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Living Within Your Means—and Assets

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Living Within Your Means—and Assets

Living Within Your Means—and Assets Living on your retirement savings can be a constant balancing act between two competing forces: maintaining your standard of living and making sure you don’t outlive your savings. How do you know if you’re withdrawing too much from your financial portfolio and threatening your ability to enjoy life as you age? Or maybe you’re taking out too little, refraining from the kind of activities you desire, such as traveling, only to end up with more than adequate assets when you die. There are no easy answers to this dilemma, although retirement experts offer a few suggestions.   The 4 Percent Rule The traditional standard for how much money you should withdraw each year after retirement is the 4 percent rule, in which you withdraw a fixed amount from your portfolio on a periodic basis. Typically this is adjusted for inflation annually, so the amount grows over time while remaining constant in real terms. In other words, you maintain the same lifestyle from year to year. Under this formula, retirees add up their investment accounts and retirement savings, such as 401(k)’s and IRA’s, and then withdraw 4 percent of the portfolio’s overall value in the first year of retirement. The next year, the retiree takes out another 4 percent plus the rate of inflation, and so on. Although it’s called the 4 percent rule, the typical withdrawal range is between 4 and 5 percent. A similar method is to base withdrawals on the value of the financial market. One expert found that withdrawing at a rate around 5.5 percent when markets are strong and reducing the withdrawal amounts when times are tough is a better standard than withdrawing at a fixed rate. Fixed Annuities offer another simple way to withdraw retirement funds because you’re promised the same income payments for life. However, most annuities are not inflation adjusted, which means your payments won’t keep up with rising prices of good and services. One drawback to an annuity includes the fact that you have used your funds to purchase the annuity, making extra withdrawals and access to emergency funds difficult to access. Further, if you die early, you may forfeit any money left in the annuity.   Newer Models Another fixed approach is to base your retirement withdrawals on your life expectancy. The Social Security Administration provides tables that give averages. Of course, you need to keep in mind your health and your genetic disposition toward life-threatening diseases such as cancer. In its simplest form, to figure out how much you could withdraw each year, divide your savings and investments by your remaining years. For example, if your life expectancy is 20 more years, you could withdraw one-twentieth every year. However, if your assets keep growing, you might have more left than you planned, and that money may have been better used when you were younger and more active. Another professional advocates a slightly different approach. The “Safety First Withdrawal Idea” focuses first on what you need to maintain your standard of living during retirement and then matches your financial resources to your required expenses. The basic idea is to use conservative investments to preserve your standard of living, such as U.S. Treasury Inflation Protected Securities (TIPS), lifetime annuities from blue-chip issuers and federally insured savings...

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Withdrawing Your Assets: Understanding RMDs

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Withdrawing Your Assets: Understanding RMDs

When it comes time to start withdrawing the money you’ve spent a lifetime accumulating in your retirement portfolio, you want to ensure that you make the right decisions. One that the government makes for you is requiring that you withdraw at least some of your funds annually, depending on the account type. This is known as a required minimum distribution, or RMD, and it must be taken from your non-Roth retirement accounts by April 1 each year, starting the year after you turn age 70 1/2. An RMD is generally determined using uniform life expectancy tables that take into consideration the account owner’s and/or account beneficiary’s age and marital status, as well as their account balance(s) as of December 31 of the year prior to the distribution year. Here are some important considerations for those entering the “distribution phase” of their investing lives. You can pick the account(s) you withdraw from … If you have more than one of the same type of retirement account — such as multiple traditional IRAs — you can either take individual RMDs from each account or aggregate your total account values and withdraw this amount from one account. As long as your total RMD value is withdrawn, you will have satisfied the IRS requirement. … Unless they are two different types of accounts. If you own more than one type of account, such as an IRA and an employer-sponsored plan account, you’ll need to calculate your RMD for both types of accounts separately and take the proper amount from each. You may be able to defer if you’re still working. If you are still employed at age 70 1/2, you may be able to defer taking RMDs from your employer-sponsored plan until after you retire. You’ll need to check with your employer to see if this applies to you. The penalties can be severe for failing to comply. If you fail to take your full RMD, the IRS may assess an excise tax of up to 50% on the amount you should have withdrawn and you’ll have to take the distribution. Taxes are still due upon withdrawal. You will probably face a full or partial tax bite for your distributions, depending on whether your traditional IRA was funded with nondeductible contributions. Note also that the amount you are required to withdraw may bump you up into a higher tax bracket. You can donate your RMDs to charity. IRA owners can donate up to $100,000 of their annual distributions to qualified charities and have it count toward their RMD. If you’ve inherited an IRA, these donations are allowable as long as you are over age 70 1/2. Roth accounts are exempt. If you own a Roth IRA or Roth 401(k), you don’t need to take an RMD. However, note that any distributions taken from a Roth do not count toward your RMD amount and that restrictions apply to the beneficiaries of inherited Roth accounts.     Koele Godfrey Investment Group, Carey Koele and Jack Godfrey. 616-931-1223, Toll Free 866-512-7164.  We are located at 123 E Main Ave, Zeeland.  Visit our Website at www.KoeleGodfrey.com for more...

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Organizing Your Finances After Your Spouse Has Died

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Organizing Your Finances After Your Spouse Has Died

Losing a spouse or partner is a stressful event. Yet, during this time, you must complete a variety of tasks and make important financial decisions. You may need to make final arrangements, notify various businesses and government agencies, settle your spouse’s estate, and provide for your own financial security. Fortunately, there are steps you can take to make dealing with these matters less difficult. Notify others and get advice Dealing with both the death of your spouse and money matters at the same time can be overwhelming, especially if the death was unexpected. But there are resources available to help. First, call on close family members, friends, and clergy–you’ll need their emotional support. Notify your employer and your spouse’s employer. Then contact the professionals who will help you cope with the paperwork and financial matters. These may include your funeral director, attorney, insurance professional, financial advisor, and accountant. Keep their phone numbers handy. Get organized and keep your finances current You will need a number of documents to finalize your spouse’s financial affairs. First, obtain certified copies of the death certificate. Your family doctor or the medical examiner should provide you with the death certificate within 24 hours of the death. The funeral home should complete the form and file it with the state. Get several certified copies (photocopies may not be accepted). Then, gather any estate planning documents, such as a will and trusts, and other relevant documents, such as deeds and titles. Also locate any marriage certificate, birth or adoption certificates of children, and military discharge papers, which you may need to apply for benefits. If you don’t know where these documents are, they may be found in a safe-deposit box, or your attorney may have copies. You may want to set up folders so you can keep track of everything. And, although it may be difficult under the circumstances, pay your bills and keep your finances current, especially mortgage and insurance payments. Settle your spouse’s estate Settling your spouse’s estate is the duty of the executor, who is named in the will. Spouses generally name each other as executor of the other’s estate. If this is so, your attorney can help you to wind up your spouse’s financial affairs. If that is not the case, contact the executor and assist him or her when you can.   Koele Godfrey Investment Group, Carey Koele and Jack Godfrey. 616-931-1223, Toll Free 866-512-7164.  We are located at 123 E Main Ave, Zeeland.  Visit our Website at www.KoeleGodfrey.com for more...

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Will Your Money Last? Risks to Retirement Income

Posted by on 1:42 pm in Blog, Financial & Legal | Comments Off on Will Your Money Last? Risks to Retirement Income

Will Your Money Last? Risks to Retirement Income

A sound retirement income plan takes into account several financial risks, including the potential for the retiree to outlive his or her assets, the effects of inflation on future income, rising health care costs, and the uncertain future of the Social Security system. For example, inflation increases the future cost of goods and services; inflation can also erode the value of assets set aside to meet future costs if the assets earn less than the rate of inflation. In addition to these considerations, a plan should take care to avoid excessive withdrawals in the early years of retirement that could lead to premature depletion of assets. The overall objective of planning should be to create a sustainable stream of income that also has the potential to increase over time. Will Your Money Last? Risks to Retirement Income With so much at stake when planning a retirement income stream, it pays to take a step back and see whether your plan takes into account the major obstacles to retirement income adequacy. When you take this big-picture view, consider the five major challenges most retirees face: the potential for outliving one’s assets; the threat of rising living costs; the impact of increasing health care costs; uncertainty about the future level of Social Security benefits; and the damage to long-term financial security that can be caused by excessive withdrawals in the early years of retirement. Understanding each of these challenges can lead to more confident preparation. Examining the Issues Longevity. While most people look forward to living a long life, they also want to make sure their longevity is supported by a comfortable financial cushion. As the average life span has steadily lengthened due to advances in medicine and sanitation, the chance of prematurely depleting one’s retirement assets has become a matter of great concern. Consider a few numbers: According to the latest government data, average life expectancy in the United States climbed to 77.9 years for a child born in 2007, compared to 47.3 years in 1900. But most people don’t live an average number of years. In reality, there’s a 50% chance that at least one spouse of a healthy couple aged 65 will reach age 89 (see table).1 Perspectives on Longevity: Probabilities of Reaching Specific Ages Chance of Living to a Specific Age 50% 25% Male aged 65 age 83 age 88 Female aged 65 age 86 age 90 50% chance at least one of a 65-year-old couple will reach age 89. Source: Social Security Administration, Period Life Table, 2007. Inflation, or the tendency of prices to increase, varies over time as well as from region to region and according to personal lifestyle. Through many ups and downs, U.S. consumer inflation averaged about 4% over the 50 years ended December 31, 2012. If inflation were to continue increasing at a 4% annual rate, a dollar would be worth 46 cents in just 20 years. Conversely, the price of an automobile that costs $23,000 today would rise to more than $50,000 within two decades. For retirees who no longer fund their living expenses out of wages, inflation affects retirement planning in two ways: It increases the future cost of goods and services, and it potentially erodes the value of assets set aside to meet those costs — if those assets...

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Mutual Fund Capital Gains and Losses

Posted by on 2:59 pm in Blog, Financial & Legal | Comments Off on Mutual Fund Capital Gains and Losses

Mutual Fund Capital Gains and Losses

Mutual Fund Capital Gains and Losses   “How can my fund ‘lose’ money in a growing market?”   As investors approach the end of each calendar year, attention often turns toward mutual fund capital gain distributions and the potential income taxes the distributions may generate.  This is often highlighted by financial publications and media outlets alerting investors about this hazard in the management of their portfolio assets.  While most investors would not like to pay any capital gain taxes, this is a component of the investing landscape that is not likely to go away.  Correspondingly, we regularly receive a few questions about mutual fund capital gain distributions, how they are calculated and what impact they may have on a portfolio.  As such, our firm thought that you would benefit from an explanation of this normal activity within a mutual fund holding.   The Fundamentals of Capital Gain Distributions   First, let’s cover a few fundamentals about mutual funds and capital gain distributions.  When your Advisor purchases a stock mutual fund on your behalf, you are purchasing a collection of stocks designed to increase in value over the long term.  This purchase price represents the market value of all of the stocks in the portfolio on the date of purchase, the accrued dividends generated to that date and the value of any holding that has gone up (capital gain) or down (capital loss) in value.   As time progresses, the mutual fund manager may sell one of the holdings in the portfolio for a variety of reasons.  This could include a change in the future outlook of the asset, an increase or decrease in valuation, the manager feels that there are better opportunities elsewhere or funds need to be raised to meet shareholder withdrawals.  At the point of the sale of an asset, the mutual fund experiences a realized capital gain or capital loss on the holding.   At the end of the year, if the mutual fund experiences a net realized capital gain among all holdings that were sold (gains minus losses), the fund must distribute at least 95% of the capital gains to shareholders.  This is required under the mutual fund regulatory structure.  In most cases, a mutual fund will complete this distribution once or twice per year, depending on the fund and their internal practices.  Many capital gain distributions occur in November and December, but can happen at other times of the year as well.  The capital gains distribution is a taxable event to the fund shareholders unless the asset is owned in a tax-deferred or retirement account like an IRA or 401k plan.   The one item that generates the most questions is what happens to the pricing of a fund when a capital gain distribution is made. “Walk me through an example.” As investors receive capital gain distributions, the value of the distribution, the impact on a fund’s pricing (net asset value or NAV) and the cost basis of the fund thereafter create a source of confusion.  This is best explained by walking through an example of what happens to share prices and market value at the time of a capital gain distribution.  First, let’s assume the following facts:     ABC Mutual Fund Facts Mutual Fund Name ABC Date of purchase 12/1/2012 Shares purchased...

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Financial Plan is Important So Why Many of us Don’t Have One?

Posted by on 9:52 pm in Blog, Financial & Legal | Comments Off on Financial Plan is Important So Why Many of us Don’t Have One?

Financial Plan is Important So Why Many of us Don’t Have One?

We all love to dream about the future we want, but many of us do not like the idea of organizing our finances and preparing a financial plan. It seems that our dream of our future is the fun part, but planning sounds like tedious and boring work. This is evident by the fact that 65% of individuals do not have a financial plan.   A study found that the benefit of having a financial plan is very significant. On average, individuals who had a plan for retirement had two and half times more assets in their retirement than those who did not have a plan. Having a plan is only part of the success equation because working with an advisor and having a financial plan shows that there is a nine to ten times increase in assets than with those who do not work with an advisor and have a financial plan.   This may explain why one third of individuals consider winning the lottery as one of their financial strategies to achieving their financial goals. So why do most of us not have a plan? It can’t be because of a lack of awareness since there are many financial institutions that are advertising the importance of planning. There is also a lot of information and material on the subject with millions of results on Google. So when it comes to Financial Planning why is it that we are not prepared? Well here is a list of the three myths that I have experienced people saying.   Myth of Time In today’s fast paced life we are all starved for time. We are so busy in our everyday activities that we feel that taking time for planning is not available. When it comes to planning there is an upfront commitment of time in identifying your life goals and putting together an action to achieve them, but once you complete these steps then it is just a matter of monitoring your progress as time goes on. The time commitment is minimal compared to the return you get by working with an advisor and having a plan done as noted above.   Myth of Knowledge The financial world, especially today, may seem too complicated with all the information out there. We are exposed to a lot of information and financial lingo. If you start by telling yourself that it is not too complicated and too hard, then you have no excuse not to do it. You may consider participating in a seminar or a workshop. You can start reading books that talk about financial matters. Soon you will learn that the financial world is not complicated once you learn some of the basics.   The Myth of Wealth I don’t have enough savings to worry about a financial plan. If you have savings then you have enough. Having a plan will help you decide not only where you should put your money, it will also help to define the why. I have learned that the why is more important than the how and where. When it comes to planning you need to start somewhere. Don’t think that just because you think you don’t have enough you should not have a plan. A Financial Plan will help you define the goals...

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