401(k) Auto Rollovers: A Convenient Safe Harbor for Small Business Retirement Plans

401(k) Auto Rollovers: A Convenient Safe Harbor for Small Business Retirement Plans

OK – with a new year upon us it’s time to clean up that rusty old 401(k) plan at your small business….right?  Let’s say that you work in or own a small business, and are responsible for operating the company’s 401(k) plan.  To put it lightly, it’s probably a massive nuisance.

401(k) plans can be a wonderful benefit to your employees AND a great opportunity for you to put more money away for retirement in a tax deferred account.  But as you may now, operating a plan can be a real bear.

I’ll be covering the finer points of operating small business retirement plans throughout the year.  Today’s post will focus on what to do with departed employees.  Employees will come and go to and from your business over time (hopefully not too often), and it’s not uncommon for them to leave money they’ve accumulated in your company’s qualified retirement plan.

 

ERISA & Fiduciary Responsibility

As you probably know, departed employees always have the opportunity to pull their money from your plan after they leave, either directly or via a trustee to trustee rollover.  But many employees neglect to do so.  Whether it’s because they don’t know how, don’t care, or are simply lazy, it’s very common for departed employees to “accumulate” in your 401(k) plan, long after leaving the company for greener pastures.

As you also know, as the sponsor of a qualified retirement plan you have certain fiduciary responsibilities when it comes to managing the plan on behalf of your participants.  It’s for this reason – fear of repercussion – that many sponsors feel stuck when it comes to managing assets of employees who long ago left the company.

Fortunately for you, ERISA was not written with the sole intention of making your life hell.  There are six safe harbors written into the law that free you from fiduciary responsibility if you follow a few step by step instructions.  And one of them conveniently covers departed employees.

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What's the Optimal Portfolio Rebalancing Frequency-

What’s the Optimal Portfolio Rebalancing Frequency?

If you’ve read the blog for very long, you probably know that I’m a big proponent of thoughtful and customized asset allocation.  The percentage of your portfolio invested in stocks, bonds, cash, and real estate should vary based on your personal financial objectives and tolerance for risk.

In fact there are plenty of studies contending that asset allocation determines the vast majority of your portfolio’s return.  In other words, it doesn’t matter as much which stock or bond you choose to invest in.  It matters far more how much of your portfolio is invested in stocks or bonds in the aggregate.

 

The Importance of Portfolio Rebalancing

If you’ve ever managed your portfolio (or anyone else’s for that matter) you also know that over time your portfolio’s asset allocation will change as the market fluctuates.  If you start with 60% in stocks and 40% in bonds, you might find your portfolio weighted 70% in stocks and only 30% in bonds after an appreciation in the stock market – especially since bonds tend to fall when stocks rise.

This is why it’s important to rebalance your portfolio over time.  The whole point of building a customized asset allocation is to match the risk in your portfolio to your personal risk tolerance.  As your individual investments fluctuate in value, selling some of the appreciated positions and replacing them with some of the depreciated positions brings your portfolio back to its intended allocation.

For example, if a 60/40 portfolio became 70/30 after the markets moved, you’d want to sell stocks that represent 10% of your portfolio and use the cash to purchase bonds – returning to your original 60/40 allocation.  Without rebalancing, your portfolio would continue to stray over time, ensuring a level of portfolio risk that’s higher or lower than you’d like.

 

 

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The Top 7 Mistakes People Make When Planning for Retirement

The Top 7 Mistakes People Make when Planning for Retirement

Hello ATC Readers!

This post is to announce that I’ll be hosting a free retirement webinar in a few weeks.  I’ve been getting a lot of questions recently to the effect of “what am I doing wrong?” when it comes to retirement planning.

As you may know, we’re often our own worst enemy when it comes to retirement planning.  As human beings we tend to get emotional when it comes to our finances.  Rather than remaining logical, balanced, and objective, we often make poor decisions because our emotions get in the way.

I wanted to cover this issue in more detail than a traditional post, so I decided to focus a 60 minute webinar on the topic:

The Top 7 Mistakes People Make When Planning for Retirement

Presented by Grant Bledsoe, CFA, CFP®

In this live webinar we’ll cover some of the most pressing issues retirees face today:

  • The top retirement mistakes made today and how to avoid them
  • How to understand the fees you’re paying your advisor
  • How your emotions can affect decision making & how to overcome them to make consistently smart investment choices
  • The 5 components all effective retirement plans must have
  • How to tell whether your retirement savings are enough for you to stop working

There are two separate dates you can attend:

  • Tuesday, December 6th from 10:00AM – 11:00AM PST
  • Wednesday, December 7th from 1:00PM – 2:00PM PST

Even if you can’t attend at these times, make sure to register anyway.  After the webinar is over I’ll email you a replay copy you can watch at your own convenience (for a limited time).

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401(k)s, IRAs & Tax Deferred vs. Tax Exempt Investing

401(k)’s, IRAs & Tax Deferred vs. Tax Exempt Investing

Should I contribute to a traditional or a Roth IRA?

This is a big question I get asked fairly frequently.  And really, the conversation expands beyond individual retirement accounts.  The decision whether to invest on a tax deferred or tax exempt basis is one you’ll likely make many times over your investing career.  Some people prefer a exempt account to “get taxes out of the way”, while others prefer to defer taxes as long as possible in order to “let their money work for them”.

In this post we’ll explore the topic and discuss which situations may be best for either strategy.  But first, let’s review exactly what tax deferred and tax exempt investing actually are.

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Case Study Retiring with $1,000,000

Case Study: Retiring With $1,000,000

Those of you who know me know that I’m a massive baseball fan.  And when it comes famous baseball quotes, most come from one player: Yogi Berra.

Yogi Berra was a long time catcher for the Yankees, and had an incredible hall of fame career.  He was equally known for his head-scratching quotes, which the world has affectionately termed “Yogi-isms.”

Yogi didn’t comment often on financial topics, but when I think about retirement planning one of his famous quotes stands out:

“A nickel ain’t worth a dime anymore.”

When we think about retirement planning, $1,000,000 is often considered a kind of “golden threshold.”  Many people think of a million dollars as the minimum nest egg they’ll need in order to retire comfortably.  But as Yogi pointed out, being a millionaire doesn’t amount to what it used to.

So is it even possible to retire with $1,000,000 these days?

Let’s find out.  In this post we’ll explore a hypothetical couple named John and Jane.  They’ve saved $1,000,000 and want to retire, which is a common situation for many Americans.

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Adventures in Estate Planning: The Educational Trust Fund

Adventures in Estate Planning: The Educational Trust Fund

Helping loved ones finance the cost of education is a wonderful & long lasting gift.  But when you build this type of gift into your estate planning aspirations, the more traditional vehicles can be limiting in many ways.

529 plans and Coverdell ESAs are two of the most popular options, but the accounts can be rigid and limiting.  If your objectives are more unique, say you want to help multiple beneficiaries or include other requirements for access, you’ll need a more customized solution.

Enter the educational trust fund.  Educational trust funds give you complete control over how your gift is to be managed and distributed.  If your gifting strategy is even marginally complex, an educational trust fund might be your best option.

 

How They Work

When contributing to the 529 or Coverdell account of a loved one, you’re faced with numerous and rigid restrictions.  There are contribution limits, there are limitations on what the funds can be used for, and there are restrictions on portability and who may use the funds.  They provide a great way to save for college on a tax advantaged basis, but there’s not much room to customize.

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Health Insurance for Retirees Under 65: How to Cope Until Medicare Kicks In

Health Insurance for Retirees Under 65: How to Cope Until Medicare Kicks In

If you’re planning to retire early, you might be wondering what you’ll do for health insurance coverage.  Medicare won’t kick in until you turn 65, and the rising cost of healthcare each year could translate to unknown monthly premiums and out of pocket costs.  This leaves you in a precarious situation if you don’t have another form of benefits.

Fortunately, the Affordable Care Act includes several rules designed to limit your costs.  For example, insurance companies may charge a 64 year old premiums of no more than three times those of a 21 year old.  The ACA also outlaws rejecting applications or charging more for preexisting conditions, and limits out of pocket costs to $6700 per year.

I’m not taking a stance on Obamacare here, but if you’re looking to retire early the road to health coverage is easier now than it was a few years back.  But despite the improvements, a major illness or  injury could still take a big chunk out of your retirement savings.  And as you probably know, the worst possible time to deplete your nest egg is immediately after you stop working.

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Sequence of Returns: the Biggest Risk to Financial Independence & a Successful Retirement

Sequence of Returns: The Biggest Risk to Financial Independence & Successful Retirement

When you think about your retirement & financial independence, what keeps you up at night?  Is it the possibility that a market crash depletes your nest egg?  Is it inflation?  What about the cost of health care, or living too long and running out of money?

These are all common concerns I hear from people approaching their leap into financial independence.

Every now and then someone will ask me what they should be concerned about.  “What would you be concerned about if you were in my shoes?  What are my biggest risks?”

 

Average Returns & Volatility

Most of us approach retirement planning with expectations about the average returns we’ll see throughout retirement.  You’ve probably heard (maybe even from me) that the S&P 500 averages between 7.5% and 9% in annual returns – depending on the exact data set and who you talk to.  Over a 30+ year retirement, if we were to invest only in the S&P 500, we could expect an average annual return between 7.5% and 9%.  I’m confident this is true, based on the last 150 or so years of historical data in the financial markets.

As you know, this doesn’t mean that the stock market will gain 7.5% each and every year.  There will be years like 2001 and 2009 where the market falls 25%-30%.  There will also be years where it gains 25% or more.  The markets are volatileBut on average, the S&P 500 will see somewhere between 7.5% and 9% returns per year.

One of the statistical measures of volatility is called standard deviation, which is used to measure just how volatile a data set is around an average.  Since 1926, the standard deviation of the S&P 500 is about 18.5%.

Now, the image below is something you’ve seen before.  It’s a bell curve based on a normal distribution.  The simple explanation of a a normal distribution is that the results occur randomly around the mean.  In a normal distribution:

  • 68.2% of the results will fall within one standard deviation of the mean
  • 95.4% of the results will fall within two standard deviations of the mean
  • 99.6% of the results will fall within three standard deviations of the mean
  • 99.8% of the results will fall within four standard deviations of the mean

 

Sequence of Returns: The Biggest Risk to Financial Independence & Successful Retirement

What does this mean for the S&P 500?  If the S&P 500 is normally distributed and resembles a typical bell curve, annual returns will fall between:

  • -11% and 26.5% 68.2% of the time (7.5% – 18.5% & 7.5% + 18.5%)
  • -29.5% and 45% 95.4% of the time
  • -48% and 63.5% 99.6% of the time

I should note that many have argued the returns of the S&P 500 are not normally distributed, including William Egan and Nassim Nicholas Taleb.  And for the most part I don’t disagree with them.  This argument is beside the point of this post though, so for this discussion and the following examples we’ll assume a normal distribution fits the S&P 500 just fine.

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The 17 Biggest Retirement Mistakes

I’m guessing that over the years you’ve read at least 1000 posts, articles, and ebooks on what to do before you retire.  Good retirement checklists are about a dime a dozen in the online world.  And even though most of them contain great information, you probably don’t need to review the same to-do’s for the umpteenth time.

So in this post I’ll spare you from a list of regurgitated tips you’ve seen before.  Instead, here’s a list of the 17 biggest retirement mistakes I see in my practice.  If you can avoid these issues after you stop working, you’ll be in much better shape than most retirees.

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6 Ways to Minimize Required Minimum Distributions

6 Ways to Minimize Required Minimum Distributions

There’s a plethora of tax advantaged retirement accounts out there today.  Enough that the acronyms and numbers can get really confusing…

  • IRA
  • 401k
  • 403b
  • 457
  • Profit sharing
  • SEP IRA
  • SIMPLE IRA

Just to name a few – trust me, there are more.  The reason?  The government wants us to save for our own retirement.  And by offering an array of tax advantaged accounts, they’re incentivizing us to put money away.

But while the tax advantages are great, the government won’t let us shelter our money from taxes forever.  When you turn 70 1/2, they’ll force you start taking withdrawals called required minimum distributions, or RMDs.  If you don’t you’ll be subject to a hefty 50% penalty.

This poses quite a problem for many retirees, since each withdrawal raises their tax liability for the year.  So for those of you who want to keep Uncle Sam’s grimy mitts off of your hard earned retirement funds, here are six ways to minimize your RMDs:

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