,000 of pay ($24,000 if age 50 or older). These deferrals go into a separate account for each employee and aren’t taxed until distributed. Generally, each employee with a year of service must be allowed to contribute to the plan.

You can also make employer contributions to your 401(k) plan–either matching contributions or discretionary profit-sharing contributions. Combined employer and employee contributions for any employee in 2015 can’t exceed the lesser of $53,000 (plus catch-up contributions of up to $6,000 if your employee is age 50 or older) or 100% of the employee’s compensation. In general, each employee with a year of service is eligible to receive employer contributions, but you can require two years of service if your contributions are immediately vested.

401(k) plans are required to perform somewhat complicated testing each year to make sure benefits aren’t disproportionately weighted toward higher paid employees. However, you don’t have to perform discrimination testing if you adopt a “safe harbor” 401(k) plan. With a safe harbor 401(k) plan, you generally have to either match your employees’ contributions (100% of employee deferrals up to 3% of compensation, and 50% of deferrals between 3 and 5% of compensation), or make a fixed contribution of 3% of compensation for all eligible employees, regardless of whether they contribute to the plan. Your contributions must be fully vested.

Another way to avoid discrimination testing is by adopting a SIMPLE 401(k) plan. These plans are similar to SIMPLE IRAs, but can also allow loans and Roth contributions. Because they’re still qualified plans (and therefore more complicated than SIMPLE IRAs), and allow less deferrals than traditional 401(k)s, SIMPLE 401(k)s haven’t become popular.

Defined benefit plan

A defined benefit plan is a qualified retirement plan that guarantees your employees a specified level of benefits at retirement (for example, an annual benefit equal to 30% of final average pay). As the name suggests, it’s the retirement benefit that’s defined, not the level of contributions to the plan. In 2015, a defined benefit plan can provide an annual benefit of up to $210,000 (or 100% of pay if less). The services of an actuary are generally needed to determine the annual contributions that you must make to the plan to fund the promised benefit. Your contributions may vary from year to year, depending on the performance of plan investments and other factors.

In general, defined benefit plans are too costly and too complex for most small businesses. However, because they can provide the largest benefit of any retirement plan, and therefore allow the largest deductible employer contribution, defined benefit plans can be attractive to businesses that have a small group of highly compensated owners who are seeking to contribute as much money as possible on a tax-deferred basis.

As an employer, you have an important role to play in helping America’s workers save. Now is the time to look into retirement plan programs for you and your employees.

 

 

 

 

 

 

 

 

 

 

 

 

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of Patrick Ray, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by Qwest, fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, AT&T, Chevron, Hughes, Raytheon, ExxonMobil, Glaxosmithkline, Merck, Pfizer, Verizon, Bank of America, Alcatel-Lucent, Northrop Grumman or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

Patrick Ray is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.

Setting and Targeting Investment Goals

Go out into your yard and dig a big hole. Every month, throw $50 into it, but don’t take any money out until you’re ready to buy a house, send your child to college, or retire. It sounds a little crazy, doesn’t it? But that’s what investing without setting clear-cut goals is like. If you’re lucky, you may end up with enough money to meet your needs, but you have no way to know for sure.

How do you set investment goals?

Setting investment goals means defining your dreams for the future. When you’re setting goals, it’s best to be as specific as possible. For instance, you know you want to retire, but when? You know you want to send your child to college, but to an Ivy League school or to the community college down the street? Writing down and prioritizing your investment goals is an important first step toward developing an investment plan.

What is your time horizon?

Your investment time horizon is the number of years you have to invest toward a specific goal. Each investment goal you set will have a different time horizon. For example, some of your investment goals will be long term (e.g., you have more than 15 years to plan), some will be short term (e.g., you have 5 years or less to plan), and some will be intermediate (e.g., you have between 5 and 15 years to plan). Establishing time horizons will help you determine how aggressively you will need to invest to accumulate the amount needed to meet your goals.

How much will you need to invest?

Although you can invest a lump sum of cash, many people find that regular, systematic investing is also a great way to build wealth over time. Start by determining how much you’ll need to set aside monthly or annually to meet each goal. Although you’ll want to invest as much as possible, choose a realistic amount that takes into account your other financial obligations, so that you can easily stick with your plan. But always be on the lookout for opportunities to increase the amount you’re investing, such as participating in an automatic investment program that boosts your contribution by a certain percentage each year, or by dedicating a portion of every raise, bonus, cash gift, or tax refund you receive to your investment objectives.

Which investments should you choose?

Regardless of your financial goals, you’ll need to decide how to best allocate your investment dollars. One important consideration is your tolerance for risk. All investments involve some risk, but some involve more than others. How well can you handle market ups and downs? Are you willing to accept a higher degree of risk in exchange for the opportunity to earn a higher rate of return?

Whether you’re investing for retirement, college, or another financial goal, your overall objective is to maximize returns without taking on more risk than you can bear. But no matter what level of risk you’re comfortable with, make sure to choose investments that are consistent with your goals and time horizon. A financial professional can help you construct a diversified investment portfolio that takes these factors into account.

Investing for retirement

After a hard day at the office, do you ask yourself, “Is it time to retire yet?” Retirement may seem a long way off, but it’s never too early to start planning, especially if you want retirement to be the good life you imagine.

For example, let’s say that your goal is to retire at age 65. At age 20 you begin contributing $3,000 per year to your tax-deferred 401(k) account. If your investment earns 6% per year, compounded annually, you’ll have approximately $679,000 in your investment account when you retire.

But what would happen if you left things to chance instead? Let’s say that you’re not really worried about retirement, so you wait until you’re 35 to begin investing. Assuming you contributed the same amount to your 401(k) and the rate of return on your investment dollars was the same, you would end up with approximately $254,400. And, as this chart illustrates, if you were to wait until age 45 to begin investing for retirement, you would end up with only about $120,000 by the time you retire.

Investing for college

Perhaps you faced the truth the day your child was born. Or maybe it hit you when your child started first grade: You have only so much time to save for college. In fact, for many people, saving for college is an intermediate-term goal–if you start saving when your child is in elementary school, you’ll have 10 to 15 years to build your college fund.

Of course, the earlier you start, the better. The more time you have before you need the money, the greater chance you have to build a substantial college fund due to compounding. With a longer investment time frame and a tolerance for some risk, you might also be willing to put some of your money into investments that offer the potential for growth.

Investing for a major purchase

At some point, you’ll probably want to buy a home, a car, or even that vacation home you’ve always wanted. Although they’re hardly impulse items, large purchases are usually not something for which you plan far in advance; one to five years is a common time frame. Because you don’t have much time to invest, you’ll have to budget your investment dollars wisely. Rather than choosing growth investments, you may want to put your money into less volatile, highly liquid investments that have some potential for growth, but that offer you quick and easy access to your money should you need it.

Review and revise

Over time, you may need to update your investment strategy. Get in the habit of checking your portfolio at least once a year–more frequently if the market is particularly volatile or when there have been significant changes in your life. You may need to rebalance your portfolio to bring it back in line with your investment goals and risk tolerance. If you need help, a financial professional can help.

Investing for Your Goals

Investment goal and time horizon At 4%, you’ll need to invest At 8%, you’ll need to invest At 12%, you’ll need to invest
Have $10,000 for down payment on home: 5 years $151 per month $136 per month $123 per month
Have $50,000 in college fund: 10 years $340 per month $276 per month $223 per month
Have $250,000 in retirement fund: 20 years $685 per month $437 per month $272 per month
Table assumes 3% annual inflation, and that the return is compounded annually; taxes are not considered. Also, rates of return will vary over time, particularly for long-term investments, which could affect the amounts you would need to invest. This hypothetical example is not intended to reflect the actual performance of any investment.

 

 

 

 

 

 

 

 

 

 

 

 

 

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of Patrick Ray, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, ExxonMobil, AT&T, Qwest, Chevron, Hughes, Northrop Grumman, Raytheon, Glaxosmithkline, Merck, Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

Patrick Ray is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.

Exchange-Traded Funds: Do They Belong in Your Portfolio?

Exchange-traded funds (ETFs) have become increasingly popular since they were introduced in the United States in the mid-1990s. Their tax efficiencies and relatively low investing costs have attracted investors who like the idea of combining the diversification of mutual funds with the trading flexibility of stocks. ETFs can fill a unique role in your portfolio, but you need to understand just how they work and the differences among the dizzying variety of ETFs now available.

What is an ETF?

Like a mutual fund, an exchange-traded fund pools the money of many investors and purchases a group of securities. Like index mutual funds, most ETFs are passively managed. Instead of having a portfolio manager who uses his or her judgment to select specific stocks, bonds, or other securities to buy and sell, both index mutual funds and exchange-traded funds attempt to replicate the performance of a specific index.

However, a mutual fund is priced once a day, when the fund’s net asset value is calculated after the market closes. If you buy after that, you will receive the next day’s closing price. By contrast, an ETF is priced throughout the day and can be bought on margin or sold short–in other words, it’s traded just as a stock is.

How ETFs invest

Since their inception, most ETFs have invested in stocks or bonds, buying the shares represented in a particular index. For example, an ETF might track the Nasdaq 100, the S&P 500, or a bond index. Other ETFs invest in hard assets–for example, gold. With the rapid proliferation of ETFs in recent years, if there’s an index, there’s a good chance there’s an ETF that tracks it. More and more new indexes are being introduced, many of which cover narrow niches of the market, or use novel rules to choose securities. Many so-called rules-based ETFs are beginning to take on aspects of actively managed funds–for example, by limiting the percentage of the fund that can be devoted to a single security or industry.

Pros and Cons of Exchange-Traded Funds

Pros

  • ETFs can be traded throughout the day as price fluctuates
  • ETFs can be bought on margin, sold short, or traded using stop orders and limit orders, just as stocks can
  • ETFs do not have to hold cash or buy and sell securities to meet redemption demands by fund investors
  • Annual expenses are often lower, which can be especially important for long-term investors
  • Because ETFs typically trade securities infrequently, they have lower annual taxable distributions than a mutual fund

Cons

  • Dollar-cost averaging will require paying repeated commissions and will increase investing costs
  • If an ETF is organized as a unit investment trust, delays in reinvesting its dividends may hamper returns
  • An ETF doesn’t necessarily trade at its net asset value, and bid-ask spreads may be wide for thinly traded issues or in volatile markets

The new wave of ETFs

New and unique indexes are being developed every day. As a result, ETFs that might seem similar–for example, two funds that invest in large-cap stocks–can actually be quite different. Many indexes define which securities are included based on their market capitalization–the number of shares outstanding times the price per share. However, other indexes and the ETFs that mimic them may select or weight securities within the index based on fundamental factors, such as a stock’s dividend yield. Why is weighting important? Because it can affect the impact that individual securities have on the fund’s result. For example, an index that is weighted by market cap will be more affected by underperformance at a large-cap company than it would be by an underperforming company with a smaller market cap. That’s because the large-cap company would represent a larger share of the index. However, if the index weighted each security equally, each would have an equal impact on the index’s performance.

The cost advantages and tradeoffs of ETFs

As indicated above, one of the reasons ETFs have gained ground with investors is because of their low annual expenses. Passive index investing means an ETF doesn’t require a portfolio manager or a research staff to select securities; that reduces the fund’s overhead. Also, investing in an index means that trades are generally made only when the index itself changes. As a result, the trading costs required by frequent buying and selling of securities in the fund are minimized.

However, don’t forget that you’ll generally pay a commission with each ETF trade (depending on the type of account you have). That means a one-time lump-sum investment in an ETF will be more cost-effective than frequent, regular investments over time.

ETFs and taxes

ETFs can be relatively tax efficient. Because it trades so infrequently, an ETF typically distributes few capital gains during the year. There can be times when some investors find themselves paying taxes on capital gains generated by a mutual fund, even though the value of their fund may actually have dropped. Though it’s not impossible for an ETF to have capital gains, ETFs generally can minimize the ongoing capital gains taxes you’ll pay.

Just how much impact can reducing taxes have over the long term? More than you might think. Even a 1% difference in your return can be significant. For example, if you invest $50,000 and earn an average annual return of 5% (compounded monthly), you would have a pretax amount of $82,350 after 10 years. Even a 1% increase in that return would give you $90,970 at the end of that time. (This hypothetical example is for illustrative purposes only and does not represent the performance of any particular investment. Actual results will vary.)

Make sure you consider how an ETF’s returns will be taxed. Depending on how the fund is organized and what it invests in, returns could be taxed as short-term capital gains, ordinary income, or in the case of gold and silver ETFs, as collectibles; all are taxed at higher rates than long-term capital gains.

What are some other reasons investors use ETFs?

  • To get exposure to a particular industry or sector of the market. Because the minimum investment in an ETF is the cost of a single share, ETFs can be a low-cost way to make a diversified investment in alternative investments, a particular investing style, or geographic region.
  • To limit losses. Being able to set a stop-loss limit on your ETF shares can help you manage potential losses. A stop-loss order instructs your broker to sell your position if the shares fall to a certain price. If the ETF’s price falls, you’ve minimized your losses. If its price rises over time, you could increase the stop-loss figure accordingly. That lets you pursue potential gains while setting a limit on the amount you can lose.

How to evaluate an ETF

  1. Look at the index it tracks. Understand what the index consists of and what rules it follows in selecting and weighting the securities in it. Be aware that the performance of an unmanaged index is not indicative of the performance of any specific security. Individuals cannot invest directly in any index.
  2. Look at how long the fund and/or its underlying index have been in existence, and if possible, how both have performed in good times and bad.
  3. Look at the fund’s expense ratios. The more straightforward its investing strategy, the lower expenses are likely to be. An index using futures contracts is likely to have higher expenses than one that simply replicates the S&P 500.

Your financial professional can help you decide how ETFs might fit your investing strategy.

 

 

 

 

 

 

 

 

 

 

 

 

 

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of Patrick Ray, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, Qwest, ING Retirement, AT&T, Chevron, Northrop Grumman, Hughes, Raytheon, ExxonMobil, Glaxosmithkline, Merck, Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

Patrick Ray is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.

Balancing Your Investment Choices with Asset Allocation

A chocolate cake. Pasta. A pancake. They’re all very different, but they generally involve flour, eggs, and perhaps a liquid. Depending on how much of each ingredient you use, you can get very different outcomes. The same is true of your investments. Balancing a portfolio means combining various types of investments using a recipe that’s appropriate for you.

Getting an appropriate mix

The combination of investments you choose can be as important as your specific investments. The mix of various asset classes, such as stocks, bonds, and cash alternatives, accounts for most of the ups and downs of a portfolio’s returns.

There’s another reason to think about the mix of investments in your portfolio. Each type of investment has specific strengths and weaknesses that enable it to play a specific role in your overall investing strategy. Some investments may be chosen for their growth potential. Others may provide regular income. Still others may offer safety or simply serve as a temporary place to park your money. And some investments even try to fill more than one role. Because you probably have multiple needs and desires, you need some combination of investment types.

Balancing how much of each you should include is one of your most important tasks as an investor. That balance between growth, income, and safety is called your asset allocation, and it can help you manage the level and type of risks you face.

Balancing risk and return

Ideally, you should strive for an overall combination of investments that minimizes the risk you take in trying to achieve a targeted rate of return. This often means balancing more conservative investments against others that are designed to provide a higher return but that also involve more risk. For example, let’s say you want to get a 7.5% return on your money. Your financial professional tells you that in the past, stock market returns have averaged about 10% annually, and bonds roughly 5%. One way to try to achieve your 7.5% return would be by choosing a 50-50 mix of stocks and bonds. It might not work out that way, of course. This is only a hypothetical illustration, not a real portfolio, and there’s no guarantee that either stocks or bonds will perform as they have in the past. But asset allocation gives you a place to start.

Someone living on a fixed income, whose priority is having a regular stream of money coming in, will probably need a very different asset allocation than a young, well-to-do working professional whose priority is saving for a retirement that’s 30 years away. Many publications feature model investment portfolios that recommend generic asset allocations based on an investor’s age. These can help jump-start your thinking about how to divide up your investments. However, because they’re based on averages and hypothetical situations, they shouldn’t be seen as definitive. Your asset allocation is–or should be—as unique as you are. Even if two people are the same age and have similar incomes, they may have very different needs and goals. You should make sure your asset allocation is tailored to your individual circumstances.

Many ways to diversify

When financial professionals refer to asset allocation, they’re usually talking about overall classes: stocks, bonds, and cash or cash alternatives. However, there are others that also can be used to complement the major asset classes once you’ve got those basics covered. They include real estate and alternative investments such as hedge funds, private equity, metals, or collectibles. Because their returns don’t necessarily correlate closely with returns from major asset classes, they can provide additional diversification and balance in a portfolio.

Even within an asset class, consider how your assets are allocated. For example, if you’re investing in stocks, you could allocate a certain amount to large-cap stocks and a different percentage to stocks of smaller companies. Or you might allocate based on geography, putting some money in U.S. stocks and some in foreign companies. Bond investments might be allocated by various maturities, with some money in bonds that mature quickly and some in longer-term bonds. Or you might favor tax-free bonds over taxable ones, depending on your tax status and the type of account in which the bonds are held.

Asset allocation strategies

There are various approaches to calculating an asset allocation that makes sense for you.

The most popular approach is to look at what you’re investing for and how long you have to reach each goal. Those goals get balanced against your need for money to live on. The more secure your immediate income and the longer you have to pursue your investing goals, the more aggressively you might be able to invest for them. Your asset allocation might have a greater percentage of stocks than either bonds or cash, for example. Or you might be in the opposite situation. If you’re stretched financially and would have to tap your investments in an emergency, you’ll need to balance that fact against your longer-term goals. In addition to establishing an emergency fund, you may need to invest more conservatively than you might otherwise want to.

Some investors believe in shifting their assets among asset classes based on which types of investments they expect will do well or poorly in the near term. However, this approach, called “market timing,” is extremely difficult even for experienced investors. If you’re determined to try this, you should probably get some expert advice–and recognize that no one really knows where markets are headed.

Some people try to match market returns with an overall “core” strategy for most of their portfolio. They then put a smaller portion in very targeted investments that may behave very differently from those in the core and provide greater overall diversification. These often are asset classes that an investor thinks could benefit from more active management.

Just as you allocate your assets in an overall portfolio, you can also allocate assets for a specific goal. For example, you might have one asset allocation for retirement savings and another for college tuition bills. A retired professional with a conservative overall portfolio might still be comfortable investing more aggressively with money intended to be a grandchild’s inheritance. Someone who has taken the risk of starting a business might decide to be more conservative with his or her personal portfolio.

Things to think about

  • Don’t forget about the impact of inflation on your savings. As time goes by, your money will probably buy less and less unless your portfolio at least keeps pace with the inflation rate. Even if you think of yourself as a conservative investor, your asset allocation should take long-term inflation into account.
  • Your asset allocation should balance your financial goals with your emotional needs. If the way your money is invested keeps you awake worrying at night, you may need to rethink your investing goals and whether the strategy you’re pursuing is worth the lost sleep.
  • Your tax status might affect your asset allocation, though your decisions shouldn’t be based solely on tax concerns.

Even if your asset allocation was right for you when you chose it, it may not be appropriate for you now. It should change as your circumstances do and as new ways to invest are introduced. A piece of clothing you wore 10 years ago may not fit now; you just might need to update your asset allocation, too.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of Patrick Ray, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, ExxonMobil, access.att.com, Raytheon, ING Retirement, AT&T, Qwest, Chevron, Hughes, Northrop Grumman, Pfizer, Glaxosmithkline, Merck, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

Patrick Ray is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.

Planning Lessons for Educators: Addressing Your Financial Issues

Being an educator requires expertise and that you stay current on developments in your field. However, that level of ongoing attention can make it difficult to find the time to stay on top of issues that affect your finances, or to put together a comprehensive financial plan. Whether you work directly with students or focus on research, whether you are just starting your career or have achieved distinction in your field, you may benefit from working with a financial professional who understands an educator’s special concerns. Here are some issues that may not have been at the top of your to-do list, but that can affect your long-term comfort and happiness.

 

Addressing tax issues

 

Many educators, particularly contingency or adjunct faculty members, have multiple sources of income. For example, you may teach at several institutions, and/or earn consulting fees or royalties on your work. Welcome as that income doubtless is, it also may complicate tax planning and preparation. Other tax issues you may need help with include the deductibility of student loan payments, tax issues that arise from pursuing an advanced degree, and the taxation of employer-provided benefits such as faculty housing.

 

Getting tenure is cause for celebration, but it also is likely to affect your tax situation. Moving into a higher tax bracket could mean it’s time to make or rethink decisions about how much you need to save for retirement, the immediate and long-term benefits of various retirement savings accounts–both taxable and tax-advantaged–and how your retirement savings are invested.

 

Planning for retirement and beyond

 

One key to any potentially successful retirement plan is starting early. The sooner you can put a well-thought-out plan in place, the better your chances of financial security. Saving for retirement is like building up an endowment; it gives you the freedom to expand your horizons. Because academic salaries tend to remain relatively predictable (at least compared with corporate salaries) once you’ve gotten tenure, you may have an advantage when it comes to retirement planning. Why? Because you may be able to make more accurate forecasts of your lifetime earning capacity than people in other professions, which can in turn help you make more informed decisions about how you should manage your money now. Statistical analysis tools can estimate the likelihood that a given financial strategy may be adequate to meet your long-term needs.

 

Take full advantage of the tax benefits of your employer’s 401(k), 403(b), or 457(b) plan, especially if there’s an employer match (it’s essentially free money). You can defer up to $18,000 in 2015 ($24,000 if you’re 50 or older), or 100% of your pay if less. Also, any deferrals you make to a 457(b) plan don’t reduce the amount you can contribute to a 401(k) or 403(b) plan. So, for example, if you’re eligible for both a 403(b) and 457(b) plan, you can contribute the maximum to both, for a total contribution of up to $36,000 ($48,000 if you’re 50 or older) in 2015. Beyond employer-sponsored plans, you may also be able to use other tax-advantaged retirement savings vehicles, such as a traditional or Roth IRA. In 2015, the annual contribution limit for traditional and Roth IRAs is $5,500 (plus an additional $1,000 if you’re 50 or older).

 

Investing responsibly

 

An understanding of investing fundamentals is essential to making informed decisions with your money. A financial professional can help you understand not only the mechanics of investing, but demonstrate why a given strategy might be appropriate for you. Most common investing strategies are derived from a wealth of research on the historical performance of various types of  investments. Though past performance is no guarantee of future results, it can help to understand the various asset classes, the way each class tendsto behave, and the function each fulfills in a balanced portfolio. Asset allocation is a method used to help manage investment risk; it does not guarantee a profit or protect against investment loss. You might find assistance especially useful if you are the recipient of a lump sum, such as a cash award, prize or grant for your work.

 

Do you have ethical concerns about investing? Socially conscious investing has entered the mainstream, and there are many investment options that could help you address your financial needs and still support your convictions.

 

Even if you’re an experienced investor, you may need to adjust your strategy periodically as your circumstances change over time–for example, after you receive tenure or as you near retirement. The sooner you establish a relationship with a professional, the sooner you might benefit from the expertise of someone who deals with financial issues daily.

 

Creating an estate plan

 

A will is the cornerstone of every estate plan; without it, you have no control over how your assets will be distributed. You also should have a durable power of attorney and a health care directive.

 

If you’ve amassed substantial outside business interests or intellectual property assets (e.g., copyrights, patents, and royalties), an estate plan is particularly important. Managing those assets wisely while you’re alive can help make an enormous difference in your ability to maximize their benefits for your heirs.

 

Estate planning also can further your legacy in other ways. Charitable giving to your heirs, your educational institution, or another nonprofit organization can both further your philanthropic goals and be an effective tool to help reduce taxes. For example, by establishing a trust, you may be able to benefit from an immediate tax deduction as well as provide an ongoing income stream for you or the charitable institution of your choice. While trusts offer numerous advantages, they incur up-front costs and often have ongoing administrative fees. The use of trusts involves a complex web of tax rules and regulations. You should consider the counsel of an experienced estate planning professional and your legal and tax advisors before implementing such strategies.

 

Protecting your assets

 

You also might want to think about whether you and your family are adequately shielded from emergencies. Types of insurance you might consider include:

  • Life insurance
  • Disability insurance
  • Liability insurance (particularly if you’re involved in applied research projects or consulting engagements)

 

Managing debt

 

Being in debt can make managing all other financial issues more challenging. If you’re in the early part of your career, you may still be facing years of student loan payments; if you’re more senior, you may be trying to pay off a mortgage and eliminate all debts before retirement. Balancing debt with the day-to-day demands of raising a family, seeking support for your work, finding good housing, and saving for your children’s education and your own retirement can be a formidable task.

 

Handling debt wisely can have consequences over time. Having someone review your finances might uncover some new ideas for improving your situation. It also can help you understand the true long-term cost of any debt you incur. Whether you have a specific concern or just want to be better prepared for the future, a financial professional may be able to help. However, there is no guarantee that working with a financial professional will improve investment results.

 

 

 

 

 

 

 

 

 

 

 

 

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of Patrick Ray, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, resources.hewitt.com, ING Retirement, access.att.com, AT&T, Qwest, Chevron, Hughes, Northrop Grumman, Raytheon, ExxonMobil, Glaxosmithkline, hewitt.com, Merck, Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

Patrick Ray is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.

Holding Equities for the Long Term: Time Versus Timing

Legendary investor Warren Buffett is famous for his long-term perspective. He has said that he likes to make investments he would be comfortable holding even if the market shut down for 10 years. Investing with an eye to the long term is particularly important with stocks. Historically, equities have typically outperformed bonds, cash, and inflation, though past performance is no guarantee of future results and those returns also have involved higher volatility. It can be challenging to have Buffett-like patience during periods such as 2000-2002, when the stock market fell for 3 years in a row, or 2008, which was the worst year for the Standard & Poor’s 500* since the Depression era. Times like those can frazzle the nerves of any investor, even the pros. With stocks, having an investing strategy is only half the battle; the other half is being able to stick to it.

Just what is long term?

Your own definition of “long term” is most important, and will depend in part on your individual financial goals and when you want to achieve them. A 70-year-old retiree may have a shorter “long term” than a 30 year old who’s saving for retirement.

Your strategy should take into account that the market will not go in one direction forever–either up or down. However, it’s instructive to look at various holding periods for equities over the years. Historically, the shorter your holding period, the greater the chance of experiencing a loss. It’s true that the S&P 500 showed negative returns for the two 10-year periods ending in 2008 and 2009, which encompassed both the tech crash and the credit crisis. However, the last negative-return 10-year period before then ended in 1939, and each of the trailing 10-year periods since 2010 have also been positive.*

The benefits of patience

Trying to second-guess the market can be challenging at best; even professionals often have trouble. According to “Behavioral Patterns and Pitfalls of U.S. Investors,” a 2010 Library of Congress report prepared for the Securities and Exchange Commission, excessive trading often causes investors to underperform the market.

The Power of Time

Note: Though past performance is no guarantee of future results, the odds of achieving a positive return in the stock market have been much higher over a 5or 10-year period than for a single year. Another study, “Stock Market Extremes and Portfolio Performance 1926-2004,” initially done by the University of Michigan in 1994 and updated in 2005, showed that a handful of months or days account for most market gains and losses. The return dropped dramatically on a portfolio that was out of the stock market entirely on the 90 best trading days in history. Returns also improved just as dramatically by avoiding the market’s 90 worst days; the problem, of course, is being able to forecast which days those will be. Even if you’re able to avoid losses by being out of the market, will you know when to get back in?

Keeping yourself on track

It’s useful to have strategies in place that can help improve your financial and psychological readiness to take a long-term approach to investing in equities. Even if you’re not a buy-and-hold investor, a trading discipline can help you stick to a long-term plan.

Have a game plan against panic

Having predetermined guidelines that anticipate turbulent times can help prevent emotion from dictating your decisions. For example, you might determine in advance that you will take profits when the market rises by a certain percentage, and buy when the market has fallen by a set percentage. Or you might take a core-and-satellite approach, using buy-and-hold principles for most of your portfolio and tactical investing based on a shorter-term outlook for the rest.

Remember that everything’s relative

Most of the variance in the returns of different portfolios is based on their respective asset allocations. If you’ve got a well-diversified portfolio, it might be useful to compare its overall performance to the S&P 500. If you discover you’ve done better than, say, the stock market as a whole, you might feel better about your long-term prospects.

Current performance may not reflect past results

Don’t forget to look at how far you’ve come since you started investing. When you’re focused on day-to-day market movements, it’s easy to forget the progress you’ve already made. Keeping track of where you stand relative to not only last year but to 3, 5, and 10 years ago may help you remember that the current situation is unlikely to last forever.

Consider playing defense

Some investors try to prepare for volatile periods by reexamining their allocation to such defensive sectors as consumer staples or utilities (though like all stocks, those sectors involve their own risks). Dividends also can help cushion the impact of price swings. If you’re retired and worried about a market downturn’s impact on your income, think before reacting. If you sell stock during a period of falling prices simply because that was your original game plan, you might not get the best price. Moreover, that sale might also reduce your ability to generate income in later years. What might it cost you in future returns by selling stocks at a low point if you don’t need to? Perhaps you could adjust your lifestyle temporarily.

Use cash to help manage your mindset

Having some cash holdings can be the financial equivalent of taking deep breaths to relax. It can enhance your ability to act thoughtfully instead of impulsively. An appropriate asset allocation can help you have enough resources on hand to prevent having to sell stocks at an inopportune time to meet ordinary expenses or, if you’ve used leverage, a margin call.

A cash cushion coupled with a disciplined investing strategy can change your perspective on market downturns. Knowing that you’re positioned to take advantage of a market swoon by picking up bargains may increase your ability to be patient.

Know what you own and why you own it

When the market goes off the tracks, knowing why you made a specific investment can help you evaluate whether those reasons still hold. If you don’t understand why a security is in your portfolio, find out. A stock may still be a good long-term opportunity even when its price has dropped.

Tell yourself that tomorrow is another day

The market is nothing if not cyclical. Even if you wish you had sold at what turned out to be a market peak, or regret having sat out a buying opportunity, you may get another chance. If you’re considering changes, a volatile market is probably the worst time to turn your portfolio inside out. Solid asset allocation is still the basis of good investment planning.

Be willing to learn from your mistakes

Anyone can look good during bull markets; smart investors are produced by the inevitable rough patches. Even the best aren’t right all the time. If an earlier choice now seems rash, sometimes the best strategy is to take a tax loss, learn from the experience, and apply the lesson to future decisions.

*Data source: Calculations by Broadridge based on total returns on the S&P 500 Index over rolling 1-, 5-, and 10-year periods between 1926 and 2014.

 

 

 

 

 

 

 

 

 

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of Patrick Ray, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, Qwest, Chevron, Hughes, Northrop Grumman, Raytheon, ExxonMobil, Glaxosmithkline, Merck, netbenefits.fidelity.com, Pfizer, Verizon, AT&T, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

Patrick Ray is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.

Beyond Traditional Asset Classes: Exploring Alternatives

Stocks, bonds, and cash are fundamental components of an investment portfolio. However, many other investments can be used to try to spice up returns or reduce overall portfolio risk. So-called alternative assets have become popular in recent years as a way to provide greater diversification.

What is an alternative asset?

The term “alternative asset” is highly flexible; it can mean almost anything whose investment performance is not correlated with that of stocks and bonds. It may include physical assets, such as precious metals, real estate, or commodities. In some cases, geographic regions, such as emerging global markets, are considered alternative assets. Complex or novel investing methods also qualify. For example, hedge funds use techniques that are off-limits for most mutual funds, while private equity investments rely on skill in selecting and managing specific businesses. Finally, collectibles are included because the value of your investment depends on the unique properties of a specific item as well as general interest in that type of collectible.

Each alternative asset type involves its own unique risks and may not be suitable for all investors. Because of the complexities of these various markets, you would do well to seek expert guidance if you want to include alternative assets in a portfolio.

Hedge funds

Hedge funds are private investment vehicles that manage money for institutions and wealthy individuals. They generally are organized as limited partnerships, with the fund managers as general partners and the investors as limited partners. The general partner may receive a percentage of the assets, fees based on performance, or both.

Hedge funds originally derived their name from their ability to hedge against a market downturn by selling short. Though they may invest in stocks and bonds, hedge funds are considered an alternative asset class because of their unique, proprietary investing strategies, which may include pairs trading, long-short strategies, and use of leverage and derivatives. Participation in hedge funds is typically limited to “accredited investors,” who must meet SEC-mandated high levels of net worth and ongoing income (individual funds also usually require very high minimum investments).

Private equity/venture capital

Like stock shares, private equity and venture capital represent an ownership interest in one or more companies, but firms that make private equity investments may or may not be listed or traded on a public market or exchange. Private equity firms often are involved directly with management of the businesses in which they invest.

Private equity often requires a long-term focus. Investments may take years to produce any meaningful cash flow (if indeed they ever do); many funds have 10-year time horizons and you may not have access to your funds when you want them. Like hedge funds, private equity also typically requires a large investment and is available only to investors who meet SEC net worth and income requirements.

Real estate

You may make either direct or indirect investments in buildings–either commercial or residential–and/or land. Direct investment involves the purchase, improvement, and/or rental of property. Indirect investments are made through an entity that invests in property, such as a real estate investment trust (REIT), which may be either publicly traded or not. Real estate not only has a relatively low correlation with the behavior of the stock market, but also is often viewed as a hedge against inflation. However, bear in mind that physical real estate can be highly illiquid, may involve more work on your part to manage, and may be subject to weather hazards, rezoning or other factors that can reduce the value of your property. The value of a traded REIT will depend on fluctuations in the value of its real estate holdings as well as investor sentiment and market volatility. The value of a nontraded REIT is directly based on the value of its underlying real estate holdings. All REITs are subject to the risks associated with the real estate market in general. Also, some types of REITs are considered more illiquid than others, which could mean problems if you need to sell quickly.

Precious metals

Investors have traditionally purchased precious metals because they believe that gold, silver, and platinum provide security in times of economic and social upheaval. Gold, for instance, has historically been seen as an alternative to paper currency and therefore may help hedge against inflation and currency fluctuations. As a result, gold prices often rise when investors are worried that the dollar is losing value, though prices can fall just as quickly. There are many ways to invest in precious metals. In addition to buying bullion or coins, you can invest in futures, shares of mining companies, sector funds, and exchange-traded funds (ETFs).

Natural resources/equipment leasing

Direct investments in natural resources, such as timber, oil, or natural gas, can be done through limited partnerships that provide income from the resources produced. In some cases, such as timber, the resource replenishes itself; in other cases, such as oil or natural gas, it may be depleted over time. Timberland also may be converted for use as a real estate development. Some limited partnerships pool your money with that of other investors to invest in equipment leasing businesses, giving you partial ownership of the equipment those businesses lease out, such as construction equipment.

Commodities and financial futures

Commodities are physical substances that are fundamental to creating other products and are basically indistinguishable from one another. Examples include oil and natural gas; agricultural products; livestock such as hogs; and metals such as copper and zinc. Commodities are typically traded through futures contracts, which promise delivery on a certain date at a specified price. Futures contracts also are available for financial instruments, such as a security, a stock index, or a currency. Though the futures market was created to facilitate trading among companies that produce, own, or use commodities in their businesses, futures contracts also are bought and sold as investments in themselves, and some mutual funds and ETFs are based on futures indexes. Futures allow an investor to leverage a relatively small amount of capital. However, they are highly speculative, and that leverage also magnifies the potential for loss in a relatively short period of time.

Art, antiques, gems, and collectibles

Some investors are drawn to these because they may retain value or even appreciate as inflation rises. However, those values can be unpredictable because they are affected by supply and demand, economic conditions, and the quality of an individual piece or collection.

Why invest in alternative asset classes?

Part of sound portfolio management is diversifying investments so that if one type of investment is performing poorly, another may be doing well. As previously indicated, returns on some alternative investments are based on factors unique to a specific investment. Also, the asset class as a whole may behave differently from stocks or bonds.

An alternative asset’s lack of correlation with other types of investments gives it potential to complement more traditional asset classes and provide an additional layer of diversification for money that is not part of your core portfolio, though diversification cannot guarantee a profit or ensure against a loss.

Tradeoffs you need to understand

Alternative assets can be less liquid than stock or bonds. Depending on the investment, there may be restrictions on when you can sell, and you may or may not be able to find a buyer. Performance, values, and risks may be difficult to research and assess accurately. Also, you may not be eligible for direct investment in hedge funds or private equity.

The unique properties of alternative asset classes also mean that they can involve a high degree of risk. Because some are subject to less regulation than other investments, there may be fewer constraints to prevent potential manipulation or to limit risk from highly concentrated positions in a single investment. Finally, hard assets, such as gold bullion, may involve special concerns, such as storage and insurance, while natural resources and commodities can suffer from unusual weather or natural disasters.

 

 

 

 

 

 

 

 

 

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, Alcatel-Lucent, AT&T, Bank of America, Qwest, Chevron, Raytheon, ExxonMobil, Glaxosmithkline, Merck, Pfizer, Hughes, Northrop Grumman, Verizon or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of Patrick Ray, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

Patrick Ray is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.

Lump Sum vs. Dollar Cost Averaging: Which Is Better?

Some people go swimming by diving into the pool; others prefer to edge into the water gradually, especially if the water’s cold. A decision about putting money into an investment can be somewhat similar. Is it best to invest your money all at once, putting a lump sum into something you believe will do well? Or should you invest smaller amounts regularly over time to try to minimize the risk that you might invest at precisely the wrong moment? Periodic investing and lump-sum investing both have their advocates. Understanding the merits and drawbacks of each can help you make a more informed decision.

What is dollar cost averaging?                                                                

Periodic investing is the process of making regular investments on an ongoing basis (for example, buying 100 shares of stock each month for a year). Dollar cost averaging is one of the most common forms of periodic investing. It involves continuous investment of the same dollar amount into a security at predetermined intervals–usually monthly, quarterly, or annually–regardless of the investment’s fluctuating price levels.

Because you’re investing the same amount of money each time when you dollar cost average, you’re automatically buying more shares of a security when its share price is low, and fewer shares when its price is high. Over time, this strategy can provide an average cost per share that’s lower than the average market price (though it can’t guarantee a profit or protect against a loss in a declining market).

The accompanying graph illustrates how share price fluctuations can yield a lower average cost per share through dollar cost averaging. In this hypothetical example, ABC Company’s stock price is $30 a share in January, $10 a share in February, $20 a share in March, $15 a share in April, and $25 a share in May. If you invest $300 a month for 5 months, the number of shares you would buy each month would range from 10 shares when the price is at a peak of $30 to 30 shares when the price is only $10. The average market price is $20 a share ($30+$10+$20+$15+$25 = $100 divided by 5 = $20). However, because your $300 bought more shares at the lower share prices, the average purchase price is $17.24 ($300 x 5 months = $1,500 invested divided by 87 shares purchased = $17.24).

The merits of dollar cost averaging

In addition to potentially lowering the average cost per share, investing a predetermined amount regularly automates your decision-making, and can help take emotion out of your investment decisions.

And if your goal is to buy low and sell high, as it should be, dollar cost averaging brings some discipline to that process. Though it can’t help you know when to sell, this strategy can help you pursue the “buy low” portion of the equation.

Also, many people don’t have a lump sum to invest all at once; any investments come out of their income stream–for example, as contributions to their workplace retirement savings account. In such cases, dollar cost averaging may not only be an easy strategy; it may be the most realistic option.

The case for investing a lump sum

Maybe you’re considering rolling over an IRA or have just received a pension payout. Perhaps you’ve inherited a large amount of money, or the mail-order sweepstakes’ prize patrol has finally shown up at your door. You might be thinking about the best way to shift your asset allocation or how to invest the proceeds of a certificate of deposit. Or maybe you’ve been parking some money in cash alternatives and now want to invest it.

In cases like these, you may want to at least investigate the merits of lump-sum investing. Several academic studies have compared dollar cost averaging to lump-sum investing and concluded that, because markets have risen over the long term in the past, investing in the market today tends to be better than waiting until tomorrow, since you have a longer opportunity to benefit from any increase in prices over time.

For example, a 2009 study by the Association of Investment Companies found that an investor who put a lump sum into the average British investment company at the end of April 2008 (talk about bad timing!) would have been down 30% one year later. Someone who invested the same total amount divided over 12 months would have been down only 7%. However, when the study examined the previous 5 years rather than a single year, the lump-sum investment made in April 2004 would have been up 26% by April 2009, compared to the periodic investment strategy’s loss of 10% over the same time. Several U.S. studies over several decades reviewed overall stock market performance and reached a similar conclusion: the longer your time frame, the greater the odds that a lump-sum investment will outperform dollar cost averaging.

Caution: Past performance is no guarantee of future results.

Considerations about dollar cost averaging

  • Think about whether you’ll be able to continue your investing program during a down market. The return and principal value of stocks fluctuate with changes in market conditions. If you stop when prices are low, you’ll lose much of the benefit of dollar cost averaging. Consider both your financial and emotional ability to continue making purchases through periods of low and high price levels. Plan ahead for how you’ll manage the temptation to stop investing when the chips are down, and remember that shares may be worth more or less than their original cost when you sell them.
  • The cost benefits of dollar cost averaging tend to diminish a bit over very long periods of time, because time alone also can help average out the market’s ups and downs.
  • Don’t forget to consider the cost of transaction fees, which can mount up over time with periodic investing.

Considerations about investing a lump sum

  • The lump-sum studies reflect the long-term historical direction of the stock market since record-keeping began in 1925. That doesn’t mean the markets will behave in the future as they have in the past, or that there won’t be extended periods in which stock prices don’t rise. Even if they do move up, they may not do so immediately and forever once you invest.
  • Even if you don’t have a large lump sum to invest now, you may be able to save smaller amounts and invest the total in a lump sum later. However, many people simply aren’t disciplined enough to keep their hands off that money. Unless the money is invested automatically, you may be more tempted to spend your savings rather than investing them, or skip a month–or two or three.
  • Even seasoned investors have difficulty timing the market, so ignoring fluctuations and continuing to invest regularly may still be an improvement over postponing a decision indefinitely while you wait for the “right time” to invest.
  • Don’t forget that though diversification alone can’t guarantee a profit or prevent the possibility of loss, a lump sum invested in a single security generally involves more risk than a lump sum put into a diversified portfolio, regardless of your time frame.

In the end, deciding between lump-sum investing and dollar cost averaging illustrates the classic risk-reward tradeoff that all investments entail. Even if you’re convinced a lump-sum investment might produce a higher net return over time, are you comfortable with the uncertainty and level of risk involved? Or are you increasing the odds that you won’t be able to handle short-term losses–especially if they occur shortly after you invest your lump sum–and sell at the wrong time?

It’s important to know yourself and your limitations as an investor. Understanding the pros and cons of each approach can help you make the decision that best suits your personality and circumstances.

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of Patrick Ray, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, Glaxosmithkline, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, AT&T, Qwest, Chevron, Northrop Grumman, Raytheon, ExxonMobil, Hughes, Merck, Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

Patrick Ray is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.

How Much Annual Income Can Your Retirement Portfolio Provide?

Your retirement lifestyle will depend not only on your assets and investment choices, but also on how quickly you draw down your retirement portfolio. The annual percentage that you take out of your portfolio, whether from returns or the principal itself, is known as your withdrawal rate. Figuring out an appropriate initial withdrawal rate is a key issue in retirement planning and presents many challenges.

Why is your withdrawal rate important?

Take out too much too soon, and you might run out of money in your later years. Take out too little, and you might not enjoy your retirement years as much as you could. Your withdrawal rate is especially important in the early years of your retirement; how your portfolio is structured then and how much you take out can have a significant impact on how long your savings will last.

Gains in life expectancy have been dramatic. According to the National Center for Health Statistics, people today can expect to live more than 30 years longer than they did a century ago. Individuals who reached age 65 in 1950 could anticipate living an average of 14 years more, to age 79; now a 65-year-old might expect to live for roughly an additional 19 years. Assuming rising inflation, your projected annual income in retirement will need to factor in those cost-of-living increases. That means you’ll need to think carefully about how to structure your portfolio to provide an appropriate withdrawal rate, especially in the early years of retirement.

Current Life Expectancy Estimates

 

  Men Women
At birth 76.4 81.2

 

At age 65 83.0 85.5

Source: NCHS Data Brief, Number 229, December 2015

Conventional wisdom

So what withdrawal rate should you expect from your retirement savings? The answer: it all depends. The seminal study on withdrawal rates for tax-deferred retirement accounts (William P. Bengen, “Determining Withdrawal Rates Using Historical Data,” Journal of Financial Planning, October 1994) looked at the annual performance of hypothetical portfolios that are continually rebalanced to achieve a 50-50 mix of large-cap (S&P 500 Index) common stocks and intermediate-term Treasury notes. The study took into account the potential impact of major financial events such as the early Depression years, the stock decline of 1937-1941, and the 1973-1974 recession. It found that a withdrawal rate of slightly more than 4% would have provided inflation-adjusted income for at least 30 years.

Other later studies have shown that broader portfolio diversification, rebalancing strategies, variable inflation rate assumptions, and being willing to accept greater uncertainty about your annual income and how long your retirement nest egg will be able to provide an income also can have a significant impact on initial withdrawal rates. For example, if you’re unwilling to accept a 25% chance that your chosen strategy will be successful, your sustainable initial withdrawal rate may need to be lower than you’d prefer to increase your odds of getting the results you desire. Conversely, a higher withdrawal rate might mean greater uncertainty about whether you risk running out of money. However, don’t forget that studies of withdrawal rates are based on historical data about the performance of various types of investments in the past. Given market performance in recent years, many experts are suggesting being more conservative in estimating future returns.

Note: Past results don’t guarantee future performance. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.

Inflation is a major consideration

To better understand why suggested initial withdrawal rates aren’t higher, it’s essential to think about how inflation can affect your retirement income. Here’s a hypothetical illustration; to keep it simple, it does not account for the impact of any taxes. If a $1 million portfolio is invested in an account that yields 5%, it provides $50,000 of annual income. But if annual inflation pushes prices up by 3%, more income–$51,500–would be needed next year to preserve purchasing power. Since the account provides only $50,000 income, an additional $1,500 must be withdrawn from the principal to meet expenses. That principal reduction, in turn, reduces the portfolio’s ability to produce income the following year. In a straight linear model, principal reductions accelerate, ultimately resulting in a zero portfolio balance after 25 to 27 years, depending on the timing of the withdrawals.

Volatility and portfolio longevity

When setting an initial withdrawal rate, it’s important to take a portfolio’s ups and downs into account—and the need for a relatively predictable income stream in retirement isn’t the only reason. According to several studies done in the late 1990s and updated in 2011 by Philip L. Cooley, Carl M. Hubbard, and Daniel T. Walz, the more dramatic a portfolio’s fluctuations, the greater the odds that the portfolio might not last as long as needed. If it becomes necessary during market downturns to sell some securities in order to continue to meet a fixed withdrawal rate, selling at an inopportune time could affect a portfolio’s ability to generate future income.

Making your portfolio either more aggressive or more conservative will affect its lifespan. A more aggressive portfolio may produce higher returns but might also be subject to a higher degree of loss. A more conservative portfolio might produce steadier returns at a lower rate, but could lose purchasing power to inflation.

Calculating an appropriate withdrawal rate

Your withdrawal rate needs to take into account many factors, including (but not limited to) your asset allocation, projected inflation rate, expected rate of return, annual income targets, investment horizon, and comfort with uncertainty. The higher your withdrawal rate, the more you’ll have to consider whether it is sustainable over the long term.

Ultimately, however, there is no standard rule of thumb; every individual has unique retirement goals, means, and circumstances that come into play.

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of Patrick Ray, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by access.att.com, Alcatel-Lucent, AT&T, Bank of America, fidelity.com, Glaxosmithkline, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, ING Retirement, Qwest, Chevron, Hughes, Northrop Grumman, Raytheon, ExxonMobil, Merck, Pfizer, Verizon, or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

Patrick Ray is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.

In-Service Withdrawals from 401(k) Plans

You may be familiar with the rules for putting money into a 401(k) plan. But are you familiar with the rules for taking your money out? Federal law limits the withdrawal options that a 401(k) plan can offer. But a 401(k) plan may offer fewer withdrawal options than the law allows, and may even provide that you can’t take any money out at all until you leave employment. However, many 401(k) plans are more flexible.

First, consider a plan loan

Many 401(k) plans allow you to borrow money from your own account. A loan may be attractive if you don’t qualify for a withdrawal, or you don’t want to incur the taxes and penalties that may apply to a withdrawal, or you don’t want to permanently deplete your retirement assets. (Also, you must take any available loans from all plans maintained by your employer before you’re even eligible to withdraw your own pretax or Roth contributions from a 401(k) plan because of hardship.)

In general, you can borrow up to one half of your vested account balance (including your contributions, your employer’s contributions, and earnings), but not more than $50,000.

You can borrow the funds for up to five years (longer if the loan is to purchase your principal residence). In most cases you repay the loan through payroll deduction, with principal and interest flowing back into your account. But keep in mind that when you borrow, the unpaid principal of your loan is no longer in your 401(k) account working for you.

Withdrawing your own contributions

If you’ve made after-tax (non-Roth) contributions, your 401(k) plan can let you withdraw those dollars (and any investment earnings on them) for any reason, at any time. You can withdraw your pretax and Roth contributions (that is, your “elective deferrals”), however, only for one of the following reasons—and again, only if your plan specifically allows the withdrawal:

  • You attain age 59½
  • You become disabled
  • The distribution is a “qualified reservist distribution”
  • You incur a hardship (i.e., a “hardship withdrawal”)

Hardship withdrawals are allowed only if you have an immediate and heavy financial need, and only up to the amount necessary to meet that need. In most plans, you must require the money to:

  • Purchase your principal residence, or repair your principal residence damaged by an unexpected event (e.g., a hurricane)
  • Prevent eviction or foreclosure
  • Pay medical bills for yourself, your spouse, children, dependents, or plan beneficiary
  • Pay certain funeral expenses for your parents, spouse, children, dependents, or plan beneficiary
  • Pay certain education expenses for yourself, your spouse, children, dependents, or plan beneficiary
  • Pay income tax and/or penalties due on the hardship withdrawal itself

Investment earnings aren’t available for hardship withdrawal, except for certain pre-1989 grandfathered amounts.

But there are some disadvantages to hardship withdrawals, in addition to the tax consequences described below. You can’t take a hardship withdrawal at all until you’ve first withdrawn all other funds, and taken all nontaxable plan loans, available to you under all retirement plans maintained by your employer. And, in most 401(k) plans, your employer must suspend your participation in the plan for at least six months after the withdrawal, meaning you could lose valuable employer matching contributions. And hardship withdrawals can’t be rolled over. So think carefully before making a hardship withdrawal.

Withdrawing employer contributions

Getting employer dollars out of a 401(k) plan can be even more challenging. While some plans won’t let you withdraw employer contributions at all before youerminate employment, other plans are more flexible, and let you withdraw at least some vested employer contributions before then. “Vested” means that you own the contributions and they can’t be forfeited for any reason. In general, a 401(k) plan can allow you to withdraw vested company matching and profit-sharing contributions if:

  • You become disabled
  • You incur a hardship (your employer has some discretion in how hardship is defined for this purpose)
  • You attain a specified age (for example, 59½)
  • You participate in the plan for at least five years, or
  • The employer contribution has been in the account for a specified period of time (generally at least two years)

Taxation

Your own pretax contributions, company contributions, and investment earnings are subject to income tax when you withdraw them from the plan. If you’ve made any after-tax contributions, they’ll be nontaxable when withdrawn. Each withdrawal you make is deemed to carry out a pro-rata portion of taxable and any nontaxable dollars.

Your Roth contributions, and investment earnings on them, are taxed separately: if your distribution is “qualified,” then your withdrawal will be entirely free from federal income taxes. If your withdrawal is “nonqualified,” then each withdrawal will be deemed to carry out a pro-rata amount of your nontaxable Roth contributions and taxable investment earnings. A distribution is qualified if you satisfy a five-year holding period, and your distribution is made either after you’ve reached age 59½, or after you’ve become disabled. The five-year period begins on the first day of the first calendar year you make your first Roth 401(k) contribution to the plan.

The taxable portion of your distribution may be subject to a 10% premature distribution tax, in addition to any income tax due, unless an exception applies. Exceptions to the penalty include distributions after age 59½, distributions on account of disability, qualified reservist distributions, and distributions to pay medical expenses.

Rollovers and conversions Rollover of non-Roth funds

If your in-service withdrawal qualifies as an “eligible rollover distribution,” you can roll over all or part of the withdrawal tax free to a traditional IRA or to another employer’s plan that accepts rollovers. In general, most in-service withdrawals qualify as eligible rollover distributions except for hardship withdrawals and required minimum distributions after age 70½. If your withdrawal qualifies as an eligible rollover distribution, your plan administrator will give you a notice (a “402(f) notice”) explaining the rollover rules, the withholding rules, and other related tax issues. (Your plan administrator will withhold 20% of the taxable portion of your eligible rollover distribution for federal income tax purposes if you don’t directly roll the funds over to another plan or IRA.)

You can also roll over (“convert”) an eligible rollover distribution of non-Roth funds to a Roth IRA. And some 401(k) plans even allow you to make an “in-plan conversion”–that is, you can request an in-service withdrawal of non-Roth funds, and have those dollars transferred into a Roth account within the same 401(k) plan. In either case, you’ll pay income tax on the amount you convert (less any nontaxable after-tax contributions you’ve made).

Rollover of Roth funds

If you withdraw funds from your Roth 401(k) account, those dollars can only be rolled over to a Roth IRA, or to another Roth 401(k)/403(b)/457(b) plan that accepts rollovers. (Again, hardship withdrawals can’t be rolled over.) But be sure to understand how a rollover will affect the taxation of future distributions from the IRA or plan. For example, if you roll over a nonqualified distribution from a Roth 401(k) account to a Roth IRA, the Roth IRA five-year holding period will apply when determining if any future distributions from the IRA are tax-free qualified distributions. That is, you won’t get credit for the time those dollars resided in the 401(k) plan.

Be informed

You should become familiar with the terms of your employer’s 401(k) plan to understand your particular withdrawal rights. A good place to start is the plan’s summary plan description (SPD). Your employer will give you a copy of the SPD within 90 days after you join the plan.

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of Patrick Ray, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, AT&T, Chevron, Hughes, Qwest, Raytheon, ExxonMobil, Northrop Grumman, Glaxosmithkline, Merck, Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

Patrick Ray is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.