2 Minute Read
A question I am asked frequently when discussing retirement; how much should I have saved? Some “experts” claim you need to replace 80% of your pre-retirement income, while other marketing campaigns by financial services companies want us to believe that we need close to $1 million or even more.
The true answer to this question is that it depends. Every situation is different in the following ways:
2 Minute Read
While browsing Yahoo Finance this week, a particular article caught my eye, “Regulators Alarmed by Risky Loans, But Don’t Know Who Holds Them.”
The risky loans these regulators are worried about are called leveraged loans, and prominent voices in finance and economics have been echoing a similar sentiment for the past several years.
Bonds and loans are essentially the same. We as investors can loan our money to a government, bank, or corporation for a period of time, receive a fixed interest rate, and our money back at the end of the term. US government bonds are considered risk free while corporations are given a credit rating based on their financials, just like all of us.
A leveraged loan is a type of loan taken by a company with a low credit rating. If the economy experiences a rough patch, loan defaults could rise, causing losses for their investors. For context, an Oppenheimer mutual fund that invested in risky bonds and loans declined 82% during the 2007-09 financial crisis.
Why then are investors putting their money into these risky loans?
Simply put, investors are “reaching for yield.” Frustrated with only a 2% return on a US government bond, investors are taking on additional risk for higher returns. This “reaching for yield” helped fuel the subprime mortgage crisis that led to the 2007-09 financial crisis.
Quality is really important within investment portfolios, and bonds are meant to be vehicles of capital preservation while providing income and liquidity to investors. Boring yes, but essential to a diversified portfolio, especially for a retiree taking income.
There are no leveraged loans in any Kane Financial managed portfolios. I truly believe bonds should be bonds, and any risk in a portfolio should come from owning shares of a company.
If you have outside investments and you are not sure about the credit quality of the bonds and loans in the portfolio, please contact the office as I’d be glad to review this for you. Investments titled “High Yield, Junk, or Senior Loan” are considered higher risk investments.
Have a great week and please don’t hesitate to contact the office with questions!
2 Minute Read
The Cannabis industry has been experiencing exploding growth as the drug continues to be decriminalized across the US, and its medical uses are expanding into more treatment programs for individuals.
This begs the question, should you invest in this young, but growing industry? I took a deep dive into this question earlier this week through the lens of an Investment Advisor, looking into one of the most popular investments in this space, Alternative Harvest (MJ).
This investment is an index fund made up of roughly 40 publicly traded companies in the cannabis space, here are a few of my observations.
It a certain sense, this reminds me of the 1990s when the internet was first introduced. While there were several companies that rewarded early investors, many others ran out of money and/or didn’t have a sustainable business model. A couple of the most successful companies to come out of the internet era were the ones that were able to adapt and pivot through strong leadership. Amazon started out selling books online, while Netflix was shipping DVDs to customers through the mail.
While several of these companies could turn out to be good investments, I would shy away from investing in high demand, new industries, and companies without track records of sustained earnings and profits. There is just so much risk associated with these companies, I would prefer to stick with the companies in the S&P 500.
I hope this is helpful, as always if you have any questions please don’t hesitate to contact me at the office. Have a great weekend!
3 Minute Read
When you retire or leave your place of employment, you have the option to leave your money in your company plan, or roll the money to an IRA.
The IRA can provide several benefits including more investment options, professional management, personalized service, and added flexibility of systematic distributions during retirement. It can also help to create clarity and simplicity by consolidating retirement assets together in one place, incorporated with a comprehensive financial plan.
The process to roll the money from a company plan to an IRA requires thoughtful analysis. Here are several items to consider to ensure the rollover is done properly, and tax efficiently.
First and foremost, make sure your company has your correct vesting amount. Vesting is your ownership in company contributions and earnings. Many companies require you to be employed at least half-time for 6 years to be fully vested in the contributions they have made to your account. Vesting records are many times not accurate, and updated infrequently so be sure your record is correct, and you receive all of the money you are entitled to receive.
Before the Roth was introduced, employees were able to make after-tax contributions to their retirement accounts. These after-tax contributions can either go to you in a check, or you can roll them into a Roth IRA. The Roth IRA will allow tax-free earnings going forward while and you retain the ability to take the contributions out of the Roth at anytime tax and penalty free.
Net Unrealized Appreciation
If you have highly appreciated company stock, you can transfer that stock into a brokerage account instead of an IRA and pay taxes on the basis. Why would you want do this? When you sell the stock, the appreciation will be taxed at capital gains rates instead of ordinary income rates, potentially saving significant tax dollars upon sale and distribution.
Many company plans will send the rollover check directly to you. When you request the distribution, be sure to indicate you are requesting a “Direct Rollover” and the check to be made payable to “IRA Custodian For the Benefit Of Your Name.” Ask that the check be sent expedited delivery so the money is out of the investment markets for the shortest time possible.
Avoid Indirect Rollovers
These are instances where the funds are paid out directly to you, fully taxable, and you have 60 days to get the money into another retirement account. These types of transfers are filled with potential tax and penalty landmines. Always opt for Direct Transfers and Direct Rollovers when moving retirement money between accounts. You can always take a cash distribution later, if needed, directly from an IRA.
Finally, the age in which you do the rollover is an important consideration. If you are between the ages of 55 and 59.5, it could make sense to at least keep some money in the company plan. Distributions from a company plan are penalty free at age 55 when separated from the company. For IRAs, distributions prior to age 59.5 incur a 10% penalty.
If you are working past age 70.5, you can delay Required Minimum Distributions (RMDs) from your company plan if you are employed for the entire year through December 31st. Retire even one day prior, and you are required to take that RMD for the entire year.
Thoughtful planning around rolling money from a company plan to an IRA can truly add value in retirement planning.
2 Minute Read
In a 417 to 3 vote, the “Setting Every Community Up for Retirement Enhancement” or SECURE Act has passed the House, and is heading to the Senate for vote. Here is a brief rundown of the bill’s major provisions along with some thoughts.
In summary, this legislation really just provides insurance companies better access to the $5 trillion dollar 401k market, at the expense of the Inherited IRA.
If this legislation passes, here are a couple of items for consideration:
If you are currently saving in a retirement plan and do not need the tax breaks of Pre-tax contributions, Roth contributions going forward could make sense. I would also review the fees inside of your 401k if your company moves to an annuity platform.
If you are retired, I would discuss Roth conversions with your accountant to see if it makes sense to gradually move money from Pre-tax to Roth over the course of several years.
Permanent life insurance to cover future tax liabilities will once again be a planning item. This type of life insurance was minimalized when the estate tax cap was increased to over $11M. Now it will come back into play, except this time for middle class America.
I hope this is helpful, as always if you have any questions please don’t hesitate to contact me at the office. Have a great holiday weekend!