Retirement Vs. Politics

TFS 03 | Fudiciary Role

 

To navigate your retirement with the utmost freedom and joy, you need to have financial education and a financial plan. Knowing the dos and don’ts will fully equip you to what’s inevitably coming for all of us. Before you immediately dive into any advisors there are around, you must make sure whether you are approaching the right people or not. Learn about the fiduciary role and why it is necessary for an advisor to be one. Learn also some of the common investment errors people make, most especially in terms of the fear of taking risks and committing errors. Navigate your way through retirement as we tackle the things you need about it.

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Retirement Vs. Politics

David, I thought appropriately we would begin with an opening monologue, a commentary from you to set the table following the commentary. I’ll set the rest of the lineup for our audience throughout the broadcast. We’ve added an interesting conversation or dialogue in our final segment of the show. We’ll do some questions and some emails as the audience base continues to grow and you continue to get more and more feedback.

We’re receiving phone calls and a lot of emails because we try to make it the least amount of pressure, no barrier to entry, so on and so forth. It blows me away that we’ve already been on air six weeks and the audience is certainly building. We’re excited about that. We did get some great questions that will be able to cover an answer at the end of the show.

We’ll put them into what we’re referring to as our mailbag, nothing unique about that. We’ll get some depth behind the topics. We’ll ask the questions that are on your mind. Remember, you can always go to ThriveFinancialServices.com, the website for more information as we begin and our education continues.

We’re in interesting times. We’re in interesting political times, interesting economic times. As we meet with folks, one of the big things that people are obviously trying to figure out is what’s going to happen with the stock market. None of us have any bit of a crystal ball to be able to predict. Being in the business for close to 29 years, you start to see things that happen. Our goal is to educate people, keep them abreast of what’s happening. One of the things I want to talk about before we get into the economics of what’s happening out there is getting people prepared for retirement. It takes a little bit of work. Before we know it, we’re there. If the planning isn’t done ahead of time, it could turn out not being the way we want it to be. If you walk into any Barnes & Noble, you’re going to see a large selection of books that are dedicated specifically to self-help. Topics range from you name it, it’s out there. Any respectful self-help book will ask the reader to partake in some form of self-reflection. It makes sense. If you want to fix a problem, you’ve got to be part of the solution.

If you want to fix a problem, then you have to be part of the solution. Click To Tweet

With that in mind, I’m going to ask our audience to do a little bit of some self-reflection on the following question. The question is, what one word describes how you feel about retirement? The thing about self-reflection is we want you to be honest so we don’t want to give an answer that you think you should answer. We want you to give the answer that first pops up into your head. Instead of focusing on what you think people want to hear or what you hope you want to hear, the first thing that pops into your head about retirement, what is that? For those of our audience that came up with descriptions like excited, happy, secure, optimistic, we’ve got good news.

You’re either an extremely positive person or you’ve got complete confidence in your existing retirement plan. All those good thoughts popped into your head and those are probably one of the two reasons why, if not both. For those of you who did not include those types of positive description, there’s good news as well. Your concerns that you’ve got possibly about retirement are shared with the vast majority of people thinking about retirement. I would tell you after meeting hundreds and hundreds of people, the vast majority of people walking through our door have concerns.

Number one, “Do I have enough for retirement? Have I saved enough? Have I done the right job thus far?” Number two, more importantly, because people are living longer and there’s the unpredictability of what the markets and the economies are going to do long-term. They asked the question, “Is the money that I have going to last? What do we do now?” On a daily basis, we get to see that transformation in people who are just taking those first steps in trying to regain that control, get that confidence back. We take them through that process that we’ve been talking about. It’s complementary, it’s educational, no pressure, very conversational.

They’re very important.

I love the word transformative because we see somebody go from a state of anxiety and unknowing to a state of a financial peace, comfort. They get the answers, they get the education, they feel empowered by it, and they get confidence about that future. If some people in our audience have those same feelings of uncertainty, it’s time to take that first step. They can call us, 800-516-5861 at our office. They can set up a phone consult, they can set up an in-person consult. They can visit our websites and start to get some basic information before coming in and seeing us, but with everything in me, encourage them to take us up on that offer. Come in and sit down and talk and find out if they can get that peace of mind.

TFS 03 | Fudiciary Role

Fiduciary Role: Get those fears out onto the table so you can start to devise a plan and start to see the way out.

 

Don’t be afraid. Let’s have a conversation. Let’s flush out some information. Let’s get some of those fears out on to the table so you can start to devise a plan or you can start to see the end. At least imagine what the end should look like and then once you get to that point with your guidance, I think you can start to fill in the blanks.

Either our guidance or someone else’s guidance. At least you have the questions and you’ve got some of the information to get validated. The neat thing that you just said is that one word, fear. Fear of the unknown, fear that they’re going to be sold something. Fear that they’re going to look like they don’t know what questions to even ask. I tell my kids, I use the acronym of FEAR. It stands for False Emotions Appearing Real. A lot of times it’s in our head. There are no stupid questions. It’s better to find out and not act like the ostrich by sticking your head in the sand and hope the problem goes away. Come on in, sit down, let’s talk. It’s going to be comfortable. We’ll sit and have that conversation.

Let me ask you to touch on retirement ages to remember. That seems to be part of one of those ingredients in the recipe that people get confused on in terms of retirement ages.

When it comes to retirement, age is certainly more than just a number. There are a couple of critical ages which we all address and if we’ve got some time in other segments, I’ll dive in deeper. When you turn age 50, it’s time to crank up your savings with catch up contributions to IRAs and 401(k)s. You should be maxing out no matter what. Once you hit that age 50, you can start to do those catch-ups. At age 59 and a half, there are new options for you as a retirement investor. Not only do early withdrawal penalties go away, but you have the ability to start consolidating existing 401(k)s. At age 62, typically in one month, you can start to collect on Social Security. It’s the earliest age that you could start collecting, but that doesn’t mean that you necessarily should.

Three months before you turn age 65, we want people to be sure to start enrolling in Medicare. Understanding what the options are, going into an open enrollment, get that information a little bit in advance. At age 66 for those people born before 1954, you’ll reach full retirement age for Social Security. This is where you get no penalties. If you’re still working and earning income, there is no penalty for earning income over a certain level. The most important at age 70 and a half, the IRS celebrates your half birthday by requiring you to start taking required minimum distributions, whether you need them or not. If you don’t do those calculations correctly, it’s a 50% potential penalty by the IRS.

Karen Bezar will join us. Understand the fiduciary rule. What is it? It sounds like it’s a difficult thing to understand. What do we need to know about the fiduciary rule?

It is a little scary sounding. To people that aren’t in the financial service industry, it’s a little confusing and it’s honestly a little confusing to those of us who were in the financial service industry. There was a lot of talk about the DOL but it’s the Department of Labor Fiduciary Rule coming into effect. That would require all financial advisors to become fiduciaries, which means to act in the best interest when advising our clients on retirement savings and any other type of financial information. I’m going to read what a fiduciary actually is. “A fiduciary is a person who holds a legal or ethical relationship of trust with one or more other parties. Typically, a fiduciary prudently takes care of money or other assets for another person.”

When it comes to retirement, age is certainly more than just a number. Click To Tweet

You’re thinking, “Aren’t they supposed to act in your best interest? Why does the government need to make a rule in that?” Strangely enough or oddly enough, advisors were required to recommend suitable investments but not necessarily imply the best suggestions for you. What does that mean? Here at Thrive Financial Services, we are an independent registered investment advisory firm. Our company is called Thrive Capital Management. We have access to many different solutions for our clients. We are not beholden to one or two or three companies. We have many solutions out there to best suit our clients. That’s the way we’ve always run our company. We always work in the best interest of our clients, but unfortunately not everybody is honest and like that. Here’s what you need to know about the postponement of the Department of Labor Fiduciary Rule. The implementation of the rule is going to be a multi-step process. There have been some delays in the government with the change of the presidency. There have been some delays on that subject.

Would you say, Karen, that people take for granted that their financial adviser is acting in their best interest, but that isn’t necessarily the case? For example, you were specifically talking about retirement moves that dealt specifically with women. You’re not opposed to getting intimate and getting up close and personal with your client based on who your client is and who you’re talking with. Is it a given that most people assume their advisor would be looking out in their best interest?

It would be a given, but not always the case. You would hope that the person that you’re dealing with is going to be an honest and credible person and give you the best advice that’s best for you and your family and your needs. When you sit down with somebody and they’re an advisor, sometimes I cringe when we have people who come into a workshop and they say, “My advisor.” What I say to people who are going to be clients or people who come and ask me questions, I say, “Make sure that you ask your current advisor if they are at fiduciary. Because a fiduciary has to have certain designations to be what’s called a fiduciary according to the new Department of Labor law.”

If they don’t?

Run the other direction as fast as you can because they won’t have your best interest at heart. They don’t have to follow the rules and regulations of the government. We do. Not only because that’s the law, but because it is the best thing for you.

How do you break it down for the individual so they can understand how to be that smart consumer? We talked about fear and sometimes we show our fear and then other times I think we hide our fear. Sometimes my fear is that somebody in a conversation with you might not be open with how they feel.

Sometimes people are afraid when they sit down with us, maybe they’re getting a second opinion with their current advisor. They don’t want to feel that they have made an error in judgment and pick somebody who is not working and doing the best thing for their clients. When we sit down with people, we’re honest and open and there should be no fear. We say upfront, we are fiduciaries, we are working in your best interest. That’s where our conversation starts. Sometimes when a person comes to a workshop and they hear that we are fiduciaries, they are educated and they are aware of the Department of Labor ruling that is going into effect.

Last thought for Karen Bezar. When you hear that term fiduciary rule, what’s the one or two bullet points that you would give our audience to reference that would fall under or that would trigger a reminder to them when they hear the term fiduciary?

TFS 03 | Fudiciary Role

Fiduciary Role: If you are working with an advisor, make sure that they’re a fiduciary, that they’re required by law to act in your best interest.

 

If you’re working with an advisor, please ask if they are a fiduciary. Make sure that they’re actually already required by law to act in your best interest in above their own. Again, at Thrive Financial Services and Thrive Capital Management, we take that to heart and we don’t need rules and regulations to tell us what is the best thing to do, which is obviously, you work in the best interest of your clients.

David, as I bring you back into the conversation, that segment with Karen on a fiduciary was so important. On putting the interest of the individual on the front burner as the real reality of why you’re here. The real reality of what your advisors should do should be to hold you in your best interest. I want to transition and get into avoiding some investing errors.

If we’ve got folks in our audience who are consistently saving double-digit percentages of their income for retirement and I certainly want to send out a personal congratulations on that. That’s one of the first steps in making sure that you’re not making any errors in investing. You’ve taken a huge step that way if you’re saving, but it’s actually only the first step in the process. The next step is to invest that money wisely so that it’ll grow enough to support you and the family and spouses, whatever the situation may be when you’re no longer working. If you’re making any of these common investing errors, then you’re going to come up short despite the diligent savings that you’ve already done.

I’m sure you’ve heard one, we have people that we talked to where they will not invest in stocks. We don’t have a crystal ball, but you’ve also heard the old adage, too much of one thing or not enough of another causes us issues. The stock market is definitely a daunting place and people are aware of the ups and downs in the market. There are a lot of people that are still remembering what happened back in 2008 through 2009. When they try to consider about investing, that fear definitely kicks in. What I would tell people, despite the risks, stocks still offer everyday investors the best long-term returns. If you don’t include them in the portfolio, then you’re going to find it very difficult, even sometimes impossible to save enough money for retirement.

The other mistake that we see quite often is that they invest entirely in stocks. Too much of a good thing, stocks are no exception to that whatsoever. Splitting your money between stocks and other investments is what helps mitigate losses when the stock market does take a dive. I think people are feeling that it’s going to happen at some particular point, we just don’t know when.

You referenced the 2008 crash, you certainly can attest to this more than I can, but whenever the conversation comes up, somewhere in the mind is that thought process or that reference to the crash back in ’08.

It’s still an open wound for some people even though the market has done exceptionally well since. People have forgotten to get back in or they waited too long to the point that they go it’s too high. Eventually, you keep missing the boat leaving the dock situation. There is a point where they’re going to definitely be right, but while you’re sitting idle, you’re losing years of accumulation potential. The other thing is people that invest entirely in stocks tend not to consider bonds. Bonds is another tenuous space too because we’re worried potentially about interest rates and as interest rates start to rise, the value of bonds that were purchased could start to go down. It takes a very diligent, deliberate approach to make sure that you navigate things well and don’t make typical investing errors.

One of the conversations we had with Bret, we’re talking about some of the new proposed tax structures. All of that conversation that’s out there nationally in the news, online, wherever you look, there’s a reference to your 401(k), and that sometimes raises a red flag or raises a question, “How much should I have in a 401? How much should I be putting in?” That’s one of the variables I think that you have to zero in on when you’re looking at somebody’s picture.

You hit both. Do I use a 401(k) and then you brought up taxes? Let me hit on both of those. Some people are not using an IRA or a 401(k). You could stick your retirement savings into a regular brokerage account and invest there, but if you do that, you’re going to miss out on enormous tax advantages that could come with an IRA or a 401(k). Tax-deferred retirement savings like IRAs, 401(k)s also do give you a tax break on the money that you contribute to those accounts. Something to consider, people who avoid it and are paying taxes along the way that can be erosive of the gains. Then some people say, “I’m going to have to pay taxes when I take this money out.” There are definitely strategic ways to structure your cashflow in the future that you minimize taxes the best that you possibly can.

That’s one of the additional investing errors is not considering the tax treatment of your investments. Retirement savings accounts aren’t the only way to get a tax advantage on your investments. There are certain types of investments that are actually exempt from state taxes, federal taxes, and even sometimes both. Some examples of these investments include treasuries and municipal bonds and things of that sort. On the other hand, investments that tend to be subject to high taxes should definitely be held in a retirement account and not in a standard brokerage account. There are investments out there like REITs, real estate investment trusts. They’re required to pay high dividends and if you keep those in a standard brokerage account, you’re going to incur hefty dividends that are going to cause taxation.

Tax consideration should be considered all along your investing life. Click To Tweet

David, to take what you’re saying and apply it to that retirement age scale because along that timeline was a lot of different ages and within those different age periods are going to be potential changes in what you’re doing.

Tax consideration should be considered all along your investing life. Sometimes it’s going to be deferred, sometimes it’s going to be current. Those ages that we talked about are all critical in the process. Those ages I described where a little bit more specific for actual events, but it’s never too early to consider what you should be doing from an investing and how taxes can potentially impact it. What we tell people is when in doubt, ask for help. Picking the right retirement investments to maximize returns, minimize taxes, make sure that we control expenses because they can get complicated. We have a lot of people who are “self-managed.” Even experienced investors may want to get an opinion from a financial advisor who’s a fiduciary with experience in retirement planning on those particular topics. A single meeting to go over the retirement portfolio, make any necessary corrections, won’t cost very much for us, it’s a complimentary service. It may make sense, it could actually be a great investment to make.

One other website that I want to make sure I push out to our audience and continue to remind them. It is a website filled with a tremendous amount of resources, MaxMyPlans.com. When David said, “When in doubt, ask for help,” that’s a good place to start. Go to that website and you’ll find some good resourceful information there which will then lead you to a workshop or lead you to a conversation with Karen or David. You have been providing an incredible amount of information for the growing audience.

We hope we’re delivering and that was the intent of putting the show out. We’ve spent a lot of time listening to the radio and trying to hear what other folks that have radio shows related to finances, and it’s interesting. I’m not going to comment, but we’re going to keep up on our research a little bit about that. Karen mentioned the fiduciary and I noticed a bunch of the people aren’t on that scale of being a fiduciary. It opens up the door a little bit of what they can say and how they can say it. I think we hope that we ultimately become that source that can provide valuable information where people can go and have confidence that the information they get is accurate.

I can say with 35 years of media and broadcast experience in some capacity, I certainly put an exclamation point and trust at your doorstep. I’m learning a lot. Let’s get into our email bag, our final segment. A question out of our email bag, we’ll go rapid fire for you, “What should I consider before taking a loan from my 401(k)?” It’s a good question. It seems to come up more and more. Should I borrow against the 401(k)?

Most 401(k) plans allow you to take loans from an account. 20% of those who are actually eligible do take loans from their 401(k) is what we see. There are benefits and risks to be weighed out in the decision-making process. On the plus side, 401(k) loans offer a lower interest rate than credit cards or personal loans. They also don’t require any type of a credit check or posting collateral out other than the 401(k) plan itself. It makes it easy for people to borrow money and that’s the plus side of doing a 401(k) loan. There are also risks to consider before deciding to borrow from your 401(k). I’d like to cover a couple of those. Number one, the default in 401(k) loans is relatively low because your employer would simply deduct what’s owed from your paycheck.

TFS 03 | Fudiciary Role

Fiduciary Role: In a study, the unfortunate finding is that people who take money out borrow their 401(k) and reduce the amount of contributions.

 

If you were to leave your job though, your default risk rises as most plans require that you repay the balance that you borrowed within 60 to 90 days, pay the income tax on the remaining balance, and then potentially a 10% penalty if you’re younger than 59 and a half. This money can also go back into the retirement plan. I hope I was able to articulate that clearly, but there are some hoops that you can potentially have to jump through. If you stay currently working, it’s usually pretty darn easy. Just repay the loan and can get deducted out of your paychecks and things are good. It’s when you leave your job and have not rolled or go into a self-directed or not done anything to roll over that money where you can find the complications.

As a matter of fact, I was reading a study recently found that while borrowing from a 401(k), you are more likely to decrease your contribution rate into your 401(k) plan by 10% or more. That’s something to consider and that’s just a human nature of the situation. If you’re saving double-digit amounts of your employment dollars percentage-wise, congratulations. That’s a big deal. What we find through this study is people who take money out, borrow money of their 401(k), tend to also reduce the number of contributions that they’re making, which is a bit of a negative.

I’ll use a personal example here for a moment because we’ve got to the point where fear jumped in and then we decided to do nothing. Should we tap into our 401(k) so we could fund or pay for our children’s college education? That thought process factored in. We’ve got to a point, fear set in, we didn’t, but those conversations come up and happen at the dinner tables.

All the time. It’s not one size fits all. Everybody has a special circumstance. Everybody operates a little bit differently. Everybody fears things a little bit differently. Having someone to consult with and go through all the different scenarios is the value of working with somebody. If that does pop up, the question is something good to cover. I also want to cover a couple of other quick points. When you borrow money out of the 401(k), you’re also giving up the opportunity for the savings to continue to grow in your account.

It’s not one size fits all. Everybody has a special circumstance. Click To Tweet

While you may have a loan at 4%, it could have been growing by stock market averages, which are typically around 7% a year if it had stayed in the account. You’ll lose some opportunity growth. Also, because you’ll be paying taxes on the money withdrew in retirement and will pay your loan back with after-tax dollars, you’ll be taxed twice on those interest payments. I don’t say it’s never a good idea if you actually have to do it. It’s just something to certainly take into consideration. There may be other alternatives out there that offer even lower interest rates and fewer downside. My encouragement to our audience is to do your research and weigh out all the alternatives.

Don’t be afraid to ask for help or at least solicit an opinion and continue to learn and educate.

We still have a number of workshops that we’re doing. The topics are Social Security Maximization, Tax Efficiency in Retirement, and Bulletproofing your Retirement Income. With the proper approach, the proper strategies, you can do that. What we want to help people understand is net worth is a number. Guaranteed income, making sure that you’ve got enough money on a monthly basis to meet your expenses and give you enough surplus to do the things that you want to do in retirement. When you think of that word retirement, travel, spend time with the grandkids, gifting, whatever it may be, that’s what we’ve got to focus on. Make sure that you’ve got that covered and then everything else will take care of itself.

Call 1-800-516-5861 or go to ThriveFinancialServices.com. On behalf of David and Karen Bezar and the traveling Bret Elam, this is Joe Krause. We’ll see you next time.

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