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Is Your Advisor a Fiduciary All of the Time?

You may have heard some news in the financial press about the so-called “Fiduciary Rule.” It is a new rule that is supposed to make sure that financial advisors always act in the best interest of their clients when providing financial advice. It might be surprising to you that we needed such a rule. I think that most people would expect that their advisor is acting in their best interest—but that isn’t always the case.

Basically, there are two types of financial advisors. There are the advisors who work for a bank, a brokerage firm, or an insurance company. These advisors have not been held to a fiduciary standard in the past, which means that they have only been required to make sure that their investment advice is “suitable” for their clients—in other words, they can put their interests before those of their clients. These advisors are often compensated by commissions on the financial products that you purchase through them.

On the other hand, there are the independent financial advisors who only work for their clients. Those advisors have always been held to a fiduciary standard, meaning that they must always act in their clients’ best interest.

New Rule Limited in Scope

The “Fiduciary Rule” was originally put forth by the Department of Labor under former President Obama. Initially, it was scheduled to be phased in from April 10, 2017, to January 1, 2018. However, after President Trump was elected, the implementation was delayed. For a while, it looked like the rule would not be implemented at all. However, the new administration ultimately allowed the rule to go into effect on June 9.

While the rule is a step in the right direction, it’s limited in its scope, and it may be changed or revoked. At this point, the rule requires all advisors to provide fiduciary guidance for retirement accounts. This means that some advisors will be acting as fiduciaries in some situations but not in others.

We wanted to assure you that Rall Capital Management is, and always has been, a fiduciary advisor. We act in our clients’ best interest 100% of the time. We’ve always have been a fiduciary advisor—and not just because it’s required for independent advisors. We do it because it’s the right thing to do.

Which Account Should I Use for Cash Flow in Retirement?

If you think that saving for retirement is hard, wait until it comes time to spend it. When you are working and making contributions to a retirement plan, it’s pretty easy. You open a retirement account, contribute to it regularly, and off you go. If you are lucky enough to have a company-sponsored plan, you make your deposits into the account via payroll deduction.

Oh sure, you will have to actually sign up for the retirement plan. And you will have to make decisions about a few things, but it’s pretty easy. When you open the account, you will name a beneficiary who will inherit the assets if something happens to you. Next, you’ll have to decide how much to contribute to the account. I would suggest that you shoot for at least 10% of your gross pay, but anything is better than nothing. If you are really lucky, your company will match your contribution—that’s free money! Make sure you are contributing at least enough to get the full company match. Finally, you’ll need to make decisions about how your account is invested. Often, when just starting out, a target retirement date fund is a good choice.

That’s it! Pretty simple. During your working years, you’ll hardly notice the retirement account. But boy, do you start paying attention to it when it comes to start spending it. Going from living on a regular paycheck to living off of your retirement funds is often more difficult than saving is! In last week’s post, Are You Living Too Frugally, I discussed how we are seeing a trend of older clients holding on to a big pile of money and underspending in their retirement years. I believe the perfect retirement plan ends with a bounced check to the funeral service. Just kidding. Sort of.

When you look to replace your paycheck, you must consider your resources and start to develop a plan of action. Usually there will be Social Security income and maybe a pension. The rest of the cash flow that you need to fund your lifestyle will have to come from your savings. Hopefully, you’ll have some after-tax savings—maybe cash you received when you downsized and sold your longtime home. You might have an IRA or a 401(k) or 403(b) from your working years. Maybe you have a Roth IRA. More and more people do.

The question then becomes “What’s the best way to take money out of my accounts?” The answer, like most answers in the financial planning world, is “It depends.” In the above scenario, our fictitious retired couple has three buckets of money to choose from. They have their after-tax money from the sale of the house. This money has already been taxed at some point, and any cash flow that comes from this bucket is not taxable again, except for the interest, dividends, and capital gains the investments generate. Our couple also has a bucket of tax-deferred money, which comes from their IRA, 401(k), or other retirement accounts. Any cash flow coming out of these accounts will be taxed as ordinary income. Finally, they have a couple of Roth IRA accounts that they funded in the years leading up to retirement. This gives them a bucket of tax-free money.

By managing which bucket you take money out of to fund your cash flow needs, you can, to some degree, control the tax consequences of your retirement income. For example, you might want to take distributions from your post-tax bucket first. Any cash taken from this account is not taxable, except for tax that may be due on the interest, dividends, and capital gains. But that’s generally OK because capital gains tax rates are lower than ordinary income tax rates. And, depending upon your tax bracket, they may be tax-free.

If you are taking distributions from your retirement account, those funds are considered ordinary income. Monitor how much you are taking, and if you are getting close to moving into a higher tax bracket and still need cash flow, you can take some distributions from the tax-free pile, your Roth accounts.

Please remember, the example above is just that—an example. It is not a recommendation. We do, however, recommend that everyone review their individual situation by doing some tax planning. Having a distribution plan in place can help you get the cash flow that you need while lessening the tax bite on those treasured retirement dollars.

Are You Living Too Frugally?

Meeting with our clients is one of the best parts of my job. Many of our clients have been with us for several years, and our meetings are like conversations with old friends. While we spend a good amount of time in our meetings reviewing portfolios and discussing financial issues that are affecting them, most of our time is spent catching up on what has occurred in their lives since our last meeting and making sure we are all prepared for whatever might happen in their future.

Every client is different and therefore every conversation is different, but there are also a number of similarities. A couple of meetings I had last week demonstrate how similar our conversations can be at times. In two separate meetings, with two separate, longtime clients, I had the same piece of advice. “Go spend some money” was my message to both.

That advice might sound funny coming from someone who makes a living by trying to get clients to save and invest for their future. But in these two cases, the advice was certainly appropriate. And, based upon the research paper I read this weekend, it’s probably appropriate for a lot more people (more on the paper in a bit).

Both meetings I am referring to involved at least one spouse who is more than 80 years old. They are both still healthy, although both admit to starting to slow down a bit. The other thing that they have in common is that both couples were very good savers through their working years and are very comfortable financially. Not rich, but comfortable. Both couples have nice-sized IRA accounts that we manage for them. And both are taking just enough from each to barely satisfy their required minimum distributions.

My advice to go spend some money is based on my philosophy that because we get to go around only once in this life, we should limit the “I wish we would have …” thoughts before it’s too late. We use a financial life planning approach with our clients that aims to limit the regrets they may have at the end of life. “I wish we would have taken more family vacations,” “I wish we would have traveled more,” “I wish we would have given more” are all examples of regrets we try to help them avoid.

Plan Wisely, but Don’t Miss Out on Life

I certainly understand the desire to keep a healthy level of funds available in the event of a long-term-care need. In fact, I support it. I often say that the time bomb ticking inside of anyone’s financial plan is the potential for a long stay in a nursing home. So I’m not advocating that they go on some wild spending spree. But I don’t want them so concerned about a potential need that they miss out on what life has to offer.

The research report I mentioned earlier confirms that my clients are not unique in this regard. The report, Living Too Frugally? Economic Sentiment & Spending Among Older Americans, by Mark Fellowes, CEO of United Income, suggests that retirees are not spending enough in retirement to live out their life-long dreams. The report indicates that, for a lot of seniors, a lack of confidence in future economic growth and their own financial well-being keeps them sitting on large portfolios.

A study done by the University of Michigan for the Social Security Administration and the U.S. Commerce Department found that adults become less optimistic about future economic growth and financial health as they age. So they are less likely to spend their nest egg. The study also found that wealth and investments generally grow as people age—so they are leaving behind large amounts of wealth when they pass away.

While leaving behind some wealth for your heirs is certainly not a bad thing, I would guess (or at least hope) that most kids would prefer to see mom and dad live life in such a way as to have few regrets. So our advice is to do some long-term-care planning and make sure you will be able to afford whatever care you may need as you grow older. Then go spend some money!

Summer Job? Maybe You Should Roth!

It’s the end of another school year. This is the time when the kids start planning their summer break, their summer jobs, and for those graduating, their next step toward adulthood. The younger kids will look forward to swimming, playing, and maybe going to a summer camp. Those who are graduating will start planning for their freshman year of college or getting started in their first real job. Those in the middle will look forward to enjoying a summer of relaxation, maybe training for an upcoming sports season, or landing a summer job.

I’ve always assumed that the motivation for a young person to find that summer job is simply to have some spending cash. I thought that they want to work so that they can put gas in their car, maybe pay for a date, add some of the latest fashions to their wardrobe, or just have a little cash in their pocket. Money earned at a summer job provides a young person with independence, and I applaud the resourcefulness and responsibility of those who take this path.

I applaud louder and longer for those who want to do more with the money they earn at their summer job. I was pleasantly surprised by my nephew at a recent family gathering celebrating Mother’s Day. He’s been lucky enough to land what looks like a pretty good summer job. He’ll have work, a paycheck, and enough flexibility to train for the upcoming football season. He surprised me when he asked how he should invest part of his paycheck. He said that he wants to set some money aside and have his money earn money, instead of just sitting in a bank or spending it all. Kudos to him!

So what should a young person do when they want to set aside a little of their current cash flow to start building a better future for themselves? My nephew will turn 18 at the end of this summer. He obviously has a lot of life and life’s transitions in front of him. He’ll want to go to college. He’ll want to buy a car. He’ll probably eventually want to marry, buy a home, have kids, and all the normal things that are part of adulthood.

What investment vehicle would allow him to save for his future but be flexible enough to allow him access to his funds if he needs them for that car, that education, or that house? There are a few choices that could work for him, but the one I recommended was the multipurpose Roth IRA.

Why would I recommend a retirement account to an 18-year-old young man? A Roth IRA sounds like it’s a long-term investment plan, designed to be used in retirement. It is. But the Roth IRA is also a very flexible vehicle that can help him when other needs come up.

First, let’s cover the basics of the Roth. There are income eligibility limits. So if you make too much money, you can’t contribute. But that’s certainly not the case for most 18-year-old young people. For 2017, you can contribute 100% of your earned income, or $5,500, whichever is less. (Note: If you are over 50, you can contribute $6,500.)

While the main idea behind the Roth is to save for retirement, the account is very flexible. You can withdraw your contributions at any time without a penalty. This means that if my nephew wants to buy that car, pay for that college, or buy that house, he can access the money he has invested. It’s important to note that there are restrictions on withdrawing earnings. Typically, you need to have had the Roth IRA account for five years and be at least 59½ years old to withdraw the tax-free earnings from the account. However, there are exceptions. You can withdraw up to $10,000 to buy a first home, tax-free and penalty-free. And you can withdraw earnings with no penalty, but not tax-free, if you use the funds to pay for higher education expenses for you or a family member.

For those reasons, I think the Roth IRA is a great choice for my nephew, and for most people. It’s important to remember that the Roth IRA is just a type of account. To make it work most effectively, you must invest it properly. As I’ve discussed in previous posts, you should focus on building a globally diversified, asset class–based portfolio using low-cost index mutual funds or ETFs.

So if you know of a young person who is interested in doing something more with their summer job money than just spending it, the Roth IRA is a choice that can work out very well for them.

My Long-Term-Care Insurance Premiums Keep Going Up. What Can I Do?

In some ways, long-term-care insurance is like auto insurance. We pay a premium and hope that we never need to file a claim. If we have to file a claim against our auto insurance, it means that our car was damaged or stolen, or that somebody was hurt in an accident. If we have to file a claim against our long-term-care insurance, it means that we’ve lost the ability to take care of ourselves in some way. Our auto insurance will help pay to fix our car or pay someone’s medical bill. Our long-term-care insurance will help pay for someone, or some facility, to help take care of us.

That’s the way insurance works. We pay a premium and the insurance company steps in to pay for losses that we can’t afford. For most of the insurance policies we own (or should own), it’s not unusual for our premiums to increase over time. Of course, we know that if we are in an at-fault accident, our auto insurance premiums will jump dramatically. But if we don’t make any claims, we typically see modest increases, somewhat in line with what we would expect with inflation.

But it doesn’t work that way with long-term-care insurance premiums. Over the years, if you’ve owned a long-term-care policy, you’ve seen premium increases every few years, often as much as 40 to 60 percent each time. In fact, last year, the federal government announced that the long-term-care insurance premiums for federal employees and retirees would increase an average of 83 percent. In other words, the cost of protecting yourself against a future claim that may or may not occur would almost double!

The Double Whammy for Insurance Companies

Before we discuss how you might control your premium increases, let’s go over why we’ve seen such large increases. I’m not one to feel sorry for insurance companies, but when it comes to long-term care, the insurance companies face a double whammy. First, we are all living longer, which means that we may need our policies to pay for a longer period. And health insurance costs are also increasing. So the insurance company has to pay higher claims for longer periods of time—not a successful business model. It’s been so bad for so long that many companies in the long-term-care business have stopped selling policies.

How to Control Your Insurance Costs

So the insurance company can raise your premium or it can stop selling policies. But what choices do you have? While you do have a few options, none of them is great. We’ll discuss those now.

First, you can dig a little deeper into your pocket and pay the premium increase. If you like the coverages in your existing policy and you can afford the increase, this may be a good choice for you. This is also your best choice if you do not want to self-insure the risk of needing long-term care at some point.

On the other end of the spectrum, you could just not pay the premium and let your policy lapse. This is a tough call. If you let your policy lapse, you will effectively be self-insuring against the risk. Maybe you can afford to do so. Maybe not. Would you qualify for Medicaid? It’s important to know because Medicare provides only limited coverage for nursing home or custodial care.

You could shop around for a policy with another company. Unfortunately, as I mentioned earlier, there just aren’t many companies selling long-term-care policies any longer. So this might not be a good option.

The option that we see most often is to reduce the benefits in your policy. A long-term care policy includes many features and options. They are the coverages provided by your policy and include:

  • The benefit period: This is the length of time the policy will pay benefits and is typically three to seven years, although some early policies provide for an unlimited benefit period.

  • The amount of coverage: This is typically quoted as a daily or monthly amount (e.g., $150/day or $4,500/month).

  • The inflation protection: This is designed to make sure that the amount of coverage in your policy keeps up with inflation. There are two types of inflation protection: simple and compound. The compound feature results in higher coverage and, therefore, higher premiums.

  • The elimination period: This is basically your deductible. It is the number of days that you must pay for care before the policy kicks in and starts paying.

These are not all the features and options of a policy, but they are the major ones. They’re also the ones that you can typically adjust to reduce the premium. For example, if you have an unlimited benefit period, you could reduce it to a three- or five-year coverage period, which would result in less risk to the insurance company and a lower premium to you. Another adjustment that we see often, and one that my wife and I have used for our policy, is to change from compound to simple inflation protection.

Please keep in mind that these are just examples of ways that you can manage the premium increases that have become all too frequent for many. Before making any changes to your policy, you should consider your situation carefully. Determining the best way for you to protect you and your family from the costs of long-term care can be complicated. We recommend meeting with a professional who can help you clarify and understand your options.

Should I Have a Trust?

When we help a client review their complete financial picture, one of the areas we always discuss is their estate plan. As part of that discussion, we often get the question “Should I/we have a trust?” Clients may ask because they have read an article that suggests that they should have one, or they may have talked with a friend who has a trust as part of their plan. But like a lot of financial questions, there is no one-size-fits-all answer. A trust can be part of a well-designed estate plan, but not everyone needs one.

Let’s start by discussing what makes up a well-designed estate plan. A typical estate plan consists of a will, a living will, and a durable power of attorney. Your will is used to name the executor of your estate and to provide the details for how you want your assets distributed after death. The living will details your desires regarding medical treatment when you are not able to express your consent. The durable power of attorney gives someone you choose the power to act in your place if you become incapacitated. That person typically has the power to act on your behalf for financial, legal, and medical responsibilities.

And sometimes you need a trust. There are several types of trusts, the most common of which is the living trust. The living trust, sometimes called a revocable trust, is a document that provides for your assets being placed in “trust” for your use during your lifetime and then transferred to your designated beneficiaries at your death. Trusts can be a powerful estate planning tool, but they also lead to increased attorney’s fees, so they are oversold at times.

When Trusts Can Help

So when should you have a trust? If your financial situation is straightforward, with minimum complexity, chances are you do not need one. The rest of this post will highlight a few situations where they can help.

Probably the most common use for living trusts is to avoid probate after your death. Assets that you place in the name of the trust will pass directly to your designated heirs. A will serves a similar purpose, but the assets that are distributed via a will must go through probate. Probate is the court-supervised process of distributing your assets to your heirs. Depending upon the assets that you own, probate can be a costly and time-consuming process.

Another problem that some people have with a will is that they become part of the public record. Trusts remain private. We often hear stories about celebrities who have passed away and how their assets are distributed. Just this week, there were news stories about the distribution of Michael Jackson’s and Prince’s estates. Michael Jackson died over 10 years ago! While you may not be a celebrity, the privacy argument can be a good reason to have a trust.

There are more second marriages and blended families than ever before. If one or both spouses of a second marriage have children from their previous marriage, it can create some estate planning issues. For instance, the surviving spouse may have the ability to disinherit the children of the deceased spouse. A living trust can solve that problem. It can allow for lifetime benefits for the surviving spouse and make provisions for the children to ultimately receive the assets.

There are other more technical and complicated situations where a trust can be helpful. No matter the complexity of your financial situation, we always recommend that you meet with a qualified and experienced estate planning attorney to make sure that you have the documents you need to handle your affairs in the way that you want them to be handled. While nobody likes to talk about death and incapacity, it’s much better for you to do some estate planning and make the decisions while you can. If you don’t, the state you live in will have statutes in place to handle things for you. And you might not like their plan.

Medicare Enrollment—Not As Easy As It Sounds

It sounds so easy and uncomplicated: Reach age 65, sign up for Medicare, and your health insurance is taken care of for the rest of your life. But seldom are things as easy as they sound. That is certainly the case with Medicare, the health insurance system in place for more than 55 million Americans. While signing up for Medicare sounds relatively simple, there are a lot of moving parts that require decisions that will impact your pocketbook and your insurance coverage.

As important as Medicare is in the life of our senior and disabled citizens, there are very few resources that provide proper guidance on working your way through the Medicare maze—and it’s certainly not a set-it-and-forget-it kind of decision. This post, and upcoming posts that we will make on this subject, will attempt to clear up some of the confusion and misinformation surrounding this very important topic.

Our first piece of advice on this topic is that you must be proactive in dealing with this complicated program. The book Get What’s Yours for Medicare (Phillip Moeller, 2016) points out that “No One Told Me” is a scary cautionary Medicare tale. Prepare yourself so that you don’t have to ever say that no one told you.

Before we get into how the enrollment process works, it would be good to go over the Medicare basics. Medicare has three parts: Part A provides insurance for expenses incurred at hospitals and is generally premium-free. Part B provides coverage for doctors, as well as outpatient and medical equipment expenses. And Part D is prescription drug coverage. We know—what happened to Part C? We’ll cover that in a future post.

We recommend six steps when going through the Medicare enrollment process:

  1. Check your timing.

  2. Choose your Medicare path.

  3. Select your specific plans.

  4. Enroll in Medicare (note that this is the fourth step, not the first!).

  5. Enroll in your specific plan(s).

  6. Review your coverage annually.

There are some decent resources that can help with steps three through six. But there aren’t many that will help with the first two steps. Yet it’s steps one and two where 90% of Medicare mistakes are made. We should not take those mistakes lightly because just one mistake can cost you thousands of dollars and may not be able to be undone. This post will offer guidance on the first step, and future posts will address the rest.

Check Your Timing

To get started, we must first determine the best time for you to enroll in Medicare. At age 65, if you are a U.S. citizen, you are eligible to begin Medicare—but being eligible doesn’t mean that you have to sign up right then. If you are already receiving Social Security when you turn 65 (which is another topic we will discuss in a future post), you should be automatically enrolled in Medicare Parts A and B—but, again, this doesn’t necessarily mean that you have to accept, and pay for, Part B. By receiving Social Security benefits, you are automatically enrolled in Part A. Your decision to sign up for Part B is going to be determined by whether you have coverage through an employer group health insurance policy. This is the case whether you are receiving Social Security benefits or not.

So if you are turning 65 and are not covered by a group health policy through an employer, you’ll want to sign up during your initial enrollment period, which is the seven-month window surrounding your birth month (the window includes the three months before your birth month, your birth month, and the three months after). If you are covered by a group health insurance policy, you’ll need to enroll during a special enrollment period. For Parts A and B, this means that you can enroll at any time while you are still covered, or within eight months after coverage or employment ends (whichever is first). For Part D, you’ll have 63 days after the coverage or employment ends (again, whichever is first).

Of course, there is always an exception to make things more complicated. If you are covered by an employer group plan with fewer than 20 employees, then you must sign up during your initial enrollment period. This is because, for small employers, the group plan will stop being the “primary” payer of claims and will become “secondary” to Medicare.

If you make a mistake in this phase of your enrollment, you could end up paying late enrollment penalties. And these are not small, slap-on-the-wrist kinds of penalties. In most cases, if you don’t sign up when you are first eligible, your premium can go up 10% for each 12-month period that you would have had coverage. And those increases don’t go away after a year or two. They follow you for life. Or you could end up with a more costly coverage that you cannot switch out of. You could face long delays in enrollment of up to a year and a half without coverage. And finally, you could end up having to pay back health care costs that you thought were covered.

It’s obvious that the basic step of signing up for Medicare is anything but basic. And that’s just signing up. Deciding which path and which plans are best for you isn’t exactly a picnic either. We’ll discuss those in future posts.

This Is How We Invest, and Why—Part One

The investing world can be a scary place. It can also be exciting. At times, it can seem like there’s nothing to it, and at times it can seem like the most complicated thing you’ve ever done. All of the thoughts and emotions that are part of investing are enhanced because, after all, you are putting your money and your financial future at risk.

Risk and reward go hand in hand when you invest. You can be very conservative and not subject your investments to much risk, but then you are not going to get much in the way of return on your investment dollars. Or you can take a lot of risk, looking for the proverbial home run. That approach can lead to stellar returns, or it can lead to distressing losses.

So what is your strategy when it comes to investing your portfolio? Are you actively looking for that one piece of information that will give you the edge you need to catch the next wave of increasing prices of your favorite tech stock? Or maybe you suffer from “paralysis by analysis,” overwhelmed by the information flow and its potential impact on your portfolio?

There is no shortage of investment strategies that you can follow. In fact, just this morning, we learned of a new strategy. A financial podcast that we listen to discussed a strategy that will buy or sell a company’s stock based on the tweets from our Tweeter-in-Chief, President Donald Trump. If he tweets a positive comment about a company, they will buy the stock. If it’s a negative tweet, they will sell it. Sounds crazy, right? But there are thousands of money managers in the investment world, and thousands of different strategies that they use to try to get their edge.

When it comes to investing for the financial future for our clients, we can’t, and won’t, play games like that. We follow a very disciplined approach to investing, based on a Nobel Prize-winning academic strategy that focuses on controlling what we can control. And we are smart enough to know that we can’t control the markets. This article is the first in a series that will explain our approach and the science behind it.

The First Step: Humility

The first building block in the science behind our investment philosophy is the need to embrace market pricing. While that sounds a little complicated, it’s really not at all. It simply means that the financial markets are very efficient and that all of the information available on a particular stock, bond, or other investment is reflected in the current price. Millions of investors around the world buy and sell investments every day, and the information that they bring to the markets helps to set prices. When some new information affecting an investment comes out, it is immediately factored into the price of that investment.

We like to use the price of Apple stock as an example. If Apple is coming out with a new iPhone soon, you know about it, we know about it, and millions of people around the world know about it. There is no way to profit from any kind of information edge that you might think exists, even if it is only temporary. That’s why it’s not a good idea to run out and buy Apple stock when you hear the news. Years ago, there may have been some pieces of information that took time to work through the markets, but with today’s technology, that time gap has disappeared. Many of us have alerts on our smartphones that let us know in real time when some important news has been released.

So the first step in putting our “evidence based” strategy into action involves being humble enough to know that we don’t know more than “the market.” There are several more pieces that we use to fully build out our strategy. We’ll cover those in future posts.

A Teaching Moment for Teachers

Our teachers are a very special group. They work long hours for low pay, helping to shape the minds of our young. They are a very important part of our society. So why do the local governments that they serve allow them to be taken advantage of when it comes to their retirement planning?

I am lucky enough to have several clients who are either retired teachers or are planning to be one. In my work with them, I get to know their financial situation pretty well. While teachers don’t make a lot of money, they are one of the few groups who still receive a pension. If they qualify, and most do, the pension provides a monthly income for the rest of their life. But since the benefit amount is based on their income, they won’t be getting rich from the pension. When you add in any Social Security benefits, most teachers will be able to maintain a “modest” lifestyle.

But what if the teacher wants a little more? What if they can save a little from each paycheck to improve that future retirement lifestyle? In the private sector, many of us have access to a company retirement plan; most often, it’s a 401(k). We can have money withheld from our paycheck and have it invested automatically for our future. Our contributions are deducted pre-tax, and grow tax-deferred over the years. Teachers have access to a similar plan, but for them it is known as a 403(b).

In the private sector, the employer selects an investment firm to handle the administration and investing of the plan’s assets. For our teachers, the School Board selects a handful of “approved” providers from which the teachers can place their retirement funds. The problem comes from this list of “approved” providers.

It has been shown, and it just makes sense, that the costs of an investment portfolio are a huge factor in its long-term performance. At Rall Capital Management, we know that we can’t control the financial markets, so we don’t try. Instead, we work to control what we can control, one of the most important being the costs involved in managing the account.

Most of the plan providers that teachers have to choose from are insurance companies. That usually means that the retirement contributions are being invested in an annuity contract, often with layers of different types of expenses. Most of the other providers on the “approved” list are investment firms that put together a menu of funds for teachers to choose from. All too often, the funds on the menu have very high expense ratios, creating an unnecessary headwind for account performance.

The expenses in the plans that are available to our teachers are among the highest. In fact, the New York Times did a 5-part report highlighting the abuses across the country. The first part of the series is entitled, “Think Your Retirement Plan is Bad? Talk To a Teacher.” I think the title says a lot. The article says a lot more. And it showed me that the problem is not just local to Brevard County’s teachers. It’s like this across the country. Why?

I’m not trying to be conspiratorial (or maybe I am) but I would dare to say that there’s some combination of politics and money at the core of the “approval” process. This system has been in place for years and any change is now subject to inertia. There’s not enough of a rank and file movement to improve the choices because most teachers don’t know. It’s been widely reported that most people don’t know how much they are paying to have their accounts managed. Teachers are no different.

It’s so much of a problem that I will typically advise my teacher clients to stop participating. What?? Advise a client to stop contributing to their retirement plan? No; we just advise them to redirect those contributions. Instead of investing in high cost annuities or other funds, I often recommend that they fund a Roth IRA instead. Roth IRA contributions are made with after-tax money and you lose the ability to have it taken directly from their paycheck, but that’s a small price to pay for the money you’ll save.

Inside the Roth, you can invest in low-cost funds that are often 1/10th the cost of many of the 403b accounts I’ve seen from my teacher clients. A 1-2% difference in costs over a number of years will make a huge difference in the value of your retirement account years from now.

One big difference between the 403(b) plan and the Roth IRA plan is the amount you can contribute. Like the private sector 401(k), participants in a 403(b) can contribute up to $18,000/year; $24,000 if you are over 50. You can only contribute $5,500 a year into a Roth IRA, or $6,500 if you are over 50. If you do have the ability to contribute more than the Roth maximum, one option would be to direct the excess to the 403(b) plan.

To become successful financially, you must do a lot of little things right. Not paying exorbitant investment expenses is one of those things.

So, if you are a teacher, here’s your homework: evaluate whether it makes more sense to fund your 403(b) account, or whether it would be better to fund a Roth IRA. If you are not a teacher, but you know one, please forward this article to him/her. They should know this!

A New Year's Resolution We Should All Try to Keep

The beginning of a new year always brings us the opportunity to make positive changes in our lives. Over the years, we’ve all set resolutions to lose weight, quit smoking, save more money, spend less, spend more time with our loved ones, etc. But there’s one resolution that I’ve never seen anyone talk about; one that we should really all consider.

I’m talking about creating or reviewing our estate documents. Yes, estate planning. Ok, so now that I’ve probably lost half of the people reading this, I’ll speak to the other half. Nobody likes to think about, let alone do, estate planning. We don’t want to think about our death, even though I’m pretty sure it’s eventually going to happen to all of us. But planning for how things are handled at our death is only one part of estate planning. The other part is planning for the possibility of becoming incapacitated. But no one likes to think about the possibility of a terrible illness or accident either.

As much as we don’t want to go through the estate planning process, it’s important that we do so. After all, estate planning is simply capturing the way we want things to be handled in the event of our death or incapacity. And who is better equipped to make those decisions besides us? And, if we take care of it, then we spare our loved ones from having to make hard decisions during a very difficult and emotional time.

For most people, an estate plan consists of a few simple documents. First, there’s a will. The main purposes of the will are to name the person you want to handle your estate and to document how you want your assets distributed when you pass away. But, if you are a young parent, there’s another very important reason to have a will. It will let the courts know who you want to serve as your child’s guardian if something were to happen to you.

Then there’s a document known as Health Care Directives. It can serve as a living will, which will detail the level of medical treatment you desire in the event that you are not able to communicate. It will also allow you to name a person who you want to make health care decisions for you if you can’t.

Next, there’s a Durable Power of Attorney. This document allows you to appoint the person who you would like to make financial decisions for you if you are unable to.

Finally, you should also consider your digital estate plan. This is something relatively new, but it reflects the age in which we live. If something happens to you, how do your loved ones handle your digital assets like your online photos and Facebook account? And how do they access your computer and passwords to all of your online accounts? Having a plan in place to answer those questions can make it much easier on our loved ones.

It is often said, that if you don’t have a formal estate plan in place, then your state has one for you. It’s true, the state has regulations in place on how things are handled when someone does not have estate documents. But wouldn’t you rather make the decisions than some government agency?

So, if you don’t have an estate plan in place, you could make it a resolution to get it done as soon as possible. There are a number of ways to get it done. We always recommend seeing an attorney who specializes in estate planning; then you know that it’s done properly. And, it’s not very expensive.

If you do have an estate plan in place, make a resolution to review your plan to see if it’s still appropriate. Lives change and laws change, so it’s important to make sure your plan is still up to date.

Putting an estate plan in place is not fun, and involves thinking about some unpleasant possibilities. But, but once you have it done, I can guarantee you’ll feel good about having checked it off your to-do list. And then you can get back to working on those other resolutions.

It's Summertime! A Perfect Time for a (Credit) Freeze!

Originally posted July 28, 2014.

The words "identity theft" in red binary code on computer monitor.

The words "identity theft" in red binary code on computer monitor.

One of the first steps in building a financial plan is to make sure that the assets you own are properly protected.  When we talk about protecting your assets, most people think of making sure their auto, homeowners and liability insurance policies are in place and sufficient.  If you are working, it's also important to make sure you are protecting your biggest asset, which for most people is the ability to get up and get out the door to earn a living.  We protect that asset using disability and life insurance.

But this article is going to focus on an asset you have worked hard to build and protect, and which is under constant attack.  We are talking about your identity.  Identity theft occurs when a thief pretends to be someone else by using their personal information to gain access to their credit, or other resources and benefits.

Identity theft is a term that was originally coined in 1964 and has been a growing problem for years. Advances in technology have turned this into a huge issue over the last several years.  Last year a new identity theft victim was hit every two seconds in America!  The number of victims climbed to 13.1 million in 2013 - an increase of more than 500,000 from the year before.

While it is obviously not possible to literally steal an identity, there are several ways that criminals make it pay:

  • Criminal identity theft occurs when someone is arrested for a crime and poses as another person to law enforcement.

  • Financial identity theft happens when the criminal uses your identity to obtain credit and buy goods or services

  • Identity cloning is when a person uses another person's information and assumes that identity in their daily life.

  • Medical identity theft occurs when the criminal uses someone else's identity to obtain medical care or drugs.

  • Child identity theft, which is generally the hardest to detect, is when the criminal uses a minor's Social Security number for some personal gain. The thieves can often establish lines of credit, get a driver's license or even buy a house using the child's identity. Sadly, this version of the crime is often carried out by a family member or friend of the family. Also, this type of identity theft can go on for years because the damage can go undetected until the child grows up and tries to access or establish credit.

As a financial advisor, I’m going to focus on the financial identity theft problem.  The potential for being a victim will only grow as we continue to move more of our financial lives online, where the thieves will continue to focus more and more attention.  So, what can we do to protect ourselves?  

Closeup of ice crystals with very shallow DOF

Closeup of ice crystals with very shallow DOF

Freeze It

While there are some companies that say they offer "identity theft protection", they tend to be expensive and of questionable value.  The single best thing you can do is to freeze your credit.  A credit freeze will prevent anyone from opening new credit in your name.  It's also very simple to do and it's inexpensive...in fact, it's free in some states.  It used to be that you had to be a victim of identity theft to get the bureaus to freeze your credit.  But a few years ago, the three major credit bureaus gave everyone access for a small fee...usually $10 per agency.  Each state has their own rules, but in Florida, the fee to freeze is $10 per credit bureau… and it’s FREE if you are over 65!

If you freeze your credit, there is no impact on the existing lines of credit that you have.  You can go on using whatever credit lines and credit cards you have just as you were before the freeze.  You can also “thaw” your credit freeze if you need to access your credit files for a creditor, like a new car or home loan, or a new credit card.  There is typically a $10 charge to thaw your account.

Computer hacker stealing data from a laptop concept for network security, identity theft and computer crime

Computer hacker stealing data from a laptop concept for network security, identity theft and computer crime

Protect your financial identity by going online to the three credit bureaus, Equifax, Experian, and TransUnion.  Follow the directions at each of the links to freeze your credit with that bureau. After submitting your request, you will be given a Personal Identification Number (PIN) that you need to lock away and make sure you know where to find it.  This PIN is what you will need to thaw your credit when you need to. The next time that you need to apply for a new line of credit, ask your lender which credit bureau they'll be using, and you can unfreeze just that one.

So, for a total of $30 you can lock down your financial identity so that no one can possibly access credit in your name…even if they have all of your personal information.  A thief can have your social security number, date of birth, and even your driver’s license number, but if you have put a credit freeze on your finances, it won’t do them any good.

For more ways to protect yourself in the digital age, see our newest blog post!

By Bob Rall, CFP®

What is Your Most Valuable Asset?

Your most valuable asset might not be what you think it is; in this video, we reveal what it really is for most people, and list some of the ways you can protect it.