Though I’m not qualified to give life advice, one thing I’ve learned through the years is that life is all about tradeoffs. For many decisions, the tradeoffs are obvious. Do I join friends for a beer or go for a run along the river? Admittedly, I don’t always make the most prudent decision on this one, but I do understand one path will lead to short-term gain, while the other will probably be better for me in the long-run (no pun intended!). Fortunately for me, (when I’m creative enough) the events don’t have to be mutually exclusive.
At Cordant, our primary role is to help our clients maximize the probability of reaching their objectives. While straightforward, the challenge is making recommendations in the face of uncertainty—the most obvious being the direction of the capital markets (stocks and bonds) in the short-term. I have
I’m clueless when it comes to cars. I take the bus to work, MAX to the airport and pretty much avoid driving at all costs (thanks Uber!). And despite my best efforts, my life is still dependent on them. You can imagine my anxiety when it comes to dealing with mechanics. They might as well be speaking a foreign language. As with most of life’s mundane occurrences, I can relate with Seinfeld’s George Costanza and Jerry Seinfeld conversation about mechanics.
As a financial planner, I’m sympathetic to those intimidated or frustrated with the financial services industry. After all, getting a new carburetor is one thing, investing your nest-egg or navigating the tax-code is whole other. For those that feel this way about coordinating their finances, this blog post is for you and is going to focus on one area of financial planning that has gained popularity in recent years: Health Savings Accounts.
As we enter December, the last month on the calendar marks the final chance to cross your financial T’s and dot your I’s. For many, this means making last-minute charitable contributions, maxing out your 401k or ensuring your health care is solidified for next year. And for those individuals in their 70’s, this means satisfying their Required Minimum Distributions (RMDs).
Boring for many, I love these year-end opportunities for financial optimization. Year-end is a great time of year for something else I love –football! With college football bowl season about to begin and NFL playoffs around the corner, the action on the field is as intense as ever. And while the on-field action is all good and dandy, I always get a kick out of the “coach speak” and endless clichés heard from coaches dancing around uncomfortable questions posed by their adversaries in the media this time of year.
Admittedly, comparing RMDs and football may be a “stretch”, but I promise this won’t be an exercise in futility. With that, let’s put our visor on, grab the clipboard, and break down everything you need to know about RMDs from the sidelines. Before we begin, it should be noted that this post will only focus on standard RMDs and will not be tackling Inherited RMDs, which have slightly different rules.
With #OscarGate squarely in our rear-view mirror, Hollywood can now resume their "normal" lives, and the rest of us can only speculate how the singular moment in the world's most popular award show was botched by someone in the financial services industry. Talk about bizarre. While I'd like to use this space to poke fun at the rich and famous in La-La Land, er, Los Angeles, I'm going to attempt to turn a quasi-movie review into a lesson in estate planning.
On Christmas day I joined many Americans at the movie theater and saw Manchester by the Sea, starring Casey Affleck (actual winner of Best Actor award). Not your typical uplifting holiday movie (read: depressing), I was struck by one key part of the plot that enabled the rest of the story to unfold.
The movie unwinds like this: Lee, an irritable, lonely handyman in Boston gets a call one day that his older brother Joe's heart has given out and he needs to make his way back to his hometown, Manchester by the Sea, immediately. Upon Lee's arrival, he learns that Joe has passed away and left Lee as guardian of his teenage son, Patrick. From there, the story focuses on the struggle that Lee faces while trying to cope with his new life as caretaker for Patrick, while also facing the demons that plagued his previous life in Manchester.
At a critical point in the movie,
Last time in our two-part series Taking Action With Tax Planning we looked at setting up a tax-efficient portfolio and actions to reduce your tax bill while working. In part two, let’s explore actionable steps to reduce taxes during the retirement transition and in retirement.
As humans, it’s in our DNA to crave action in moments of uncertainty. It’s the fight or flight instinct. Because of this, successful investing will always be counterintuitive to many and difficult for most. When it comes to long-term investing, the data and research continue to support an approach that rewards patience and discipline, not action or reaction. Fortunately, not all aspects of managing your wealth require you to resist against our ancient wiring. In fact, when it comes to tax planning, opportunities abound, in all phases of life, to grab the bull by the horns and to act.
Below we’ve provided actionable items for all three phases of your financial life – working, at retirement and in retirement. But, before we get into the three phases, there are a few things you can and should be doing regardless of what phase of financial life you’re in.
How much can I spend in retirement? For many, that’s the million-dollar question – literally.
The first step taken of any retirement planning should be developing a baseline financial plan, and understanding the appropriate withdrawal rate is paramount to this process. During the early stages of plan development for our clients, we often get questions about the 4% withdrawal rule and how it applies to their situation. The popular financial “rule of thumb” was the result of research done in 1994 by a financial planner and MIT grad, Bill Bengen, and produced what is now known as the 4% Withdrawal Rule.
Trying to do right by his clients, Mr. Bengen sought out to produce something that wasn’t yet available – a framework for providing guidance that was rooted in research and data. Here’s what he came up with – a “rule of thumb” that posits that retirees who withdraw 4% of their initial portfolio at retirement, and then adjust that amount for inflation, can sustain that spending amount for 30 years and not outlive their money. The research assumed the retirees’ portfolio consisted of an equal mix of stocks and bonds (S&P 500 & Intermediate Government Bonds) and was rebalanced annually. From there, he tested every rolling 30-year period dating back to 1926 to determine the maximum withdrawal rate that would survive all periods. For that time period, the worst-case scenario in U.S. history produced a 4.15% withdrawal rate. Thus, the 4% rule was born.
Words of caution - Oversimplification
When it comes time to make the decision on retirement, and answering the ultimate question of, “Do I have enough?”, using the 4% Rule to help answer that question is a decent starting point. However, for a variety of reasons, we caution against blindly accepting this rule and applying to your situation.
Whether you’re approaching retirement or already in it, you probably have questions about Social Security and how it impacts your retirement plan. Social Security is as complex as it is important. The income stream can be an integral part of a well-thought out financial plan and the myriad of options often lead to sub-optimal elections by otherwise well-informed folks. Social Security goes beyond retirement income and provides workers and their families with disability and survivors insurance benefit as well; however, this post will focus on the following key points of Social Security as part of retirement planning:
- How benefits are calculated
- Solvency of the program
- Recent changes to popular claiming strategies
- Social Security as part of your retirement plan