6 Steps to Securing Your Retirement Portfolio

Few people reach retirement with perfectly allocated and optimized 401(k)s or IRAs. Only about 45 percent of all workers even have access to a workplace retirement plan at all, according to the Washington, D.C.-based Employee Benefit Research Institute. But if you do have one, chances are good you have more than one.

The nature of the employment system is that people accumulate accounts as they change jobs, and they often end up with a hodgepodge of investments that leaves them vulnerable to risk of all kinds, including a portfolio that’s so volatile it could take a dip just when you need the money, a portfolio that is so conservative you lose to inflation, or a portfolio that is not optimized for taxes.

A snapshot of the U.S. retirement market tells the story. Of the $23 trillion in retirement assets, more than half is in 401(k)s and IRAs, and the rest is in defined benefit plans, annuities, state and local pension plans and an array of other financial vehicles, according to the Investment Company Institute’s most recent 2014.

Just beginning to think about what you need to do may be the hardest step. But ignoring your portfolio could come at a high cost if history catches you at the wrong moment. At the end of 2007, investors were woefully weighted with stocks, according to the Employee Benefit Research Institute. Nearly 1 in 4 Americans ages 56 to 65 had more than 90 percent of their account balances in equities at year-end 2007, and over 2 in 5 had more than 70 percent. Equities declined nearly 40 percent the following year, wiping out billions in retirement savings for many retirees. It forced many near-retirees to delay stepping out of the workforce.

So now, as the economy hums along and the market reaches new highs, it is a good time to re-calibrate that retirement portfolio against volatility that may strike at any time.

1. Figure out what you need. Most financial advisors will tell you that as you enter your 50s, you should have a firm idea of the budget you’ll need in retirement. So before you begin, you’ll also have to have a clear sense of your required monthly income.

**According to The Federal Reserve’s Survey of Consumer Finances, a typical American household in the 55-to-64 age range has accumulated about $120,000 in retirement assets, only enough to produce $400 to $500 of monthly income before Social Security. The typical Social Security benefit is about $1,887. If that’s not enough, you’ll need to make some changes.

2. Save more, and extend your working life. The most effective lever you have for a successful retirement portfolio is to save more. That means increasing your contributions during your working lifetime or work longer.

**Suppose you need $80,000 a year in retirement. If you can continue to earn $100,000 a year for five years past your expected retirement date and put aside $20,000 or $30,000 of that a year, you will have added a total of six to seven years of income to your portfolio. You can also increase your Social Security benefit 76 percent a month by delaying your claim from 62—the earliest year you’re allowed to claim—to 70.

3. Diversify. If you want to lower the unexpected reality of volatility within your portfolio, diversify among various asset classes. That means owning mutual funds instead of individual stocks and having multiple asset classes represented instead of just one; emerging markets stock and bond funds in addition to domestic stock and bond funds. Equally important, keep your fees low.

** Vanguard expects returns for a balanced portfolio of 60 percent stocks and 40 percent bonds over the next 10 years to range from –3 percent to 12 percent, with the most likely scenario between 1.5 percent and 7.5 percent a year on an annualized basis. Equities alone are forecast to have a return centered on the 6 percent to 9 percent range, but with a possible swing from year to year of 18 percent. Bonds expected returns are in the 1.5 percent to 3 percent range. The translation: You’ll probably earn nearly as high returns with a balanced portfolio, but you’ll face much less volatility.

4. Design your asset allocation with an view of taxes. If you have significant holdings outside your retirement accounts, think through which asset classes belong in your retirement account. You’ll save significantly on taxes if you keep the equities—which you may buy and sell more frequently as you re-balance—in your retirement portfolio. But don’t make your portfolio decisions only around your tax savings; optimizing your investment returns and keeping your principal safe is a higher priority.

5. Equities should not to be avoided. Don’t make the mistake of significantly selling all of your equities and shifting into money market funds because you think they are safer. That would likely be too conservative for the long term. If you look at the returns of equities and cash every year since 1926, equities lost value in 1/3 the time on a real basis but cash also lost money 1/3 the time too, because of inflation. Most experts recommend that in retirement you have at least a 20 percent allocation to equities.

6. Periodically re-balance. You’ll be retired for a long time, so in order for your money to keep working in the best way possible you need to continue selling high and buying low as a process, which is what re-balancing does for your portfolio.

You devoted a lifetime to accumulating assets, put these steps into action and protect your hard earned dollars. More importantly, work closely with a competent, qualified, independent and objective financial advisor.

 The information contained herein does not constitute tax or legal advice.  Any decisions or actions should not be made without first consulting a financial professional or attorney.

For more information contact us at 845.563.0537 or Contact@CompassAMG.com

The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC.

Spire Wealth Management, LLC is a Federally Registered Investment Advisory Firm. Securities offered through an affiliate, Spire Securities, LLC. Member FINRA/SIPC.

Suddenly Single? Start Fresh: Protect Finances

Losing a spouse through death or divorce can be emotionally devastating and is often a difficult time to make important life decisions. Yet it’s this very time that attention needs to be paid to important financial matters such as retirement assets, budgeting on a single income, appropriate insurance, or reviewing Social Security benefits.  Should you become suddenly single, avoid the risk of making emotionally driven and potentially harmful financial decisions. Here are six important and actionable steps to help to protect your personal finances.

1. Update your financial accounts.

When you lose a spouse, you’ll likely need to change the registrations on any financial accounts that are owned jointly. Such ownership changes typically require certain documentation.

If you’re widowed, you need to provide your financial institutions with copies of your spouse’s death certificate in order to shift accounts from joint ownership into your own name. In a divorce, changing ownership requires first determining how you’ll divide jointly owned assets. Usually this is through court orders and/or divorce agreements. Then securing any signatures guarantees or documentation required by your financial institutions will be needed to make the necessary changes.

Caution: Attention needs to be paid to the conditions and methods under which you divide assets or change ownership. Following the wrong advice could result in significant tax burdens. You should consult your tax or financial planner…not your broker.

2. Divide or roll over retirement assets.

Pension and retirement account assets have their own set of rules when it comes to changing ownership or splitting the assets.

Death of a spouse
Generally, upon the death of the account owner, retirement account assets will pass directly to the beneficiaries designated on the account. Some questions to consider in this case might be 1) Should you withdraw funds, 2) Should you rollover the assets into your own IRA or 3) Do you create a Beneficiary IRA or 4) Waive your right to the assets? The answers might not be easy. Do you need the money now? Will you be subject to tax and/or penalties? Will you be required to take a required minimum distributions? What will this do to your estate? Depending on your personal circumstances, the answers will be varied. It’s important to consult with a financial planner or accountant to evaluate your situation before making decisions.

The next critical issue to address here is updating the beneficiary designations on your own retirement accounts—such as 401(k)s, 403(b)s, and IRAs. Even if your will were to include your retirement assets, your beneficiary designations supersede them.

Divorce

Retirement assets are often split up as part of a divorce settlement through a qualified domestic relations order (QDRO). A QDRO is a legal arrangement that either recognizes an alternate payee’s right to receive (in this case the ex-spouse) or assigns to that alternate payee all or a portion of his or her former spouse’s retirement account balance and/or pension benefits.

IRAs are divided through a one-time distribution from one spouse’s IRA into the other spouse’s IRA, without income tax or early withdrawal penalties. But this must be a court-approved transfer; otherwise, the distribution is treated as taxable to the original account owner, while the spouse on the receiving end gets the money tax-free.

3. Re-evaluate your income and budget.

Chances are, when you’re suddenly single, you may be taking a cut in your income, so you may need to adjust your budget accordingly. Start by listing your essential expenses (housing, food, insurance, transportation, etc.) and your discretionary expenses (dinners out, vacations, clothing, etc.). Try to match reliable sources of income (salary, Social Security, pension, etc.) to your essential expenses and see where you might trim your discretionary spending.

If you’re near retirement or are already retired and fear an income shortfall, you might consider creating a regular source of income by focusing your portfolio on income producing investments or yield. This can turn your retirement savings into a source of predictable income that you can use to budget wisely.

4. Evaluate your insurance needs.

What you’ll have and what you’ll need for insurance can change dramatically when you lose a spouse through death or divorce. It’s important to take a careful look at all the different types of insurance that are available to see where you may need to adjust your coverage. Be sure to review:

Life insurance. If you are the surviving spouse and the beneficiary on your deceased spouse’s life insurance policy, you will typically receive the proceeds tax free. But if you are still caring for children, you may want to either purchase or increase your own life insurance coverage to make sure they will be protected in the event of your death.

If you divorce, remember to consider (1) changing the beneficiary on your life insurance if it is currently your ex-spouse, and (2) purchasing or modifying your coverage to adequately protect your children if either you or ex-spouse dies.

Health insurance. Even if your spouse carried your family’s health insurance coverage, you can continue to maintain it for a period of time, whether you are divorced or become widowed.

Through the Consolidated Omnibus Budget Reconciliation Act (COBRA), if you’re going to lose health benefits (because of death, divorce, job loss, etc.), you can continue coverage for up to 36 months—so long as you pay the premiums, which can be up to 102% of the cost to the plan.

Because COBRA coverage is expensive in many cases and doesn’t last indefinitely, you may want to check out other insurance options, whether through your own employer or by evaluating individual plans available through the Affordable Care Act (ACA).

Disability insurance. We all hope we will never need it, but disability insurance is one of the least understood and most useful ways of protecting ourselves and our loved ones. What if you were injured or sick and couldn’t go to work? Disability insurance is designed to protect you and your loved ones against lost income.

Long-term-care insurance. If you’re over the age of 50, you may want to consider buying long-term care insurance (LTCi) to help keep potential costs of nursing home stays and home health care from depleting your income resources if you become seriously ill or injured.

5. Review your credit.

When you’re suddenly single, your credit can be among your most valuable assets—so protect it wisely. After divorce or the death of a spouse, you may want to request a copy of your credit report to take inventory of all the accounts that are open in your name and/or jointly with your former spouse.

If you’re divorced, you’ll want to close joint credit accounts and shift to single accounts so that an ex-spouse’s credit score won’t affect your credit rating. If you’re widowed, contact all three credit bureaus (Experian, Equifax, and TransUnion) to let them know that your spouse has passed away, to keep others from falsely establishing credit in his or her name.

Unfortunately, a surviving spouse is often responsible for paying the deceased spouse’s credit card bills, whether these were joint or individual accounts. It’s always worth calling the credit card company, however, to negotiate better payment terms if necessary.

6. Maximize Social Security benefits.

Here’s some good news: Even if you’re now on your own, Social Security recognizes that you were once part of a married couple, and offers benefits to both surviving and ex-spouses. Widows and ex-spouses are generally entitled to 50% of their former spouse’s Social Security benefits, if those benefits would be greater than their own Social Security benefits.

As a surviving spouse, you can receive full Social Security benefits at your full retirement age or reduced benefits as early as age 60. A disabled widow or widower can get benefits as early as age 50.

If you’re divorced, you could be eligible for Social Security benefits, based on your ex-spouse’s record, if those benefits would be greater than your own retirement benefits. However, your ex-spouse must be eligible for Social Security benefits, and generally you must be unmarried and at least 62 years old. In addition, you must have been married for at least 10 years.

You can’t avoid the turmoil that comes with divorce or the death of a spouse, but recognizing how your personal finances might change could help you make thoughtful, rather than rushed, decisions and provide more solid financial ground as you transition to being single.

The information contained herein does not constitute tax or legal advice.  Any decisions or actions should not be made without first consulting a CFP, CPA or attorney.

For more information contact us at 845.563.0537 or Contact@CompassAMG.com

The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC.

Spire Wealth Management, LLC is a Federally Registered Investment Advisory Firm. Securities offered through an affiliate, Spire Securities, LLC. Member FINRA/SIPC.

Increase Your Retirement Batting Average, Don’t Close Your Eyes!

If you don’t have an actual plan for how to achieve retirement successfully, you may just be “winging it”! Really?! How do you think that’s going to work out for you?

It’s true that while many may participate in their company’s 401(k) plan or another workplace retirement plan, many workers don’t know what to invest in or how much to save. As a result, they’re not saving enough. Additionally, surveys have shown that many workers feel overwhelmed by day-to-day financial pressures, paying monthly expenses and even job security. These only contribute to taking your eye off the ball! The result…a secure retirement Strikeout!

Retirement Plans

Consider this: According to Fidelity, the average 65-year-old couple retiring today will spend about $220,000 on health-care costs alone.

Reality is setting in with American workers. Recent polls have suggested that while half of Americans say they would like to retire before the age of 65, only 20 percent believe they will realistically be able to do so. This leaves two options: working longer or saving more.

But how much more should you save?

Determining the amount of money you may need in retirement as income is an vital factor in calculating how much you may need to save today.

Fidelity took a look at how much 401(k) investors at various ages would need to save for every $1,000 they’ll need to generate in retirement income to make their money last, assuming a 5.5 percent annual return and not taking taxes into account. The analysis had eye opening results:

• A 25-year-old just starting to save would only need put away about $160 each month to generate $1,000 in monthly retirement income.
• Start saving at age 35 and you’ll need to contribute almost $270 a month to generate the same income.
• For every $1,000 in monthly income, a 45-year-old just beginning to save for retirement would have to put away nearly $500 every month.
• A 55-year-old just starting to build a nest egg would have to make monthly contributions of $1,154 for every $1,000 in monthly retirement income—that’s double the amount of a 45-year-old and more than seven times the sum that a 25-year-old would need to stash away.

That’s why financial planners suggest that the rule of thumb is you should save anywhere from 10 to 15 percent of your income towards retirement. Yet, most workers are only putting away 6 to 7 percent of the annual income into a 401(k) or workplace retirement plan, the firm has found. Some who have delayed retirement savings may have to put away 20 to 25 percent of their income.

Can’t get there yet? Smaller increases can help. Even incremental changes like a 1 percent increase can eventually make a big difference and create hundreds of dollars in potential income in retirement.

The bottom line is that most people aren’t saving enough money. In the absence of saving an adequate amount there is no other magic bullet. You cannot start so late that assuming more risk will make up for the lack of contributions. Not to mention that more risk could mean more potential losses if the market changes. Surely that will be the fastball that sends the batter down swinging. You can choose the best investments in the world but if your only putting $500 a year into your IRA or your 401(k) plan you’re just not going to get there.

 The information contained herein does not constitute tax or legal advice.  Any decisions or actions should not be made without first consulting a CFP, CPA or attorney.

For more information contact us at 845.563.0537 or Contact@CompassAMG.com

The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC.

Spire Wealth Management, LLC is a Federally Registered Investment Advisory Firm. Securities offered through an affiliate, Spire Securities, LLC. Member FINRA/SIPC.

Successful Retirement Planning Strategies For Women

Everyone faces similar challenges in planning for their long-term financial goals, such as a successful retirement.

But women seem to have a few unique obstacles to overcome. Fortunately, through a well conceived financial plan and implementing a solid strategy, women can alleviate those obstacles:

Retirement Planning for Women

• Longer life expectancies – Women on average live seven years longer than men which means they need to plan for a longer, more independent retirement.
• Lower earnings: – According to Women’s Institute for a Secure Retirement (WISER), men are out-earning women at an average of 23 cents on the dollar. Lower earnings result in less money contributed to retirement plans and social security.
• More time out of the workforce – Women typically are the caregivers. They may spend time out of the work force to raise a family or care for ailing parents or other relatives. This time away can potentially negatively impact the raises and promotions. To compound this, while they are out of the workforce, women are not contributing to their pension, other retirement plans or social security which means they end up with less in savings than men.

Creating a retirement plan will help women to feel more in control of their finances and give them confidence about achieving their long-term financial goals.  There are a couple of steps women can take:

• Educate yourself by reading and attending workshops.
• Review your credit usage and reduce any unnecessary debt.
• Take an active role in your investments including your retirement plans.
• Invest for long-term growth, being balanced in your risk tolerance.
• Maximize your contributions to your retirement plan.
• Consider working with a financial planner.

Remember, you are in control of your financial future. Careful planning and putting a long term strategy in place can go a long way towards overcoming the obstacles, achieving your long term retirement goals and living the retirement lifestyle you desire.

The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC located in Newburgh, New York and specializes in planning for women. His goal is to empower, educate and engage women around money matters.

For more information contact Steven at Compass Asset Management Group, LLC at 845.563.0537 or Contact@CompassAMG.com

Steven M DiGregorio is an Investment Advisor Representative with Spire Wealth Management, LLC a Federally Registered Investment Advisory Firm. Securities offered through an affiliated company Spire Securities, LLC a Registered Broker/Dealer and member FINRA/SIPC.

Women Empowered Toward Investment Success

Women now comprise nearly half of the U.S. workforce, and they now earn a higher percentage of the bachelor’s and master’s degrees compared to men. So how come women’s average retirement plan balances are just 60 percent of men’s average balances?  No, it’s not because there was just a great shoe sale!

Take Control of Your Finances

CONTRIBUTING FACTORS

Several factors may play into women having lower average retirement plan balances:

• Lower average salaries In 2010, the Bureau of Labor Statistics reported that the earnings ratio of women to men was 81 percent. Lower wages may translate to lower contribution and match rates.
• Tendency to select more conservative investments Generally speaking, conservative investments may result in lower long-term returns.
• Employment breaks Not only do women take time off for maternity leave, they may take additional time away for child rearing, as well as the care of elderly parents. Most who take time off for care-giving duties do not continue to contribute to any kind of retirement plan.

Combine the above factors with the fact that women usually live longer than men and, as a result, need an even bigger nest egg, and it’s not surprising that only 24 percent of women are very confident they will have enough money to take care of basic expenses in retirement.

HELP YOURSELF

There are several steps women may take to help themselves live comfortably through retirement:

• Get an idea of how much you may need in retirement If you don’t know, don’t feel bad. Only 40 percent of women (and 45 percent of men) have ever tried to calculate how much they will need to have saved by the time they retire. Try the Retirement Calculator at Fidelity.com  to gain some perspective.
• Pay yourself first Stash cash into your retirement plan — even before saving for your children’s college education (Loans may be available for college, but not retirement). You may feel that’s selfish, but one of the best gifts you can give your children is to secure your own retirement to avoid being a financial burden upon them in the future.
• Learn about saving and investing Usually the more you know, the less scary it is. A good place to start is right here. Go to the Blogs tab on our website at CompassAMG.com  for information on many financial topics, from budgeting  and investing to estate planning
• Explore when to claim Social Security Nearly 60 percent of the people receiving Social Security benefits are women. Although Social Security was never intended to cover all your retirement needs, it may be an important aspect of your retirement. If you are married, there are several scenarios to explore to coordinate you and your spouse’s benefits. For most people, delaying claiming Social Security beyond your full retirement age equals approximately 8% more per year in benefits. (This increased benefit for delaying stops at age 70.) On the Social Security Web site is a Retirement Estimator, which will help you get immediate and personalized retirement benefit estimates. Sign up for My Social Security and view your personal information.

YOU GO, GIRL

Empower your future! Explore, learn and put to work these ideas to close the retirement gap. Begin now to make your future financially secure.  A good strategy and plan will leave a lot more dough around for the magic of martinis & Manolos!! Start today!

This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.

Written by Steven M. DiGregorio, President, Compass Asset Management Group, LLC.   Compass Asset Management Group, LLC is an affiliate of Spire Wealth Management, LLC.

Spire Wealth Management, LLC is a Federally Registered Investment Advisory Firm.
Securities offered through an affiliate Spire Securities, LLC.
Member FINRA/SIPC.

2013 Retirement Plan Limits and Savings Strategies

A new year and new beginnings! With that said, it’s time to consider adjusting your retirement savings. The Internal Revenue Service recently issued a variety of inflation adjustments for 2013, and retirement savers can now save even more.   Take advantage!

New Limits for 2013

Beginning with the 2013 calendar year, participants in 401(k), 403(b), and governmental 457 or Thrift plans can now save up to $17,500. This is a $500 increase from 2012.  Those aged 50 or older can save an additional $5,500 as a catch-up provision for a total limit of $23,000. This catch-up ceiling is unchanged from 2012.

Retirement Plan Contribution Limits 2013

Small business owners will be able to save up to $51,000 in a SEP IRA or Solo 401(k) or up to $56,500 for those age 50+. This is also the maximum that can be added into a traditional employer-sponsored 401(k) through the combination of employee and employer contributions.

Some 401(k) plans have begun using an auto-increase option that automatically increases the savings percentage each year. This feature became available after a number of studies suggested that most people are too lazy or distracted to ever adjust their savings elections after their initial enrollment.

While some will not be able to max out their retirement account, everyone should consider increasing their savings amount in 2013. For some people, this can mean simply increasing the percentage of their salary deferral. Do whatever you can do to get the full matching amount.

You can go online or contact your Human Resources Department now and request an increase in your salary deferral beginning today.

Where Do Roth IRAs Come In?

After receiving your company match, Roth IRAs are the next best place to save. Roth IRA maximums are increasing to $5,500 in 2013 or $6,500 for those ages 50 or older. The upper income limits for eligibility begin phasing out at $178,000 of adjusted gross income (AGI) for married couples, a $5,000 increase from 2012. Singles are capped at $127,000. Those who earn more could consider a backdoor method for investing in a Roth IRA. That’s where you convert a traditional IRA to a Roth IRA account. While taxes in the process cannot be avoided, there are no limits on Roth conversions.  Avoiding tax on future growth, priceless!

How much savings is enough? 

A question many people ask.  We always suggest a target savings rate of 10% to start.  How important is saving at a 10% target rate for retirement? The difference between saving 10% of your salary and 3% of your salary could be over half a million dollars for an employee who starts out making a salary of $50,000 and invests with an 8% per year return over 30 years.  Returns are never guaranteed so the only variable that you can control is the amount of your regular contributions. Save more!

How Soon Should I begin?

While the savings amount is important, even more critical for your success is to start sooner than later!  The value of compounding is not to be underestimated.  More money working longer over time can be…priceless!  Notice in the chart below that starting the same dollar amount of a contribution amount just 10 years earlier results in more that twice the amount of retirement savings in the long-term. Clearly, starting earlier than later makes a tremendous difference! So the key is to start today!

This hypothetical example assumes the following (1) $5,000 annual IRA contributions on January 1 of each year for the age ranges shown, (2) an annual rate of return of 7% and (3) no taxes on any earnings within the IRA. The ending values do not reflect taxes, fees or inflation. If they did, amounts would be lower. Earnings and pre-tax (deductible) contributions from Traditional IRAs are subject to taxes when withdrawn. Earnings distributed from Roth IRAs are income tax free provided certain requirements are met. IRA distributions before age 59½ may also be subject to a 10% penalty. Systematic investing does not ensure a profit and does not protect against loss in a declining market. This example is for illustrative purposes only and does not represent the performance of any security.

It’s not too late to make a 2013 resolution that can make your retirement stress free.  So take action today! 

 

The information herein contained does not constitute tax or legal advice. Any decisions or actions based on information contained herein should not be made without first consulting a CPA or attorney.

For more information contact Compass Asset Management Group, LLC at 845.563.0537 begin_of_the_skype_highlighting 845.563.0537 FREE  end_of_the_skype_highlighting or Contact@CompassAMG.com

The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC a Federally Registered Investment Advisory Firm. Securities offered through an affiliated company Spire Securities, LLC a Registered Broker/Dealer and member FINRA/SIPC.

Make Your 401(k) Work For You

When it comes to saving for retirement and building a portfolio to last a lifetime, most Americans are way behind. More than 54% of Americans report that the total value of their household’s savings and investments is less than $25,000, according to the Employee Benefit Research Institute’s annual Retirement Confidence survey. What’s worse, 27% have less than $1,000 in assets. Just 11% have more than $250,000 set aside.

Those figures include Americans young and old, those just starting in the work force as well as those about to check out. The bottom line is clear, Americans need to modify their savings and spending patterns to have any hope of enjoying not just a standard of living they’ve become accustomed to but rather a comfortable retirement they would aspire to.

401(k) Portfolio

You work hard for your money. So here’s some guidelines to get your 401(k) on the right track and working for you!

1. Participate in your plan

If you’re lucky enough to have a 401(k) at work, contribute to it. The healthiest 401(k) plans tend to be those where the majority of the eligible employees are participating in the plan. Many 401(k) plans now have automatic enrollment, where eligible employees are automatically enrolled in the 401(k) plan; automatic increases, where the percent of salary employees contribute to the 401(k) plan is automatically adjusted upwards on a regular basis; and investment workshops, websites or advice provided to workers.

2. Avoid risky behavior

What kind of risky behaviors are we talking about? Having an outstanding loan that represents 25% or more of your total 401(k) account balance; not being properly risk adjusted or diversified; not using an investment strategy; concentrating in specific asset classes; concentrating in company stock; not taking full advantage of the company match; saving 2% or less; and not saving at all.

3. Increase your contribution rate.

If you are participating in your 401(k), consider upping the percentage of your salary that you contribute because every little bit matters. Contributing just 1% or 2% more of your salary to your 401(k) can have a dramatic effect on your retirement savings over time.
For example, a 30-year-old employee earning an average salary of $50,000 who increases her contribution rate from 4% to 6% will have accumulated an extra $295,000 by the time she reaches retirement age.

4. Put your plan on autopilot

Face it, its human nature to avoid change. Since what you start you may well just leave alone, make it a positive. If you contribute 6% to your 401(k), you’re likely to keep it that way even if you get a raise. But you should consider taking advantage of any and all tools that take the guesswork out of saving and investing. Consider signing up for automatic escalation and automatic rebalancing tools if your employer offers such options.

5. Take advantage of advice

The median annual return for employees using investment help was almost 2% higher than those who did not, according to a joint study from Hewitt Associates and Financial Engines.

According to Hewitt, one in every two firms in its survey currently offers online investment guidance, and 39% offer online, third-party investment advisory services. In addition, 28% of employers currently offer managed accounts that let participants delegate management of their account to an outside professional.

6. Don’t forfeit free money

If your employer has a matching contribution in the plan, don’t miss out! It’s hard to believe, but more than one-in-four workers leave free money on the table. They contribute below the company-match threshold, according to Hewitt. Contribute enough to your 401(k) to receive your full employer match.

7. Don’t cash out

If you’re changing jobs or leaving your current job, don’t cash out your 401(k) savings. About 46% of employees cash out, according to Hewitt. But doing so can have serious consequences. Typically, you’ll play a tax on the amount withdrawn and a 10% early withdrawal fee. Rather, you may want to consider taking control by considering a 401(k) rollover to an advisor you trust.

8. Don’t over-invest in company stock

Over-investing in company stock means that both your human capital and financial capital are tied to your employer. And if your employer goes belly up, you lose your job and a good portion of your 401(k).  We would recommend contributing no more than 10% of your 401(k) to your employer’s stock.

For more information contact Compass Asset Management Group, LLC at 845.563.0537or Contact@CompassAMG.com

The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC a Federally Registered Investment Advisory Firm. Securities offered through an affiliated company Spire Securities, LLC a Registered Broker/Dealer and member FINRA/SIPC.

Tax-smart Strategies for Retirement Income Distribution

The first wave of baby-boomers turns 65 this year, and that means millions of new retirees will begin to switch from accumulating a nest egg to drawing income from it. If you’re a boomer, it’s time to start thinking about how you’ll convert decades of savings into a lifetime stream of income, which accounts to tap first and how best to navigate. Different sources of income have different tax consequences. Withdrawing funds in the most tax-efficient way will not only minimize your tax bill but could also make your savings last longer.

Key Strategies for Retirement Income Distribution

Knowing which accounts to raid first can stretch your savings.

Generally, if you benefited from a tax deduction for contributing to an IRA or 401(k), every dollar you withdraw later will be taxed at your ordinary income-tax rate — currently as high as 35%. Each year, you’ll receive a Form 1099-R from your account custodian that documents the taxable distributions to report on your tax return.

 If you took a pass on the upfront deduction by contributing or converting funds to a Roth IRA, you’ll enjoy some tax-free income in retirement. Your annual Form 1099-R will note that you received a distribution from a Roth account, but it won’t specify whether any of the money is taxable (you’ll have to calculate that yourself on Form 8606, available at http://www.irs.gov). You may withdraw Roth IRA funds, up to the cumulative amount of your contributions, at any time tax-free and penalty-free. But you must wait until you are at least 59 1/2 years old and the account has been open at least five years before you can access the earnings tax-free (unless you use the money to buy a first home).

If you made nondeductible contributions to a traditional IRA, distributions are a little trickier.

Spread out the tax liability

Just as you should diversify your assets among various types of investments to minimize your risk, it’s a good idea to vary your tax liability.  The old assumption that you would be in a lower tax bracket in retirement is not only more questionable but hopefully for you, improbable!  The liklihood that future income tax rates will rise is greater now more than ever.  Hence, it makes sense not to put too many of your eggs in a single basket.

If you have been contributing to a 401(k), 403(b), 457 plan or a federal Thrift Savings Plan, have you avoided accumlating assets in taxable savings and investment accounts?   Reconsider, current tax laws could tax those assets at a lower rate than ordinary income from the retirement plans.  You may also want to contribute to or convert some retirement funds to a Roth account so that you will have more control over how much you pay in taxes in retirement.

First out: Taxable accounts

Conventional wisdom suggests that you should withdraw money from your taxable accounts, can benefit from lower capital-gains rates, before touching your retirement funds. Tapping taxable accounts first not only minimizes your tax bill but also allows your traditional IRAs and other tax-deferred accounts to continue to compound unfettered by taxes for as long as possible. The result: a bigger nest egg.

Of course, every rule has its exception.  Sometimes it pays to tap into your tax-deferred retirement accounts once you can — but before you are required to — so that your IRA doesn’t grow too big, which would result in large required minimum distributions each year after you turn 70 1/2, along with hefty tax bills.

If you have a brokerage account and sell assets that you’ve owned for more than a year, you’ll pay just 15% on your profits and, in some cases, no tax at all. Or, if you sell an asset in a taxable account at a loss, you can use it to offset investment gains, potentially wiping out any tax liability on your profits. Excess losses may be used to offset up to $3,000 of ordinary income per year and may be carried forward to offset income in future years.  You generally cannot claim tax-deductible losses in a retirement account.  Qualified dividends are also taxed at a maximum 15% rate or 0% for those who are eligible.  Although interest on your savings is taxed at your ordinary income-tax rate, the principal (the money you originally invested) is tax-free.

Next: Retirement accounts

After exhausting your taxable accounts, focus on your traditional retirement accounts, such as IRAs, 401(k)s and other employer-based retirement plans. You’ll pay taxes on your entire withdrawal at your ordinary income-tax rate (except for any after-tax contributions you made, which would be tax-free). If you need $20,000 per year in after-tax money, for example, and you’re in the 25% tax bracket, you’ll have to withdraw nearly $27,000 from your IRA.

You can start taking withdrawals from your traditional IRA penalty-free once you turn 59 1/2, but you’ll owe federal and possibly state income taxes on the distributions. You probably can’t invade your 401(k) or similar employer-based retirement account while you’re still working, unless your plan has an in-service distribution provision that allows you to take withdrawals once you reach the 59 1/2 milestone.  But if you leave your job when you are 55 or older, you can take penalty-free withdrawals (but still owe taxes). If you roll over your retirement funds to an IRA before age 59 1/2, you’ll lose this early-out option.

Once you turn 70 1/2, it’s time to reimburse Uncle Sam for all those years of tax-free growth. You must start tapping IRAs and other traditional retirement accounts by April 1 of the following year and take withdrawals by December 31 each year after that.  If you delay your first distribution until April 1, you’ll have to take a second distribution by the end of that same year which could result in a sizable tax bill.

Your required minimum distributions, known as RMDs, are based on your account balance at the end of the previous year divided by your life expectancy, as determined by IRS mortality tables. If you don’t take a distribution of at least the required amount, you’ll be hit with a stiff penalty: 50% of the amount you failed to withdraw. In most cases, you should save your tax-free Roth IRA distributions for last. Unlike traditional IRAs, Roth IRAs have no annual distribution requirement.   Should you have funds left over when you die, your heirs will thank you: Distributions from inherited Roth IRAs are tax-free; those from traditional IRAs are taxed at heirs’ ordinary income-tax rate.

Don’t be afraid to tap your Roth IRAs earlier as a way to increase your retirement income without being pushed into a higher tax bracket. The bottom line: Decide whose taxes you want to minimize — yours or your heirs’.

The information herein contained does not constitute tax advice.  Any final decisions or actions should not be made without first consulting a CPA or Accountant.

For more information contact us at 845.563.0537 or Contact@CompassAMG.com

The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC a Federally Registered Investment Advisory Firm.  Securities offered through an affilliated company Spire Securities, LLC a Registered Broker/Dealer and member FINRA/SIPC.

When It’s OK to Tap Your IRA

You’ve been saving diligently for your retirement, but now you need some of that cash to cover today’s expenses. Can you get to it without incurring Uncle Sam’s tax wrath? In some instances, the answer is yes.

When you take money out of an individual retirement account before you reach age 59½, the Internal Revenue Service considers these premature distributions. In addition to owing any tax that might be due on the money, you’ll face a 10 percent penalty charge on the amount.

But there are times when the IRS says it’s OK to use your retirement savings early.  Two popular, penalty-free withdrawal circumstances are when you use IRA money to pay higher-education expenses or to help purchase your first home.

OK for School

When it comes to school costs, the IRS says no penalty will be assessed as long as your IRA money goes toward qualified schooling costs for yourself, your spouse or your children or grandkids.

You must make sure the eligible student attends an IRS-approved institution. This is any college, university, vocational school or other postsecondary facility that meets federal student aid program requirements. The school can be public, private or nonprofit as long as it is accredited.

Once enrolled, you can use retirement money to pay tuition and fees and buy books, supplies and other required equipment. Expenses for special-needs students also count. And if the student is enrolled at least half time, room and board also meet IRS expense muster.

First-Home Exemption

Then, there’s your home. Uncle Sam offers various tax breaks for homeowners. He’ll even bend the IRA rules a bit to help you get into your house in the first place.

You can put up to $10,000 of IRA funds toward the purchase of your first home. If you’re married, and you and your spouse are first-time buyers, you each can pull from retirement accounts, giving you $20,000 in residential cash.

Even better is the IRS definition of “first-time homebuyer.” Technically, you don’t have to be purchasing your very first abode. You qualify under the tax rules as long as you (or your spouse) didn’t own a principal residence at any time during the previous two years. In fact, you can even share your IRA wealth. The IRS says the first-time homebuyer using your IRA funds for a down payment can be you, your spouse, one of your children, a grandchild or a parent.

But be careful not to take out your money too soon. You must use the IRA funds within 120 days of withdrawal to pay qualified acquisition costs. This includes the costs of buying, building or rebuilding a home, along with any usual settlement, financing or closing costs.

Different Treatment for Roth

These home buying IRA options apply to traditional retirement accounts. The rules are a bit different if your nest egg is in a Roth IRA.

The $10,000 you take out for your first home is a qualified distribution as long as you’ve had your Roth account for five years. This means you can take out your retirement money without penalty, and because Roth earnings are tax-free, you’ll have no IRS bill, either.

If, however, you opened your Roth IRA less than five years ago, the withdrawal is an early distribution. As with a traditional IRA early withdrawal, a Roth holder can use the first-home exception to avoid the 10 percent penalty but might owe tax on earnings that are withdrawn.

You can reduce the tax bite by first withdrawing the already-taxed contributions you made to your Roth. In fact, the IRS has specific rules about the order in which you can take unqualified Roth distributions: contributions, conversions from traditional IRAs and earnings. Check Chapter 2 of IRS Publication 590, Individual Retirement Arrangements for details.

Military Exceptions

Members of the military reserves also can receive early IRA distributions without penalty. To qualify, the following conditions must be met:

Conditions:

• You were ordered or called to active duty after Sept. 11, 2001.

• You were ordered or called to active duty for a period of more than 179 days or for an indefinite period because you are a member of a reserve unit.

• The distribution is from an IRA or from an elective-deferral plan, such as a 401(k) or 403(b) plan or a similar arrangement.

In addition, the early distribution cannot be taken before you received your orders or call to active duty or after your active duty period ends.

Personnel eligible for this early withdrawal exception include members of the Army or Air National Guard; the Army, Naval, Marine Corps, Air Force or Coast Guard Reserves; and the Reserve Corps of the Public Health Service.

Allowable, But Not Preferable, Distributions

Early IRA withdrawals also are penalty-free in a few other instances. Unfortunately, most of these are hardship situations that no taxpayer wants to face.

Hardship circumstances for penalty-free withdrawals:

• Payment of excessive unreimbursed medical expenses.

• Payment of medical insurance premiums while unemployed.

• Total and permanent disability.

• Distribution of account assets to a beneficiary after you die.

You also can get IRS-approved early access to your nest egg if you take IRA money on a specific schedule. Known as substantially equal periodic payments, this method allows you to begin withdrawing from your IRA early as long as the amounts are determined by an IRS-calculated life expectancy table.

Finally, keep in mind that the early withdrawal exceptions do not eliminate your tax bill if you take the money out of a traditional IRA. Unlike Roth accounts where you eventually can withdraw your money tax-free, taxes are merely deferred on traditional IRAs. So when you take the money out of such an account, regardless of your age or the purpose of the withdrawal, you’ll owe your regular tax rate on the amount.

But the early withdrawal exceptions do protect you from paying the IRS more in penalty charges. To let the IRS know that you used the retirement money early for a tax-acceptable purpose, file Form 5329. When you report your withdrawal here, you’ll also enter a code, found in the form’s instructions, that lets the IRS know the distribution is penalty-free.

The information herein contained does not constitute tax advice.  Any final decisions or actions should not be made without first consulting a CPA or Accountant.

For more information contact us at 845.563.0537 or Contact@CompassAMG.com

The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC a Federally Registered Investment Advisory Firm.  Securities offered through an affilliated company Spire Securities, LLC a Registered Broker/Dealer and member FINRA/SIPC.

Retirement Success – Decoding the Mystery

Millions of Americans fear the unknown – Retirement. They fear not having enough money to live comfortably. They fear becoming dependent on their children because they cannot afford to make it on a fixed income.

“Americans’ confidence in their ability to afford a comfortable retirement has plunged to a new low,” says the latest annual Retirement Confidence Survey from the Employee Benefits Research Institute, a respected nonprofit think tank.

Fewer than 50% of workers are confident about their ability to retire comfortably. The number “very confident” has halved in a few years to just below 13%. 

Meanwhile, the number who have no confidence at all has nearly tripled, and now stands at 27%. More than one in four.

A similar number of people question whether they will even be able to meet their basic expenses.

I am convinced one of the biggest problems is that people don’t know how much money they will need to retire comfortably. Many don’t even know where to begin. Unfortunately, many advisors are too focused on returns and not enough on planning to meet those needs. The most populular planning method for retirement seems to be guessing.

Don’t leave your happiness and success to guesswork!  If you’re totally baffled, try these six simple steps. It’s not a plan. But it’s something anyone can do in 10 minutes or less, and it will give you a much better idea where you stand—and what you need to do.

1. Figure out how much income you’ll need

What sort of income will you need each year in retirement? What will be comfortable? What will mean real hardship?

Some people will tell you to sit down and draw up an elaborate budget. And maybe that’s the perfect solution, but you could take a shortcut instead.  At a pinch, for most people the best guess for the income you’ll need to live on in retirement comfortably is about the same as the income you need now.

Obviously, a few things will be different in retirement. You’ll no longer have to set aside money to save for retirement, for starters. If you expect to pay off your mortgage by then, you’ll no longer have to set aside money for that. The same goes for putting kids through college. But once you’ve eliminated those costs, the best way to calculate the disposable income you’ll need in retirement is to look at the disposable income you have now.

Sure, you can make adjustments. You may find you’re comfortable with less, or you may want more.  But when you are dealing with the unknown, it helps to start with something familiar. In this case, try your current disposable income.

2. Figure out how much you will get from outside sources

That means how much you will get from Social Security. It may also mean how much you will get from any other pension plan, if you are among the diminishing few who has one.

Social Security is central to most Americans’ retirement plans. It is an inflation-protected annuity that will last your lifetime and where the insurer, Uncle Sam, won’t run out of cash. This is why it’s such a political hot potato.

What does Social Security mean for you? The Social Security Administration posts an online calculator that will help you work out what to expect in benefits. As of 2011, the average retired single worker gets $14,000 a year. The average couple: $23,000.

If you are among the shrinking group of people eligible for a pension, you should work out how much you are going to get from that as well. Add that to your expected Social Security benefits.

3. Figure out how much income you will need from your investments

Once you know how much income you’ll need (step 1) and how much you can expect from Social Security and any private pension plan (step two), it’s easy to work out how much you’re going to need from your own investments.

At the risk of stating the blindingly obvious, it’s what’s left over. For those who have been using computers for too long, subtract item two from item one.

That means a married couple that lives on $40,000 a year in disposable income, has no pension and expects Social Security benefits of $23,000 a year is going to need to provide $17,000 a year from its own resources.

4. Understand how long your investments will have to last

In other words, how long you’re likely to live in retirement.  There’s a very good chance it’s longer than you think. That’s great news, of course. But it doesn’t help your math.

The average life expectancy in the U.S. these days is about 75 for a man and 80 for a woman. Those data are from the U.S. Census. And they’re completely useless for retirement math.

Why? Because you are unlikely to be exactly average and your fears are asymmetric. From a purely financial standpoint, you don’t want to outlive your savings, even by a couple of years.

Furthermore, those life-expectancy figures are measured from birth, not from age 65. Much more useful are the cohort survivorship figures calculated by the U.S. Department of Health. Of those who make it to 65, 25% will go on to live to 90, they show. Among women it’s 30%. And of women who make it to 65, 12%, or one in eight, will live to 95. Quite a few, about 3%, will live to 100.

If you live into your 80’s or beyond, you do not want to find yourself there with your money running out. In other words, to save enough for your retirement you’re going to have to set aside enough money to provide you with a suitable income for several decades. Think 25 years, maybe even 30.

5. Here’s your answer

You now basically have enough data to make some estimates.

Let’s say you plan to retire at 65 and will need an income of $10,000 a year from your investments and you want to make sure the money will last up to 30 years.  How much will you need to save?

Some people will direct you to the annuities market for some answers. An immediate fixed annuity is a product from an insurance company that will provide you with a guaranteed income for life.

A 65-year-old man who wants an income of $10,000 a year for life could approximate that number and buy an annuity for about $130,000. A 65-year old woman would pay a little more, upwards of $140,000 because the insurance company figures she’ll live longer.

So that’s it, right? You’ll need to save about 13 or 14 times the extra income you need?  Not so fast.

Those annuities won’t protect you from inflation. That problem is a big deal! Over 20 or more years, even modest rates of inflation will hurt you. An inflation rate of 3% will nearly halve your purchasing power. There are, unfortunately, very few annuities which offer inflation protection.

A reasonably conservative investment portfolio, suitable for someone in retirement, can do better.

Think of a portfolio of inflation-protected Treasury bonds, known as TIPS, and high-quality blue-chip stocks. Although both offer lower returns than usual at the moment, most of the time you would expect a portfolio like this to earn an average return of inflation plus about 3% over the course of an economic cycle.

Based on those numbers, you probably need to set aside about 20 times your required annual income by the time you retire.

If you need your portfolio to generate $10,000 a year and last up to 30 years, for example, you’d want to start with about $200,000. If you need your portfolio to generate $50,000 a year, you’d want to start with $1 million.

6. Don’t panic yet

It’s no wonder so few people want to do the math. They haven’t saved anywhere near enough. The most depressing data from each year’s EBRI report are the numbers showing what people have actually saved.

Fewer than one worker in two has even managed to set aside $25,000. Fewer than one in four has reached $100,000—itself only enough to generate $5,000 a year.

Yes, the numbers are slightly better for those who are older and nearer retirement. They’ve had longer to save. But even among them the picture is dismal. Among workers over 45, just 54% have even managed to save $25,000 or more.

Remember, this is after three decades of supernormal investment returns. Stocks boomed through the 1980s and ’90s. Bonds have boomed for 30 years. Future returns from here are highly unlikely to be so favorable.

Those falling short will need to save, save and save even more. The sooner they start, the more likely they are to make it.

The one cheerful caveat: The EBRI numbers do not include the value of people’s homes. If you have a lot of equity in your home, you can convert that into extra savings if you need to, either by selling or by using a cash-out reverse mortgage, which allows you to convert some of your equity into cash.  These mortgages typically involve high fees. But they are, at least, an option.

For those facing a retirement-savings crisis, the strategies for adapting are well known but worth reviewing. They include scaling back, moving somewhere much cheaper and delaying retirement as long as possible, which works multiple levers. It gives you longer to save, it gives your savings longer to grow, it reduces the length of time you will need to live off your savings, and it boosts your Social Security income. Even staying in part-time work can help.

There are no easy answers. But the real problem is that most people still don’t even understand the questions.  The best strategy is to get ahead of this problem now, before it’s too late!

Consult with a financial planner or advisor to evaluate and design strategies specific for your circumstance.  Plan now…Relax later!

The information herein contained does not constitute tax advice.  Any decisions or actions based on tax related information contained herein should not be made without first consulting a CPA or Accountant.

For more information contact Compass Asset Management Group, LLC  at 845.563.0537 or Contact@CompassAMG.com

The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC a Federally Registered Investment Advisory Firm.  Securities offered through an affilliated company Spire Securities, LLC a Registered Broker/Dealer and member FINRA/SIPC.

Be Tax Smart with Retirement Accounts During Divorce

Getting divorced is a major financial transaction not to be taken lightly. As such, it can have serious tax implications, including some pitfalls you’ll want to avoid. This is especially true when it comes to splitting up tax-favored retirement accounts between you and your soon-to-be ex. You’ll need to plan ahead to make sure the tax results turn out OK for you. This blog details the story.

Divorce Finances

Use QDRO to divide up qualified retirement plan accounts

Let’s say you have a qualified retirement plan at work, a profit-sharing or 401(k) plan; or if self-employed a small business retirement program like a “Keogh” pension plan or even IRAs. You’ll probably be ordered by the court to divide up the retirement account(s) between you and your ex as part of the divorce property settlement. However, doing it carelessly can create a real tax liability.

To divide up qualified retirement plan accounts the tax-smart way, you need to establish a qualified domestic relations order, or QDRO. What’s a QDRO? It’s simply some boilerplate language that should be included in your divorce papers. First and foremost, the QDRO establishes your ex’s legal right to receive a designated percentage of the retirement account balance or designated benefit payments from the plan. The good news is that the QDRO also ensures that your ex, and not the plan participant, will be responsible for the related income taxes when he or she receives payouts from the plan.

The QDRO arrangement also permits your ex-spouse to withdraw his or her share of the retirement plan money and roll it over tax-free into an IRA, assuming the plan permits such a withdrawal as most do. That way, your ex can take over management of the money while postponing income taxes until withdrawals are taken from the rollover IRA.

Bottom line: The QDRO is a fair deal for both you and your ex because it ensures that the person who gets retirement plan payouts will also owe the related income taxes.

Here’s the pitfall. If money from your qualified retirement plan gets into your ex-spouse’s hands without a QDRO being in place, as the plan participant, you face a potentially disastrous tax outcome. You’ll be treated as if you received a taxable payout from the plan and then voluntarily turned the money over to your ex. So you’ll owe all the taxes while your ex gets the money tax-free.  To add insult to injury, you may also get stung with a 10% penalty tax if this happens before you turn age 59½.

So make sure your divorce papers include the necessary QDRO language. Helpfully enough, the government even provides sample language in IRS Notice 97-11.

If you think this advice would be so well-known you would be wrong. There have been many court cases where individuals turned over retirement plan money to their ex-spouses without bothering with QDROs. Those individuals all wound up incurring big tax bills. Perhaps not fair, but the tax rules are often unfair to folks who don’t know what they are doing.

Be careful with IRAs too

You don’t need a QDRO to divide up an IRA between you and your soon-to-be ex without dire tax consequences. You can simply arrange for a tax-free rollover of money from your IRA into an IRA set up in your ex’s name. Then your ex can manage the rollover IRA and defer taxes until he or she begins taking money out of the account. As with a QDRO, this procedure ensures that your ex, and not you, will owe the resulting income taxes. These rules apply equally to traditional IRAs, Roth IRAs, SEP accounts, and SIMPLE IRAs (they are all considered IRAs for this purpose).

You still need to be careful here. The nice tax-free rollover deal only applies when your divorce agreement requires the rollover. If money from your IRA gets into your ex’s hands before or after the divorce without such a requirement, again you’ll be treated as if you received the money, and you’ll be on the hook for the related taxes–even though you didn’t actually keep the money. Plus you’ll usually owe a 10% penalty tax if you’re under age 59½. To avoid this fate, you should never transfer IRA money to your ex in advance of a legal requirement in your divorce papers to do so.

In the end

You can divide up tax-favored retirement account money the tax-smart way or the tax-naive way. Unfortunately, some otherwise-competent divorce attorneys know little or nothing about taxes, which doesn’t work in your favor.  You’ll need a good financial advisor or a tax professional that have handled numerous divorce-related tax issues to work with your attorney.  The good news is, they generally don’t charge as much and you’ll actually save money in the process.  While your attorney might be able to fill that role, don’t take it for granted.

For more information contact us at 845.563.0537 or Contact@CompassAMG.com

The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC a Federally Registered Investment Advisory Firm.  Securities offered through an affilliated company Spire Securities, LLC a Registered Broker/Dealer and member FINRA/SIPC.

 

The Road Trip Plan To Retirement

Most of us work hard all our lives to get to the endgame of retirement. But retirement  isn’t the endgame any more, as if it ever was.  Retirement is just the beginning of another stage of life.

With most retirements often lasting 25 or 30 years nowadays, financial experts are telling people to think of it in four phases, much like a road trip.

1. The planning phase
2. The exhilaration period
3. A more relaxed phase
4. Finally arriving at your destination.

Before you retire

Retirement shouldn’t be a single goal of money alone. Think about what you want your retirement to be. Do you plan to work a little? Volunteer? Travel? Devote yourself to a new pursuit?

Wherever your retirement ends up, you should start planning for it now by taking a good hard look at your current expenses, both a) fixed – mortgage, utilities, car payments; and b) variable – food, travel & health care. Then make changes based on your expected income and expenditures in retirement.

Remember to include quarterly and annual expenses like property taxes, club memberships and association fees. New retirees often find they initially spend about as much as they did when they were working, yet eventually many expenses trail off.

Once you understand your expenses, you’ll need to map out a plan to meet those income requirements. Think of this in three buckets:

• Cash. Clearly, this is your most secure bucket. Many advisors recommend that anyone nearing retirement keep about 10-12 months of expenses in cash to cover emergencies the other two buckets fail to cover. This can change later depending on your level of comfort.
• Income. The primary source to meet your ongoing income needs. This bucket includes pensions, Social Security, guaranteed income annuities, dividends and interest-bearing stock and bond funds.
• Investment. Because retirement, for many people, can last 30 years or so, a healthy chunk of your assets should still be invested for the long haul. So you’ll want a diversified allocation of stocks and bonds to provide long-term growth—an important factor in meeting the financial requirements of the latter stages of your retirement. The exact mix depends on your personal risk tolerance.

Pedal to the metal

Most people find the early years of retirement fairly active—some travel or start a business, or take part in other pastimes that can be costly. All that can add up to higher variable expenses, which means you’ll need more cash to pay for them.

If your income bucket isn’t producing enough, you could consider converting some long-term assets from the investment bucket into income-producing vehicles such as bonds, dividend-paying stocks and immediate or guaranteed income annuities. Best bet to convert: more aggressive stocks or mutual funds, as you’ll want to make your portfolio more conservative as you age.

What you choose to convert to depends on both risk tolerance and need—if you’re conservative, better to go with safer choices like bonds or annuities. If you’re comfortable with more risk—consider dividend-producing stocks.

But the decision to sell stock to fund your golf game shouldn’t be made lightly. You should tap your investment bucket as little as possible, so plan appropriately.

One key factor in this planning is taxes.  Traditionally, people just think about asset diversification, but tax-deferred accounts like IRAs, 401(k) plans and many annuities should take advantage of your tax situation and Social Security benefits.

Gearing down

The trip isn’t over but your speed isn’t quite what it once was. Your trips around the world have become visits to the grandchildren; you’ve passed on your business and are settling down.

Although ongoing expenses may be less than in earlier years of retirement, inflation has reduced your income’s purchasing power. Even if, as most economists predict, inflation won’t go much beyond today’s 2% to 3% a year, that can still hurt: $400,000 in current savings will require $487,000 in 10 years’ time to have the same purchasing power.

If you haven’t been keeping a close eye on your portfolio, this is a good time for a checkup. If your income-producing vehicles are coming up short, think about switching over more of your long-term assets. Again, take only what you’ll need. Overall, roughly 60% to 70% of your assets should be in the income bucket by this stage.

Finding a place to park

The active phase of your retirement is pretty much done with. Now, your goals are to make certain you’re comfortable while looking to make your assets last as long as necessary. This slice of retirement will likely include more doctors’ visits, prescription costs and other medical expenses than your earlier years. That makes security job one.

At this point, most retirees’ assets are in cash or ultra-safe securities like government bonds that offer both income and security. If you’re also planning your estate, you may want to consider keeping some money in a mix of high-quality bonds or blue-chip stocks that pay dividends to leave to your heirs.

Where to live will be a central issue. Congratulations if your health allows you to continue to live independently. Whether you stay where you are or move, you’re probably going to have to pay a substantial sum out of pocket for whatever care you require, which will mean a greater strain on your income bucket.

That illustrates the importance of planning for retirement for the long haul. Knowing what your and your family’s goals are is important, not just five years from now, but 20 and even 30 years from now.

For more information contact us at 845.563.0537 or Contact@CompassAMG.com

The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC a Federally Registered Investment Advisory Firm.  Securities offered through an affilliated company Spire Securities, LLC a Registered Broker/Dealer and member FINRA/SIPC.

 

401(k) Beneficiary Rules You Should Know

Most investors worry about whether they will outlive their savings and haven’t given enough thought to the opposite scenario.  This can be a big mistake because there are inheritance rules that may require your account to be distributed in a way that you didn’t foresee.

So for starters, confirm who is listed as the beneficiary of your account. You should have filled out a beneficiary form when you opened the account, but it’s a good idea to reevaluate it periodically. It’s especially important if you’re recently divorced or experienced other life changes that would prompt you to rethink your choices.

Who gets the money

One of the most common financial planning mistakes is forgetting to change beneficiaries after a divorce or when someone remarries.

It’s not enough to specify in a will that you want someone else to inherit your 401(k). As with insurance policies, certain retirement account funds are paid directly to beneficiaries regardless of wills.

What’s more, if you’re married a federal law says a surviving spouse is automatically the beneficiary of 401(k) funds. To leave the money to someone other than your spouse, that person must be named on a beneficiary form, and your spouse must sign a waiver relinquishing any right to the money.

Note a real life story of a client who at 70 remarried a much younger woman. The man had three adult children to whom he wanted to leave the $1.6 million in his retirement account. The three children were named as beneficiaries, however, the new wife had never signed a waiver. She received the entire amount.

A few minutes of planning can prevent years of heartache, legal fees and family squabbles among the people you love the most.

If you’re single and you don’t fill out a beneficiary form, the retirement plan rules may dictate who gets the money. It could end up in your estate, which means it will be tied up in a legal process before distribution to heirs.

On your account you’ll be able to list both a primary and a contingent beneficiary. It’s important that you name a contingent beneficiary because if your primary beneficiary dies before you do, your account balance may pass to your estate.

How taxes are handled

A surviving spouse will be able to rollover the funds into an IRA without incurring any taxes or penalties. A key benefit is that the spouse can continue to enjoy compounded earnings and won’t have to start withdrawing money until age 70½, when the IRS required minimum distribution rules kick in.

The spouse can also choose to put the money in a new account called an inherited IRA — which would be set up in the 401(k) account holder’s name with the recipient as beneficiary. The recipient must take the first minimum distribution to be withdrawn a year after the account holder’s death. The distributions would be taxed but there would be no early withdrawal penalty.

Anyone other than a spouse receiving 401(k) funds cannot transfer funds into an existing IRA. Instead they should set up a new inherited IRA to avoid tax penalties or forced cashing out of the account. The recipient can leave the money in the IRA to continue to grow tax-free, withdrawing only the minimum amount required by the IRS.

How to leave your account to the children

If your spouse doesn’t need the money, there may be advantages to leaving the account to younger members of the family. Younger heirs will be able to stretch the value of the account further.

The IRS requires recipients to take minimum distributions out of the account, usually the year after the death of the deceased, but bases those payments on the life expectancy of the recipient. A younger person would have more years in which to stretch out the payments, allowing the account to grow tax-free for longer. Very large accounts may be stretched out over the lifetimes of children and grandchildren.

How to consider multiple beneficiaries

When weighing what to leave your children, you should know the Latin phrase “per stirpes” which is used more frequently on retirement account beneficiary forms.

It means “by branches” and it’s a good way to make sure your funds are distributed among family members following a succession of parents to children to grandchildren.

Let’s say you want to leave your spouse as the primary beneficiary, but you want the money to automatically go equally to your three children if your spouse also dies. If you name your spouse per stirpes, the money would flow equally to the children. Let’s say you have grandchildren, too. If one of the children happened to die, that child’s share of the money would then flow to that person’s children equally.

It’s an easy way to establish primary and contingent beneficiaries.

A couple last housekeeping notes: Be sure to tell someone in your family your plans for leaving your retirement money. Keep beneficiary forms in a safe place and tell someone you trust where they can be found.

For more information contact us at 845.563.0537 or Contact@CompassAMG.com

The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC a Federally Registered Investment Advisory Firm.  Securities offered through an affilliated company Spire Securities, LLC a Registered Broker/Dealer and member FINRA/SIPC.

 

To Rollover or Not to Rollover Your 401(k)

When leaving a job, take some time to evaluate the benefits of a 401(k) rollover.  The reasoning has to be sound, so let’s look at a few things to consider when evaluating the merits of rolling over 401(k) assets into an IRA.

1. Consolidation – Moving all of your 401(k) accounts at different former employers to one IRA account eliminates administrative difficulties. If you move, you only need to change address with one provider instead of several. You only have to remember one website login and password to view your account. Having the assets at one provider makes it easier to build a diversified portfolio. When the assets are spread around in several 401k plans, it becomes significantly more challenging to monitor your portfolio and make sure you are not too concentrated in one asset class. Some clients find by having the all of their retirement assets in one location they take the account more seriously. They are more diligent in monitoring the account and the underlying investments. They are faster to make changes when things going well. Lastly, most providers give customers a better deal for having more assets in their accounts. The better deal could come from lower fees, lower commission rates or additional free services.

2. 401(k) plan expenses – In addition to the fees charged by the underlying funds in a 401(k) plan, there is usually an administrative fee charged as a percent of assets. It is even worse because both sets of fees are hidden to the investor. By moving the 401(k) balance into an IRA, you will have transparency on the fees you pay. If you want to remain in mutual funds, you’ll be able to assemble a portfolio of funds with reasonable expenses.

3. Broad Investment Choices – A Rollover IRA will have near unlimited investment choices. On the other hand, a 401(k) plan will have limited options. Most have between 10 to 15 investment choices. Even a quality 401(k) plan at can have only about 30 investment options.  Many firms offering IRAs have access to virtually every mutual and stock. There is no reason to limit your choices. One could argue that only a high quality investment can get on a 401(k) platform, but in reality, you could be surprised to learn why those particular investment options are on a company’s 401(k) platform. Maybe someone on the investment committee has an unconscious affinity for particular brand of mutual funds or maybe the investment option won a place on the platform after good (but unsustainable) streak in the market. More options are better, and Rollover IRAs have many more options than 401(k) plans.

4. Roth IRA Options – The tax-free growth of a Roth IRA can mean enormous benefits in retirement.  But in order to convert to a Roth IRA, you have to first rollover the 401(k) to an IRA.  The advantages of a Roth IRA will provide additional benefits such as tax-free withdrawals, no minimum distributions at age 70 ½, and no penalties for certain early withdrawals. Starting in 2010, there will be no income limits on conversions from Traditional IRA accounts to Roth IRA Accounts.

5. Investment Choices – By leaving your money in a 401(k) Plan, your investment choices may become stale. 401(k) plans change their investment options from time to time. Often, the 401(k) Plan will replace an existing fund with a similar fund and shift all of the 401(k) Plan participants’ investments to the new fund. Other times, a 401(k) plan may eliminate an investment option and there is no replacement or the replacement is different enough that the 401(k) Plan’s Trustees don’t feel comfortable shifting participants from the old fund to the new fund. In these instances, the 401(k) Plan will send you a letter telling you about the shift and asking you what to do. If they are not able to find you or you do not respond, your money is liquidated from the old fund and investment into the 401(k) Plan’s money market option, which is not a healthy long-term investment.

6. Tracking Your Investments – 401(k) Plans often invest in a separate account that clones an existing mutual fund. The separate account is traded alongside the mutual fund, but it may have a different fee structure. This makes tracking the underlying investments in a 401(k) plan difficult if not impossible.

7. Estate Planning – A Rollover IRA is better from an estate planning view. If you die before taking minimum distributions at 70 1/2, your named non-spousal heirs have the option to take your IRA assets and move them into IRA accounts under their name and extent the minimum distributions to their life expectancy. This gives your heirs the power of tax deferral over their lifetimes. There is not such opportunity with a 401(k) account held at the time of your death.

For more information contact us at 845.563.0537 or Contact@CompassAMG.com

The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC a Federally Registered Investment Advisory Firm.  Securities offered through an affiliated company Spire Securities, LLC a Registered Broker/Dealer and member FINRA/SIPC.

Three Ideas to Safeguard Your Retirement Plan

If you don’t want to open your 401(k) statement, you’re not alone. But not paying attention to your retirement plan now will come back to haunt you later. Take these three steps to build a solid plan to ensure security in retirement.

1. Determine your contribution amount
At Compass Asset Management Group, we believe that the amount you need to contribute to your 401(k) or 403(b) plan should be guided based on your age.

If you are in your 20s, it should be at least 10 percent of income.  If you’re in your 30s, 15 percent.  If you’re 40-plus, 20 percent. Workers in their 40s who haven’t saved before should save the maximum, which is now $16,500 per year. For workers 50 and older, the limit is $22,000.

If your company matches, you should include that in your calculations. For example, if you’re in your 20s and your employer matches 3 percent, then you should be saving 7 percent, for a total of 10 percent.

The biggest mistake made concerning 401(k) contributions? The employee’s withholding is incorrect. When you get the job and you’re not sure what to put down for withholding, you put down zero and it never gets changed.

Instead, adjust your withholding to accurately reflect your tax liability, then put the extra money that would end up in your paycheck in your 401(k) instead. Don’t get the money as a tax refund and blow it at Disneyland

2. Choose appropriate funds
Confused by all the offerings in your 401(k)? You’re not alone. Many 401(s) plans offer more than the average participant can reasonably choose from, the national average number of options is 17.

While the offerings are frequently skewed in favor of equities, bond funds should be included in your allocation. But how much? A general rule of thumb is to subtract your age from 100 and invest that much in stock funds. For example, if you’re in your 20s, about 80 percent of your 401(k) assets should be in equities and 20 percent in fixed income. When you’re in your 30s, it should be about 70 percent stocks and 30 percent bonds, etc.

You also need to understand certain things about yourself. How comfortable are you with seeing your account balance move up and down? Less risk tolerance means you may wish to allocate more to bonds.

At Compass Asset Management Group, we generally recommend a participants choose at least four options: large, midsize and small-cap fund, as well as a bond fund. If you have a company stock option, that should be no more than 10 percent of the portfolio.  It might also be a good idea to get some exposure outside the U.S. by investing in a foreign stock fund.

In recent years, employers increasingly have included target-date funds in their lineups. These are one-fund solutions to the asset-allocation quandary that novice investors face. As a rule, you sacrifice some return due to the higher costs of this option.

3. Rebalance as needed
Once you make your fund selections, you can coast along. But you do need to do an occasional tuneup. If you don’t go back to those options and revisit them, the market will rebalance your portfolio for you, and not always in ways that you’d like.

Look at your 401(k) every quarter, and rebalance it once every year. Reduce your winning investments to an appropriate proportion of your overall portfolio. That strategy is known as buying low and selling high.

We recommend to invest outside of your retirement plan options with after tax dollars as well. This extra discretionary investment will allow you to do more of the things you want to do in retirement — the trips, spoiling the grandchildren. In most cases, you can’t save enough in a 401(k) to have as much as you need in retirement because limits are too low.

Another consideration if you don’t want to pay tax on investment earnings every year to Uncle Sam: Invest in a Roth IRA.

The most important things? Don’t wait until you’re 50, find out that you won’t have enough and panic. Start thinking about it earlier by assessing your future income needs, and you’ll have a much better chance of enjoying a happy retirement.

For more information contact us at 845.563.0537 or Contact@CompassAMG.com

The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC a Federally Registered Investment Advisory Firm.  Securities offered through an affilliated company Spire Securities, LLC a Registered Broker/Dealer and member FINRA/SIPC.

 

Basics of Successful Retirement Planning

The shear mention of retirement can bring mental images of strolling on a beach, basking in the warmth of the sun without a care in the world.  Maybe your heart’s desires involve travel or spending time with family & friends.  Few people though imagine working at age 70, realizing that the retirement that you dreamed of 30 years ago may never come.  That’s the scenario more likely to become a reality for 1/2 the population of the U.S. and could include you unless you get started.

The Golden Key to Retirement

Step 1 – Don’t Become Overwhelmed

If what you know about planning for retirement can fit on a pencil tip, don’t get discouraged or overwhelmed.  There are some very basic terms & products you should understand to gain control over your retirement prosperity.

Start with finding a professional you can communicate well with.  After all, you will need to rely heavily on this individual’s advice, especially in the beginning.  The goal here is to get a proper assessment of your present circumstances and a picture of what you want your retirement to look like.  This will help to develop the strategies you’ll need to reach the golden years successfully.

Retirement savings can take many forms.  In other words, there are many roads that lead to retirement and choosing the right combination will get you there sooner and safer.   For most, the word investing means using stocks, bonds and mutual funds to grow wealth in a 401(k) or IRA.  Others use real estate by selling properties for income or having a collection of rental homes and commercial properties that generate lease payments. For today I’ll write about the most common methods, the stock market and mutual funds.  In follow up blogs we’ll talk turkey about real estate.

The ABCs and 123s

One of the first questions I usually get is, “What is a mutual fund?”

In its most simple form a mutual fund is a combination of stocks that someone known as a fund manager puts together. The idea of a mutual fund is you put money into one account to invest in many different stocks. If you have ever heard the advice, “Don’t put all your eggs in one basket” the mutual fund attempts to help you to follow that guidance.  Mutual funds start by declaring the objectives for the investments.  For example, a mutual fund in the retail sector may be made of stocks from Sears, Wal-Mart, Target, Macy’s, Best Buy and Lowes. The value of that mutual fund will depend on how these stocks preform collectively. The idea is, if one stock tanks, the combination of the other stocks will help offset your losses.  One slant on this same process involves investing without a fund manager and instead using an index.

Index funds are meant to allow diversity and simplicity under one roof.  An index is the measurement of a combination of stocks.  The Dow Jones Industrial Average (DJIA) is an index of 30 different stocks that are supposed to be a representative of the the entire stock market.  The S&P 500 is another index of 500 different stocks again measuring the overall performance of the market as a whole or a bellwether for the U.S. stock market.

The advantages of investing in index mutual funds are they’re easy to track, they are less expensive overall due to lower management fees (the fund managers don’t actively manage the funds so the fees are typically less) and historically the indexes have produced reasonable returns over time.

Don’t Put it Off

These are some VERY basics of the retirement planning process.  The primary focus should be “Do not delay” when beginning to plan for retirement until you understand it all.  Each year you wait to begin saving for retirement is a year you lose in money accumulated and money that could have grown.  One of the best analogies I’ve heard in my career as a financial planner was in a CFP class I took 15 years ago.  Retirement savings is kind of like a road trip.  You can either use a sports car to get there really fast, or you can start with a sedan and take a little more time to get to your destination.  You can always change the type of car during your travels, but the key is to get in the car and start driving or your never going to get there.

For more information contact us at 845.563.0537 or Contact@CompassAMG.com

The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC a Federally Registered Investment Advisory Firm.  Securities offered through an affilliated company Spire Securities, LLC a Registered Broker/Dealer and member FINRA/SIPC.