Getting Retirement-Ready: Have your cake and eat it too!

Transcription

1 This firm is not a CPA firm. Getting Retirement-Ready: Have your cake and eat it too! The 2017 Spring Accounting Expo May 22, 2017 Steven R. Goodman, CPA, CFP

2 Have your cake and eat it too! 2

3 Common Retirement Planning Mistakes/Challenges 1. Starting too late (better late than never) 2. Not taking advantage of time / Underestimating investment horizon 3. Not having a retirement plan 4. Not investing regularly / Ignoring your plan 5. Not taking full advantage of tax-deferred retirement accounts 3

4 Common Retirement Planning Mistakes/Challenges 6. Not properly managing financial / investment risks 7. Poor asset allocation 8. Relying too heavily on your company s stock 9. Falling for the sales pitch 10. Underestimating the importance & need for diversification 11. Exiting in a downturn / Emotional investing 4

5 Common Retirement Planning 12. Cashing out or borrowing heavily against your retirement accounts 13. Underestimating cash needs 14. Failing to consider taxes and inflation 15. Misunderstanding effective tax rate 16. Not providing for a spouse Mistakes/Challenges 17. Overestimating ability to continue working 5

6 Common Retirement Planning 18. Retiring based on your birthday instead of your bank account 19. Taking Social Security at too early an age 20. Taking withdrawals from the wrong location 21. Outspending means Mistakes/Challenges 6

7 The Facts of Life And Don t Forget About Taxes! 7

8 Retirement Planning Phases Accumulation Phase (30-40 years) Distribution Phase (30+ years) 20s 30s 40s 50s 60s 70s 80s 90s 8

9 Benefit of Investing Early Annual Salary $65,000: Assumes a 3% per year increase and 10% per month contribution in a tax-deferred account Assumed Rate of Return 7.59% blended return calculated using historical average annualized benchmark index returns for the period 1926 through February 28, 2017 for a 70% Stocks/30% Bonds/0% Cash portfolio allocation less 1% hypothetical portfolio management fee. Cash is represented by the U.S. T-Bill, bonds are represented by the Bloomberg Barclays Intermediate Government/Credit Index, and stocks are represented by the S&P 500 Index. 9

10 Your 20s and 30s (Early Career) Retirement Strategies: A To-Do List Determine risk profile / asset allocation Contribute as much as you can to tax-deferred plans i.e. IRAs, 401(k), 403(b), 457 Consider Roth contributions Monitor investments / re-balance Manage your spending and debt Consider life insurance and disability insurance Consult on estate planning

11 Retirement Strategies: A To-Do List Your 40s and 50s (Mid-Career) Continue contributing as much as you can to tax-deferred plans Contribute to non-qualified asset sources Monitor investments / re-balance Review asset allocation / adjust target as appropriate Assess after-tax retirement cash needs Consider health, life, disability, and long-term care insurance Review/Consult on estate planning

12 Special Considerations For the corporate employees: Plan for the possibility of a forced early retirement Consider carrying insurance other than that provided by your current company Develop a plan for exercising your stock options that will minimize the tax cost Review company benefits to take full advantage of those that apply to pre-retirees and retirees Optimize the use of your 401(k) plan For business owners: Possible strategies for customized Defined Benefit Plan Strategies to monetize business for retirement cash needs 12

13 Your Early 60s (Late Career) Review asset allocation / adjust target as appropriate Determine your Social Security and pension income Monitor investments / re-balance Review estate plan Retirement Strategies: A To-Do List Reduce debt as much as possible

14 Your Retirement Review asset allocation / adjust target as appropriate Decide a retirement date and apply for your Social Security Benefits when appropriate Evaluate when and from what sources to start withdrawing money for retirement (cash flow analysis) Arrange to have your periodic payments directly deposited into your checking account ENJOY IT! Retirement Strategies: A To-Do List 60 Retirement 14

15 Some Factors Investors Need to Consider Risk Return Profile Goals & Objectives Family Analysis: Market / Sector Industry & Company Investor Fiscal & Monetary Policy Political Environment (U.S. & Foreign) Economic Environment (U.S. & Foreign) Time 15

16 Other Risks Reality vs Goals Perception vs Reality Zero I want to double my money in 3 years and retire This is different, equities will not go back up This does not exist Timing Markets Day trader and success? 16

17 Emotional Other Risks (Continued) I feel it will come back Taxes Family Gain / loss (should not drive investment decisions) Decision blockers / influencers Regulatory/Political SEC, Feds, State, Agency rules always changing 17

18 Industry Other Risks (Continued) Obsolescence, alternatives, declining Management Good business, bad managers Known, Unknown Ike, Oil Spill Unknown Diversification 18

19 Guarantee Other Risks (Continued) What does this actually mean? Exit Fraud Time Risk Benchmark Limited Partnerships / ARS Madoff / Stanford vet your advisors To achieve goal, health Returns measured against inappropriate parameter 19

20 Ratings Other Risks (Continued) Any highly rated bonds ever default? Understanding of Metrics Tips /Rumors Not-Rebalancing P/E, EPS, Beta, Projections, Forecasts, etc Really, you want to invest using tips? Ignoring asset allocation Bottom Line: Do you understand and accept the risks relevant to your circumstances and investments? 20

21 Effect of Investor Behavior 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 8.19% 20-Year Annualized Returns ( ) 5.34% 4.83% US Stocks US Bonds International Stocks 3.14% 2.20% 2.11% Homes Inflation Average Investor US Stocks: S&P 500 Total Return Index; US Bonds: Barclays US Aggregate Bond Total Return Index; International Stocks: MSCI EAFE Total Return Index; Homes: U.S. existing home sales median price; Inflation: CPI-U; Average Investor: Average Asset Allocation Investor from "Quantitative Analysis of Investor Behavior, 2016," Dalbar, Inc., 21

22 Sources: Standard & Poor s, Barclays Capital and Ibbotson Associates Returns are through 3/31/

23 S&P 500 Index Historical Calendar Year Returns Source: Ibbotson Associates 23

24 Federal Reserve Interest Rate Expectations 24

25 Impact of Rising Interest Rates on Bond Values Note: Calculations are based on a hypothetical $10,000 par value bond with a 3.5% coupon rate and a base yield of 3.5%. 25

26 Passive Bond Investing Vanguard Total Bond Market Index Fund (VBTLX) Source: Morningstar, accessed April

27 Effect of Rising Interest Rates on Bond Funds 4 th Quarter st Quarter 2017 Vanguard Long-Term Bond Index Fund (VBLTX) Fidelity Long-Term Treasury Bond Index Fund (FLBAX) Vanguard Total Bond Market Index Fund (VBTLX) Fidelity Total Bond Index Fund (FTBFX) 27

28 Determine Risk Tolerance Risk Tolerance = A level of volatility (risk) that an investor accepts plus An understanding that achieving a financial goal is not a certainty. 28

29 Determine Asset Allocation Asset Class Cash & Equivalents Bonds Stocks Real Estate Other Example Savings account, money market funds, short term treasuries and certificates of deposit (mature in less than 1 year) Short-term (1-5 Years), intermediate-term (5-10 years), long-term (10+ years), investment grade, high yield Small-cap, mid-cap, large-cap, growth, growth and income, value, international, emerging markets, indexes Home, residential rental property, apartments / condos, office buildings, shopping centers, REITs Art, coins, precious metals, collectibles, natural resources, commodities, intangibles 29

30 Asset Allocation: Which spices & how much in Your Portfolio? Cash Bonds Stocks?%?%?% Portfolio 30

31 FIDELITY FREEDOM 2020 FUND [CA TE GO R [CATE GORY NAME ] [PERC ENTA GE] [CA TE GO R Target Date Funds (a sampling) VANGUARD TARGET RETIREMENT FUND 2020 [CA TEG OR Y [CATE GORY NAME] [PERC ENTAG E] [CA TEG OR Y WELLS FARGO DOW JONES TARGET 2020 FUND Cash & Other, 9% Bon d, 62% Sto ck, 29% Source: Morningstar, 02/28/

32 [CA TEG ORY NA [CAT EGOR Y NAM E] [CAT EGOR Y NAM E] [PER Aggressive [CA TE GO RY N [CA TEG ORY NA ME] [V [CA TEG ORY NA ME] Moderate [CA TE GO RY N [CA TE GO RY N [CA TEG ORY NA ME] [V Conservative 32 Consider Your Asset Allocation Sample Allocations

33 Asset Allocation Sample Return Conservative Portfolio Sample Return Asset Class Allocation Asset Class Portfolio Cash 10.0% 3.4% 0.3% Bonds 60.0% 5.1% 3.1% Stocks 30.0% 10.1% 3.0% Total Sample Return 6.4% NOTE: Sample asset class returns are calculated using historical average annualized benchmark index returns gross of fees for the period 1926 through March 31, Cash is represented by the U.S. T-Bill, bonds are represented by the Bloomberg Barclays Intermediate Government/Credit Index, and stocks are represented by the S&P 500 Index. 33

34 Asset Allocation Sample Return Moderate Portfolio Sample Return Asset Class Allocation Asset Class Portfolio Cash 5.0% 3.4% 0.2% Bonds 45.0% 5.1% 2.3% Stocks 50.0% 10.1% 5.0% Total Sample Return 7.5% NOTE: Sample asset class returns are calculated using historical average annualized benchmark index returns gross of fees for the period 1926 through March 31, Cash is represented by the U.S. T-Bill, bonds are represented by the Bloomberg Barclays Intermediate Government/Credit Index, and stocks are represented by the S&P 500 Index. 34

35 Asset Allocation Sample Return Aggressive Portfolio Sample Return Asset Class Allocation Asset Class Portfolio Cash 1.0% 3.4% 0.0% Bonds 9.0% 5.1% 0.5% Stocks 90.0% 10.1% 9.1% Total Sample Return 9.6% NOTE: Sample asset class returns are calculated using historical average annualized benchmark index returns gross of fees for the period 1926 through March 31, Cash is represented by the U.S. T-Bill, bonds are represented by the Bloomberg Barclays Intermediate Government/Credit Index, and stocks are represented by the S&P 500 Index. 35

36 Sample Asset Allocation Transition Pre-Retirement Post-Retirement 36

37 Consider Tax Efficiency Now 37

38 Effective Tax Rates 2017 Tax Brackets - Married Filing Joint Taxpayers But Not Over Pay + Of Excess Over 2017 Effective Tax Rate - MFJ Taxable Income Effective Tax Rate If Over Pay $0 $18,650 $0 10% $0 $18,650 $1, % $18,650 $75,900 $1,865 15% $18,650 $75,900 $10, % $75,900 $153,100 $10,453 25% $75,900 $153,100 $29, % $153,100 $233,350 $29,753 28% $153,100 $233,350 $52, % $233,350 $416,700 $52,223 33% $233,350 $416,700 $112, % $416,700 $470,700 $112,728 35% $416,700 $470,700 $131, % $470,700 $131, % $470, Tax Brackets - Single 2017 Effective Tax Rate - Single But Not Over Pay + Of Excess Over Taxable Income Effective Tax Rate If Over Pay $0 $9,325 $0 10% $0 $9,325 $ % $9,325 $37,950 $933 15% $9,325 $37,950 $5, % $37,950 $91,900 $5,226 25% $37,950 $91,900 $18, % $91,900 $191,650 $18,714 28% $91,900 $191,650 $46, % $191,650 $416,700 $46,644 33% $191,650 $416,700 $120, % $416,700 $418,400 $120,910 35% $416,700 $418,400 $121, % $418,400 $121, % $418,400 38

39 Tax-Efficient Planning Bracket Management & Preferential Rate Opportunities 39

40 Sample Tax-Efficient Allocation by Account Portfolio Target Account Targets Non-Qualified $900,000 4% Cash 36% Fixed Income 60% Equities IRAs & 401(k) $800,000 2% Cash 73% Fixed Income 25% Equities Roth IRAs $100,000 0% Cash 20% Fixed Income 80% Equities 40

41 Qualified Cash, 2% Construct Diversified Portfolio Sample Tax-Efficient Portfolio Structure Non-Qualified Cash, 4% Taxable Bonds, 67% High Dividen d Equities, 31% [CATEGO RY NAME], [VALUE] No/Low Dividend Equities, 60% 41

42 Types of Retirement Vehicles Individual Retirement Arrangements (IRAs) Roth IRAs 401(k) Plans 403(b) Plans SIMPLE IRA & 401(k) Plans SEP Plans SARSEP Plans Payroll Deduction IRAs Profit Sharing Plans Defined Benefit Plans Money Purchase Plans Employee Stock Ownership Plans 457 Plans HSA Accounts? 42

43 Net Unrealized Appreciation (NUA) Hypothetical Example 43 43

44 Potential Tax Savings NUA vs. IRA NOTE: Assumed ordinary marginal tax rate of 25% and capital gains rate of 15%. 44

45 Retirement Distribution Rules of Thumb Save 8-10 times your ending salary Safe withdrawal rate Detailed retirement analysis 45

46 Net Cash flow from current budget Retirement After-Tax Cash Needs Less: Expenses reduced or eliminated in retirement (Education costs, mortgage, commuting, etc.) Plus: Future retirement expenses (Additional travel, health care, etc.) = After-Tax Retirement Cash Needs 46

47 Income Needed During Working Years vs. Cash Needed in Retirement 47

48 $100,000 $80,000 $60,000 $40,000 $100,000 Impact of Inflation on Fixed Annual Income $86,261 $74,409 $64,186 Fixed Annual Amount: $100,000 Inflation Rate: 3% $55,368 $47,761 $41,199 $20,000 $0 Now Years Inflation-adjusted amount needed in 30 years to equal $100,000 in today s dollars is $242,

49 Retirement Distribution Tax Efficiency Non-Qualified Assets $900,000 Monthly Distributions $9,000 Qualified Assets $900,000 Annual Distributions $108,000 Total Portfolio $1,800,000 0 Monthly Distributions $9,000 0 Annual Distributions $108,000 0 Distributions From: 2017 Non-Qualified Qualified Qualified January $9,000 $9,000 February $9,000 $9,000 March $9,000 $9,000 April $9,000 $9,000 May $9,000 $9,000 June $9,000 $9,000 July $9,000 $9,000 August $9,000 $9,000 September $9,000 $9,000 October $9,000 $9,000 November $9,000 $9,000 December $9,000 $9,000 $54,000 $54,000 $108,000 Est. Taxable Interest (5% Coupon)* $22,500 $22,500 Est. Taxable Dividends (2% Yield)* $9,000 $9,000 Estimated Capital Gain** $27,000 $27,000 IRA Distribution $54,000 $108,000 Adusted Gross Income $112,500 $166,500 Less: Standard Deduction (2017) ($12,700) ($12,700) Less: Two Exemptions (2017) ($8,100) ($8,100) Taxable Income $91,700 $145,700 Tax Bill $9,793 $24,303 Tax as % of Taxable Income (Effective Tax Rate) 10.68% 16.68% *Income items based on 50/50 Asset Allocation Tax as % of Total Distribution 9.07% 22.50% **Capital Gain assumes 20% turnover of taxable account with 15% of proceeds being capital gain ($900,000 x 20% x 15%). Note, when 6 months of distributions are taken from the taxable joint account, taxable income drops into the 15% tax bracket. Under current law, qualified dividends and long-term capital gains for taxpayers in the 15% tax bracket are taxed at 0%. 49

50 Example Retirement Analysis No. 1 (1) This amount reflects spousal benefits, which is based on half of Mr. Client's FRA Social Security Benefits. This is higher than her own benefit of $417/month. 50

51 Retirement Analysis Return Assumptions 51

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54 Example Retirement Analysis No. 2 (1) This amount reflects spousal benefits, which is based on half of Mr. Client's FRA Social Security Benefits. This is higher than her own benefit of $417/month. 54

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57 Example Retirement Analysis No. 3 (1) This amount reflects spousal benefits, which is based on half of Mr. Client's FRA Social Security Benefits. This is higher than her own benefit of $417/month. 57

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60 Example Retirement Analysis No. 4 (1) This amount reflects spousal benefits, which is based on half of Mr. Client's FRA Social Security Benefits. This is higher than her own benefit of $417/month

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63 Thank you Additional information or answers to questions can be obtained by contacting: Steven R. Goodman, CPA, CFP Goodman Financial contributors to this Presentation Ed Roth, CFA, CPA, CFP, CEBS Wade D. Egmon, CPA, CFP Charlotte M. Jungen, CPA, CFP Morgann Ellis, CFP Chelsea Bailey Anna Ceker Dana Woodruff Quinten Womack Goodman Financial Corporation 5177 Richmond Ave, Suite 700 Houston, TX (713) Toll Free: (877) This firm is not a CPA firm. 63