The Diversified Blog

A wealth management blog dedicated to creating a long lasting sustainable retirement.

Contribution Limits to 401K

Here is a nice article provided by Kimberly Lankford of Kiplinger:

 

By Kimberly Lankford, Contributing Editor   

 

September 6, 2017

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What to Do After Inheriting an IRA

Here is a nice article provided by Kimberly Lankford of Kiplinger:

 

By Kimberly Lankford, Contributing Editor   

 

September 1, 2017

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Marriage and Roth IRA Contributions

Here is a nice article by Kimberly Lankford of Kiplinger:

 

By Kimberly Lankford, Contributing Editor   

 

August 25, 2017

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13 Ways to Simplify Your Finances

Here is a nice article provided by the Editors of Kiplinger’s Personal Finance:

 

By the Editors of Kiplinger’s Personal Finance | From Kiplinger's Personal Finance, May 2017

 

We know you're stressed out. Our strategies can help you simplify, streamline and organize your financial life to free up both time and cash.

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Time-Tested Tactics to Build Your Wealth

Here is a nice article provided by the Editors of Kiplinger’s Personal Finance:

 

By the Editors of Kiplinger’s Personal Finance | April 2017

 

We have doled out a lot of good advice over the 70 years we’ve been publishing Kiplinger's Personal Finance magazine. So in many ways it was easy to come up with 70 ideas on how to create wealth. But when our editorial staff submitted nearly 300 ideas, the editors had to roll up our collective sleeves and distill the advice into absolute gems.

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How Much Should You Save for Retirement?

Here is a nice video provided by Dimensional Fund Advisors:

 

This is just one in a series of videos which explain the reasons why we choose Dimensional Funds.

 

How Much Should You Save for Retirement? - How much should you be saving for retirement? Massi De Santis, PhD, explains that the answer should be customized for each individual, based on how their income grows prior to retirement.

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How Much Income Do You Need in Retirement?

Here is a nice video provided by Dimensional Fund Advisors:

 

This is just one in a series of videos which explain the reasons why we choose Dimensional Funds.

 

How Much Income Do You Need in Retirement? - How much retirement income is enough? In this client-ready video, Marlena Lee, PhD, explains that the answer should be customized for each individual, based on their lifestyle and their income prior to retirement.

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Retirement Confidence: It's All in the Plan

Americans' confidence in the ability to afford a comfortable retirement continues to rebound from the lows reported between 2009 and 2013. The increasing optimism is coming largely from workers who indicate they and/or their spouse have a retirement plan, such as a defined contribution (401(k)-type) plan, defined benefit (pension) plan, or individual retirement account (IRA). This is one of the key takeaways from the 25th annual Retirement Confidence Survey (RCS) -- the longest-running survey of its kind, conducted by the nonpartisan Employee Benefit Research Institute (EBRI) and Greenwald & Associates.

 

According to the 2015 RCS, among workers with access to some type of retirement plan, more than one in five (22%) are "very confident" they will have enough money to live comfortably in retirement, up from 13% in 2009 -- a time when devastating losses to retirement plan assets caused by the financial crisis of 2007-2008 crushed investor confidence. This year an additional 36% reported being "somewhat confident" in their ability to live comfortably in their later years, while 24% are "not at all confident" in their retirement prospects. This percentage has remained statistically the same for the past two years.

 

Paying the Bills

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Choosing a Retirement Location

Baby boomers are going to retire differently than their parents did. Americans are living longer, healthier lives -- a fact that is reflected in our notions of what it means to retire. Now, instead of a complete cessation of work, Americans view retirement as a gradual transition into another lifestyle.

 

Some retirees may go back to school, start their own businesses, or work part time. Others will tackle those home improvement projects they've been putting off for decades or volunteer their time and talent for causes they care about. Still others will fulfill a lifelong dream of seeing what the world has to offer. Whatever the coming generation of retirees decides to do, where they decide to do it will be of the utmost importance.

 

Deciding whether to relocate or to stay rooted in your own hometown -- and your own home -- or to "trade down" to a smaller easier-to-maintain home involves a host of issues that you will need to weigh carefully. In making the decision, give yourself plenty of time, do as much research as possible and try to focus your thinking on your needs and those of your spouse or others close to you.

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How Well Do You Know Your 401(k)?

The old saying "knowledge is power" applies to many situations in life, including retirement planning. The more you know about the benefits your plan offers, the more likely you'll be to make the most of them and come out ahead financially when it's time to retire. Here are some questions to test your knowledge about your plan.

 

How much can I contribute?

 

The maximum contribution permitted by the IRS for 2015 is $18,000, although your plan may impose lower limits. Further, if you are age 50 or older, you may be able to make an additional $6,000 "catch-up" contribution as long as you first contribute the annual maximum. Check with your benefits representative to find out how much you can save.

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Delaying Retirement May Provide the Financial Boost You Need

Americans are living longer, healthier lives, and this trend is affecting how they think about and plan for retirement. For instance, according to the Employee Benefit Research Institute, the age at which workers expect to retire has been rising slowly over the past couple of decades. In 1991, just 11% of workers expected to retire after age 65. Fast forward to 2014, and that percentage has tripled to 33% -- and 10% don't plan to retire at all. 1

 

Working later in life can offer a number of advantages. Many people welcome the opportunity to extend an enjoyable career, maintain professional contacts, and continue to learn new skills.

 

A Financial Boost

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How Do I Know If My IRA Contributions Are Tax Deductible?

Contributions to a traditional IRA are tax deductible if you don't already participate in an employer-sponsored retirement plan. For 2015, the maximum you can contribute to an IRA is $5,500. If you are age 50 or over, you can make an additional "catch-up contribution" of $1,000.

 

If you do participate in an employer-sponsored plan, your contributions still can be fully or partially deductible, up to certain income thresholds. For 2015, those limits are between $61,000 and $71,000 for single filers and $98,000 and $118,000 for married couples filing joint returns.

 

If you are ineligible to make deductible contributions to a traditional IRA, you may want to investigate a Roth IRA. Contributions to a Roth IRA are made with after-tax dollars and are not tax deductible, but distributions are tax free. Be aware that there are income thresholds to contribute to a Roth. For 2015, those limits are between $116,000 and $131,000 for single filers and $183,000 and $193,000 for married couples filing joint returns.

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Prepare for Retirement…Consolidate!

If you are preparing for retirement and have multiple investments spread among a number of accounts and institutions, you may want to consider making your life easier and possibly saving yourself money by consolidating your accounts. Here’s why:

 

1.  Managing multiple accounts that are similar such as Joint accounts, IRAs, and 401(k)s can become pretty confusing and very time consuming. If, in addition, you own individual or company stock, tracking cost basis can be a nightmare. Do you really want to spend so much of your time managing all these investments once you retire? 

 

2.  Having 401(k)s from current or former employers and individual retirement accounts (IRAs)  in a number of financial institutions makes it difficult to track portfolio performance, asset allocation, and diversification. You’ll at least need to rebalance your portfolio periodically.  This would be much easier if your retirement funds were all in one place.

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Is Your Portfolio "In Style" or Making a Bad Fashion Statement?

It is fairly common knowledge that a retirement portfolio's carefully constructed asset allocation can become unbalanced in two cases: When you alter your investment strategy and when market performance causes the value of some funds in your portfolio to rise or fall more dramatically than others. But did you know there is also a third scenario? Your portfolio can become unbalanced due to unexpected changes in the funds' holdings.

 

The phenomenon known as "style drift" generally occurs when a fund's manager or management team strays beyond the parameters of the fund's stated objective in pursuit of better returns. For example, this may occur when a growth fund begins investing significantly in value stocks or when a large-company fund begins investing in the stocks of small and mid-sized companies. As a result, the fund's name may not accurately reflect its strategy.

 

If style drift occurs within the funds held in your portfolio, it could alter your overall risk and return potential, which may influence your ability to effectively pursue your financial goals.

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What are the retirement plan limits for 2014 & 2015?

Here is a nice article written by Dimensional Fund Advisors:

 

The Federal tax laws can be saver friendly and allow most people a way to save money in a tax-deferred or tax-free environment. Here is a table of the contribution limits for some U.S. retirement vehicles:

 

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Medicare and Social Security: A Good News, Bad News Story

The good news for Medicare is that the program's outlook has improved considerably in the past year. According to the trustees, Medicare's Hospital Insurance Trust Fund is in good shape until 2030 -- that's four years longer than the trustees projected last year -- and 13 years longer than they anticipated the year before the passage of the Affordable Care Act (ACA). 1

 

Officials pointed to the ACA's legislated cutbacks in payments to health care providers as one of the key drivers of the slowdown in Medicare spending. Additionally, they indicated that the post-recession drop in wage and price growth had also contributed to the Medicare spending decline.

 

In the short term, the good news for Medicare recipients is that the premiums charged for Medicare Part B -- the portion of Medicare that pays for doctor visits and outpatient care -- will likely remain at its current monthly rate of $104.90 for a third year in a row. 2

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Sequence of Returns -- A Critical Factor in Shaping Your Retirement Outlook

This article illustrates how the variation of year-to-year investment returns works together with an investor's withdrawal rate and inflation to potentially affect the longevity of a retirement portfolio.

One of the key determinants of retirement income planning is the expected rate of return on your investments. Conventional analysis typically relies on long-term performance averages to gauge a retiree's spending limits. Increasingly, however, planning experts say that for those who are withdrawing from a portfolio, it is not just the average rate of investment return that is important.

 

In fact, the sequence of those returns may be just as, if not more, critical to your portfolio's long-term success. In other words, over time, "average" returns will include both bull markets and bear markets. Yet once withdrawals begin, it is far better to have poor years occur later in retirement than earlier.

 

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Target-Date Funds Will Garner Majority of 401(k) Contributions by 2018

Target-date funds continue to gain ground in the employer-based retirement plan arena. It is estimated that by 2018, they will garner more than 63% of total defined contribution plan participant contributions and account for 35% of total 401(k) plan assets.

 

A new study by Cerulli Associates reported these findings and revealed other key trends influencing target-date funds' popularity. For instance, 84% of plan participants cited the risk management and asset allocation features of the funds as being "very important," while 42% were attracted to target-date funds' built-in diversification qualities.

 

By definition, target-date funds are mutual funds that automatically reset their asset mix of stocks, bonds, and cash equivalents to maintain a risk profile that is appropriate for a particular investor's "target date" for withdrawals, such as retirement.

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Research in Focus: How Much Do You Need to Save for Retirement?

Here is a nice article and video provided by Massi De Santis, PhD of Dimensional Fund Advisors: 

How much should you be saving for retirement? In this client-ready video, Massi De Santis, PhD, explains that the answer should be customized for each individual, based on how their income grows prior to retirement.

Click HERE to watch the video.

More detailed information can be found by clicking on the following title to download: How Much Should I Save for Retirement?

 

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Top Issues Facing Corporate Executives Before They Retire

As a well-paid corporate executive, you might think that shifting into retirement will be a breeze.

But even with enough money to retire, there are concerns facing corporate executives, which can turn that calm breeze into choppy gusts.  For a smoother ride, be prepared to do some planning many years before you retire.

A good place to start your planning before retirement is to calculate how much money you need.  To answer this, look at what your take home pay is and subtract out any current savings. Current savings can consist of contributions to an IRA (Roth IRA), contributions to a taxable investment or savings account or extra principal payments. From this, subtract estimated amounts for additional retirement income such as Social Security, pensions, or rental incomes. This will provide a good idea of what you need on an after tax basis to live on during retirement. Typically, this works out to be 60%-80% of your pre-retirement income. But having enough money to retire is not all there is to it.

One of the biggest issues facing a corporate executive is figuring out what to do with your large position in the company stock or company stock options. Just like any other stock, owning a large position in a single stock is risky business.  It leaves you with an unbalanced portfolio, that’s subject to wild swings.

Look at the standard deviation of your portfolio with and without the large position in the company stock. There are techniques to hedge your large position by using stock options and equity collars. These methods can become complicated and usually require the assistance of an investment professional and accountant.

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401(k) Plan Roundup

401(k) plans have received a lot of press and attention of late. Recent implementation of Department of Labor regulations has resulted in some changes for 401(k) plan participants and plan sponsors.

Here are some recent articles that offer some critiques and issues facing 401(k) plans today.

"Bad behavior persists in 401(k) accounts"
In an April 2013 article, author Linda Stern highlights how many 401(k) participants have missed much of the market rebound since 2009 due to their own ‘emotionally driven’ behavior. The article mentions one positive trend in 401(k) plans since 2009 – the elimination of large stakes in company stock within 401(k) plans. A 401(k) plan can be your largest financial asset and it is crucial that you are receiving the information and advice you need when it comes to your 401(k).
Full article: http://reut.rs/18tNaOG

“Ban ‘active’ fund from 401(k)s, IRAs”
In March 2013, Alicia Munnel of the Center for Retirement Research at Boston College wrote a short article highlighting her position for why ‘Investments in tax-favored accounts should be limited to index funds’. She found that there is not a correlation between the high fees of actively managed funds and higher investment returns. Her position goes so far as to suggest ‘banning actively managed funds from tax favored plans’.
Full article: http://on.mktw.net/12Vcojg

“Cover: Delegation of Duty”
This article delves into the selection and monitoring of a 3(21) or 3(38) fiduciary assigned to a company 401(k) plan. Plan sponsors need to do their homework when outsourcing this important role and have a prudent process in place to select and monitor the plan fiduciary. Recent laws have changed where the responsibility falls and it’s not as easy as signing away the role.
Full article: http://bit.ly/11j9nPe

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I am retiring and I can’t lose money now

The retirement process is very overwhelming for most individuals and couples. Typically you are transitioning from a steady paycheck to depending on accumulated wealth to provide a “retirement paycheck”. Understanding the complete retirement process is crucial to making a smooth transition from the corporate/self-employed world to a long-lasting, sustainable retirement. The retirement process consists of many steps, each of which is important. A summary of three key steps are as follows:

1. Asset Consolidation: Consolidate your accounts as much as possible, simplify the big picture.
2. Quarterly Account Rebalancing: Maintain portfolio diversification and address cash needs for the retirement paycheck
3. Create Retirement Paycheck: Transfer cash generated from quarterly rebalancing to bank account - your retirement paycheck

One of the big myths about retirement is that you simply put your portfolio in safe investments and “live off the interest”. Typically, pre-retirees are referring to bonds when they make this statement. There are two problems with having just bonds. The first is that there is no potential for growth in your portfolio. Each year your living expenses need to increase with inflation, and bonds will not provide any growth to compensate for this. Secondly, there is interest rate risk. If interest rates rise, your portfolio of bonds could decrease in value. The decrease would be a function of the average maturity of the bonds (longer maturity=larger decrease when interest rates rise) and the magnitude of the rise in interest rates.

Another common myth is, to be safe; you would just buy CD’s in your portfolio. This can work but you actually will need to accumulate 33% more before your retire if you want to use this investment strategy because the safe withdrawal rate for a portfolio of CD’s is 3%. Typically, a diversified portfolio of stock & bond mutual funds (ranging from 40% stock funds and 60% bonds to 80% stock funds & 20% bond funds) will provide a safe withdrawal rate of 4% annually. This amount can be increased each year for inflation. For example, if you have accumulated $2M, you can safely withdraw 4% or $80,000 per year with a diversified investment portfolio. If you only have CD’s and money markets, then you need $2,666,666 to withdraw the same $80,000 annually.

In summary, you do need to take some risk but not a lot. The reason you need to take risk is that you need to have some growth in your portfolio to keep up with the increased living expenses each year. As you move to the extremes on each end, meaning really conservative or really aggressive, you increase the probability of running out of money. As you get more aggressive, a couple of bad years in the beginning can derail your retirement. If you chose an extremely conservative portfolio, then you run the risk of not having your portfolio keep up with inflation.

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New 401(k) fee and reporting disclosures have taken effect

Entrepreneurs of Boulder County there are new disclosure rules for retirement plans that make your job tougher. The new rules are in response to lawsuits filed by employees and excessive fees charged by retirement plan service providers, the Department of Labor (DOL) issued new disclosure rules and regulations for 401(k)’s, pension and profit-sharing plans and many 403(b) plans. Many plan participants have seen shrinkage in their retirement plan values, in part due to market volatility and in part due to excessive fees charged by service providers. Over time, excessive fees can have a substantial negative compounding impact on investment results. The resulting regulations to correct these issues, are a three part fee-disclosure regulation set by the DOL.

The first part of the regulations essentially took place in 2009 and primarily focused on government reports, using Schedule C of each retirement plan’s Form 5500 annual report.

The second part of these regulations, effective July 1, 2012, is known as the 408(b)2 regulations and pertains to the service provider fee disclosures. The new regulations apply to all new and existing service provider arrangements, and require the service providers to disclose all compensation, fees, and a detailed description of all services to the plan. The disclosures must also reveal revenue sharing agreements to the provider’s affiliates or subcontractors. This information must be disclosed to the plan fiduciary and the plan sponsor. Plan fiduciaries have always had the obligation to monitor plan expenses under ERISA but now the ultimate oversight and well-being of the plans falls to the plan’s designated fiduciary.

The third part of the DOL’s regulations, known as 404(a)5, took effect on August 31, 2012. The amendments require plan fiduciaries to disclose fee information to plan participants. Most participants will get their first look at the new fee disclosure regulations when they get their third quarter 2012 401(k) statements. The goal of this regulation is greater transparency and standardization in the way fees and expenses are disclosed and reported to plan participants.   

The Advisors AccessTM 408(b)2 bulletin has laid out an action plan for fiduciaries and retirement plan sponsors which is summarized below:

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