December Retirement Plan Newsletter 2019

December Retirement Plan Newsletter 2019

 

LUTZ BUSINESS INSIGHTS

 

DECEMBER RETIREMENT PLAN NEWSLETTER

THE BENEFITS OF MATCHING RETIREMENT CONTRIBUTIONS

As the unemployment rate has dropped, hiring has grown increasingly competitive – especially for businesses with highly-specialized positions. It’s important to understand how retirement matches factor into the hiring process and how they can financially benefit your company. Here are a few reasons why offering a retirement match helps your business.

Competitive Hiring

If you don’t offer a retirement match, chances are your competitors do, meaning it’s more difficult to attract top talent. A full benefits package that includes a retirement match may prevent you from paying top dollar to win candidates who might consider a job offer from your competitors.

Reduced Turnover

In order to reap the largest rewards attached to a retirement plan match, employees often must work for a particular period of time, known as vesting1. This timeframe encourages employees to stay and maximize their contributions to receive the best benefits. Since replacing a departing worker is expensive2, reduced turnover brings cost savings.

Tax Savings

Your finance department will love the savings received at tax time from your retirement plan match. Businesses can deduct every dollar they contribute toward employee retirement plans in addition to the tax savings employees reap for participating. Small and mid-sized business may also be able to deduct their retirement plan startup costs under the Credit for Small Employment Pension Plans Startup Costs3.

Future Compliance

In most states, businesses aren’t required to offer retirement plans for their employees, but that is changing. Seven states4 now have a government-mandated retirement option in place for residents, and in Oregon and Illinois5, employers are required to enroll their workers in a plan. By having an employer-matched retirement plan in place, your business will be prepared if a mandate impacts your workplace.

By understanding the benefits of a retirement plan match, your business can make informed decisions and save money. For further questions about matching or other questions relating to retirement plans, contact your plan advisor.

 

1. https://money.cnn.com/retirement/guide/401k_basics.moneymag/index10.htm

2. https://www.peoplekeep.com/blog/bid/312123/Employee-Retention-The-Real-Cost-of-Losing-an-Employee

3. https://www.irs.gov/retirement-plans/retirement-plans-startup-costs-tax-credit

4. https://primepay.com/blog/state-retirement-plans-now-mandatory-7-states

5. https://www.forbes.com/sites/ashleaebeling/2016/09/13/when-will-new-state-retirement-plans-start-enrollment/#7905e2f57e0f

THE MORE YOU KNOW: AUTOMATIC ENROLLMENT NOTICES

 Many retirement plans today provide automatic enrollment for employees, meaning the plan sponsor initiates enrollment into the retirement plan on behalf of the employee. One common question plan sponsors come across is whether their enrollment kit satisfies the annual automatic enrollment notice requirement.

At first glance, it may seem that enrollment kits contain all the necessary information to satisfy your obligation to provide an annual notice of your plan’s automatic enrollment feature, however the notice must include the following information:

  1. The default contribution rate that will apply if the participant does not make an affirmative deferral election.
  2. The employee’s right to elect not to have the default rate apply, or to elect a different contribution rate.
  3. How default contributions will be invested absent an investment election by the participant.
  4. The notice must be provided before each plan year.

Do you expect to send out enrollment kits to all covered employees before the beginning of each plan year? Since most plans merely provide an enrollment kit at the time an employee first becomes eligible to participate, the enrollment kit will not likely satisfy the annual notice requirement.

For more information on automatic enrollment notification requirements, contact your plan advisor.

TOP TEN FIDUCIARY RESPONSIBILITIES

A plan fiduciary plays an important role in the organization’s financial health. Not only do they oversee the fiduciary process, but they identify and serve the best interests of a retirement plan’s participants and beneficiaries. Here are 10 important responsibilities to keep in mind.

  1. Limit liability: As a fiduciary, it is imperative that you understand ERISA so you can keep yourself and your business safe from liability.
  2. Find the right plan provider: Finding a retirement plan provider is much more complicated than many realize.
  3. Keep costs low: No matter how big your business’s budget, always monitor fees to ensure you are getting the best deal.
  4. Oversee plan performance: Once a retirement plan is in place, continuously monitor its performance.
  5. Educate plan participants: Regardless of position and hierarchy, employees may come to you asking about plan options. What should you say?
  6. Stay informed: Your role is to know more about your business’s retirement savings plan than everyone else, so education is vital.
  7. Avoid personal gain: As a fiduciary, it’s important to distance yourself from any situation that could be perceived as personal gain from the retirement plan.
  8. Diversify investments: The investment options offered in your plan should be diversified. This limits financial risk and helps balance risks and rewards.
  9. Monitor participant satisfaction: Evaluate employee satisfaction with the plan. Follow up on complaints, and regularly gauge the plan needs to determine the right time for change.
  10. Ensure employees understand their options and monitor their satisfaction levels.
PARTICIPANT CORNER: INCREASING YOUR RETIREMENT DOLLARS

1. Don’t Cash Out Retirement Plans When Changing Employment

When you leave a job, the vested benefits in your retirement plan are an enticing source of money. It may be difficult to resist the urge to take that money as cash, particularly if retirement is many years away. If you do decide to cash out, understand that you will very likely be required to pay federal income taxes, state income taxes, and a 10 percent penalty if under age 59½. This can cut into your investments significantly and negatively impact your retirement savings goals! In California, for example, with an estimated 8 percent state income tax, someone in the 28 percent federal tax bracket would lose 46 percent of the amount withdrawn. When changing jobs, you generally have three options to keep your retirement money invested – you can leave the money in your previous employer’s plan, roll it over into an IRA, or transfer the money to your new employer’s plan.

 

2. Take Your Time: Give Your Money More Time to Accumulate 

When you give your money more time to accumulate, the earnings on your investments, and the annual compounding of those earnings can make a big difference in your final return. Consider a hypothetical investor named Chris who saved $2,000 per year for a little over eight years. Continuing to grow at 8 percent for the next 31 years, the value of the account grew to $279,781. Contrast that example with Pat, who put off saving for retirement for eight years, began to save a little in the ninth and religiously saved $2,000 per year for the next 31 years. He also earned 8 percent on his savings throughout. What is Pat’s account value at the end of 40 years? Pat ended up with the same $279,781 that Chris had accumulated, but Pat invested $63,138 to get there and Chris invested only $16,862!

 

3. Don’t Rely on Other Income Sources, and Don’t Count on Social Security

While politicians may talk about Social Security being protected, for anyone 50 or under it’s likely that the program will be different from its current form by the time you retire. According to the Social Security Administration, Social Security benefits represent about 34 percent of income for Americans over the age of 65. The remaining income comes predominately from pensions and investments. They also state that by 2035, the number of Americans 65 and older will increase from approximately 48 million today to over 79 million. While the dollars-and-cents result of this growth is hard to determine, it is clear that investing for retirement is a prudent course of action.

 

4. Consider Hiring a Financial Advisor!

Historically, investors with a financial advisor have tended to “stay the course”, employing a long-term investment strategy and avoiding overreaction to short-term market fluctuations. A financial advisor also can help you determine your risk tolerance and assist you in selecting the investments that suit your financial needs at every stage of your life.

For more information on retirement tips, contact your plan advisor.

DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Lutz Financial (“Lutz”), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Lutz.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Lutz is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.  A copy of the Lutz’s current written disclosure Brochure discussing our advisory services and fees is available upon request. Please Note: If you are a Lutz client, please remember to contact Lutz, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Lutz shall continue to rely on the accuracy of information that you have provided.

For more important disclosure information, click here.

RECENT LUTZ FINANCIAL POSTS

New IRS Indexed Limits for 2020

New IRS Indexed Limits for 2020

The Internal Revenue Service today announced that employees in 401(k) plans will be able to contribute up to $19,500 next year. The IRS announced this and other changes in Notice 2019-59 (PDF)…

read more

Toll-Free: 866.577.0780  |  Privacy Policy

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OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

601 P Street, Suite 103

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850

New IRS Indexed Limits for 2020

New IRS Indexed Limits for 2020

 

LUTZ BUSINESS INSIGHTS

 

new irs indexed limits for 2020

 

WASHINGTON — The Internal Revenue Service today announced that employees in 401(k) plans will be able to contribute up to $19,500 next year. The IRS announced this and other changes in Notice 2019-59 (PDF), posted today on IRS.gov. This guidance provides cost of living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2020.

Share this valuable information with your clients. Download a communication to send to your clients and memo for your clients to send to their participants in the Advisor Portal Resource Center > Fiduciary Compliance & Plan Design > Plan Limits folder.      

 

ITEM

2020

2019

2018

401(k), 403(b), 457 Elective Deferral Limit

$19,500

$19,000

$18,500

Catch-Up Contribution Limit (age 50 or older)

$6,500

$6,000

$6,000

Annual Compensation Limit

$285,000

$280,000

$275,000

Defined Contribution Limit

$57,000

$56,000

$55,000

Defined Benefit Limit

$230,000

$225,000

$220,000

Definition of Highly Compensated Employee

$130,000

$125,000

$120,000

Key Employee

$185,000

$180,000

$175,000

IRA Contribution Limit

$6,000

$6,000

$5,500

IRA Catch-Up Contributions (age 50 and older)

$1,000

$1,000

$1,000

 

HIGHLIGHTS OF CHANGES FOR 2020

The contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $19,000 to $19,500.

The income ranges for determining eligibility to make deductible contributions to traditional Individual Retirement Arrangements (IRAs), to contribute to Roth IRAs and to claim the saver’s credit all increased for 2020.

Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. If during the year either the taxpayer or their spouse was covered by a retirement plan at work, the deduction may be reduced, or phased out, until it is eliminated, depending on filing status and income. (If neither the taxpayer nor their spouse is covered by a retirement plan at work, the phase-outs of the deduction do not apply.) Here are the phase-out ranges for 2020:

  • For single taxpayers covered by a workplace retirement plan, the phase-out range is $65,000 to $75,000, up from $64,000 to $74,000.
  • For married couples filing jointly, where the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is $104,000 to $124,000, up from $103,000 to $123,000.
  • For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $196,000 and $206,000, up from $193,000 and $203,000.
  • For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

The income phase-out range for taxpayers making contributions to a Roth IRA is $124,000 to $139,000 for singles and heads of household, up from $$122,000 to $137,000. For married couples filing jointly, the income phase-out range is $196,000 to $206,000, up from $193,000 to $203,000. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

The income limit for the Saver’s Credit (also known as the Retirement Savings Contributions Credit) for low- and moderate-income workers is $65,000 for married couples filing jointly, up from $64,000; $48,750 for heads of household, up from $48,000; and $32,500 for singles and married individuals filing separately, up from $32,000.

 

KEY LIMIT REMAINS UNCHANGED

The limit on annual contributions to an IRA remains unchanged at $6,000. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.

Details on these and other retirement-related cost-of-living adjustments for 2020 are in Notice 2019-59 (PDF), available on IRS.gov.

Important Disclosure Information

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Lutz Financial), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Lutz Financial.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Lutz Financial is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.  A copy of the Lutz Financial’s current written disclosure statement discussing our advisory services and fees is available upon request.

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OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

601 P Street, Suite 103

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850

December Retirement Plan Newsletter 2019

November Retirement Plan Newsletter 2019

 

LUTZ BUSINESS INSIGHTS

 

NOVEMBER RETIREMENT PLAN NEWSLETTER

KEEPING IN COMPLIANCE: IRS TIPS FOR PLAN SPONSORS

As an employer, you’re responsible for keeping your company’s retirement plan in compliance at all times. Additionally, your plan document should be reviewed on an annual basis and administered accordingly. The IRS offers useful tips for plan sponsors, helping you to stay compliant, informed and prepared to provide the best possible retirement plan for your employees – here are some highlights.

It’s very important to understand and verify your adoption agreement options. For pre-approved plans, you may have an adoption agreement that supplements the basic plan document and lists features that may be selected. Understanding this document is critical – and you should very specifically understand and comprehend what it says about plan eligibility, types and limits of contributions, how contributions are divided among plan participants, as well as vesting and paying benefits.

Learn everything you can about your service agreement. As a plan sponsor, it’s important to understand what your service agreement does and does not cover. For administrative tasks, it’s imperative to know who will perform these – and to make sure that person has the information they need in order to perform the following:

  • Administer the terms for enrollment, contribution and distribution of funds.
  • Give mandatory plan notices to participants.
  • Determine any testing that’s required and carry it out in a timely manner.
  • Perform all required recordkeeping properly.
  • Review the plan document for any legal changes and make updates as needed.
  • Make all required filings to the IRS and Department of Labor

Communicate with your pre-approved plan provider. Notify your provider if you make any changes with respect to your business, employees or compensation – or if you need to make changes to your plan’s terms. In addition, it’s important that you:

  • Understand all fees that will be charged by the plan provider.
  • Retain the IRS issued opinion or advisory letter for your pre-approved plan.
  • Promptly sign any plan amendments from your plan provider.

Maintain open communication with your plan service provider regarding the following. Advise your provider about any changes in employee status, new hires, terminations and compensation as well as:

  • Accurate census data for determining plan eligibility and benefit payments.
  • Terms for defining employee contributions, payments and loans.
  • Any amendments to the plan (e.g., loan or hardship provisions, contributions or allocation formulas).

Stay on top of your plan maintenance requirements. Review all reports, including the allocation report for potential contribution errors and the distribution report to verify that participants have started their minimum required distributions and consented to these payments. Monitor that all loans are made in accordance with the terms of the plan, and that payments are made in a timely fashion. Document your actions with respect to defaulted loans and retain all documentation for hardship withdrawals. The IRS also recommends an independent review of your plan.

View the full IRS document at the link here (https://www.irs.gov/retirement-plans/plan-sponsor/a-plan-sponsors-responsibilities) – or for further questions relating to your specific plan, consult your plan advisor.

THE TOP THREE REASONS TO OUTSOURCE FIDUCIARY SERVICES

Many companies are outsourcing more and more activities, mainly because outsourcing can provide cost savings and increase productivity. Outsourcing allows companies to focus more on their core businesses, rather than spending time on areas outside their expertise. For retirement plan sponsors, outsourcing services makes sense for these reasons as well as others.

Reduced Risks.

As a plan sponsor, you and your company are plan fiduciaries, and can be held legally responsible for the plan’s administration and performance. Many sponsors outsource some or most responsibility. A 3(21) investment fiduciary assumes part of the risk, functioning as a co-fiduciary that provide prudent and objective advice. A 3(38) investment fiduciary accepts total responsibility and the lion’s share of potential liability for selecting, monitoring and replacing investment options, which helps the plan sponsor manage the risk of legal action concerning investment decisions. A true 3(16) outsourcing of the plan administrator role means offloading not only the day-to-day mechanics of plan administration, but the ultimate fiduciary responsibilities attendant thereto. That said, when plan sponsors contemplate outsourced 3(16) services they need to dive in deep in contract review to understand what is actually being outsourced and what might remain in their hands.

Increased Objectivity.

 Independent third-party plan administration and fiduciary services help your retirement plan by managing conflicts of interest, biases or self-interest. As set out in the Employee Retirement Income Security Act of 1974 (ERISA), both 3(21) and 3(38) investment fiduciaries, as well as 3(16) plan administrators, are required to act solely in the interest of plan participants and must act prudently when making decisions about, or administering, the plan. These actions provide plan sponsors and plan participants with a greater level of risk management and confidence in the retirement plan.

Increased Service Level.

Typically, a third-party plan administrator or fiduciary can devote much more time and attention to the support of your retirement plan than can employees. Employees often ‘squeeze in’ plan-related tasks around their regular duties, and may lack the skills, training and resources that an outsourced provider offers.

BEAT RISING HEALTHCARE COSTS WITH A FINANCIAL WELLNESS PROGRAM

Healthcare costs are on the rise, and employers expect double-digit growth in the next decade. As a result, there’s a growing trend toward financial wellness programs included with employee benefits, as this both benefits employees and minimizes a company’s fiduciary risk. In addition to these growing trends, workers are beginning to look for the during job searches.

If your business doesn’t invest in financial wellness for your team, you may find it difficult to attract and retain the best employees. For fiduciaries, this is a great time to conduct in-depth research about financial wellness programs and recommend the best one to your employer. Considering starting a financial wellness program? Here are a few things to consider before starting a program of your own.

Financial Education. Financial education is nothing new in the business world. For decades employers have invested in seminars and workshops to assist employees with their financial health. The new era of financial wellness goes beyond traditional training classes for budgeting, paying off debt and amassing an emergency fund. It emphasizes the need for your employees to not only plan for retirement but enjoy financial health prior, thus developing happy, loyal and productive workers.

Wellness Assessment Check-Ups. Traditional financial workplace training typically lacks follow-up. Newer wellness programs include regular assessments, where participants review the progress they’ve made on each of their goals. Afterwards, employees possess the data needed to create a roadmap for future financial plans. It’s important for employers to tailor educational programs to the unique needs of their employees, guaranteeing everyone receives appropriate advice and assistance.

PARTICIPANT CORNER: THREE TAX TIPS THAT CAN HELP AS YOU APPROACH OR BEGIN RETIREMENT

Retirement is a whole new phase of life. You’ll experience many new things, and you’ll leave others behind – but what you won’t avoid is taxes. If you’ve followed the advice of retirement plan consultants, you’re probably saving in tax-advantaged retirement accounts. These types of accounts defer taxes until withdrawal, and you’ll probably withdraw funds in retirement. Also, you may have to pay taxes on other types of income – Social Security, pension payments, or salary from a part-time job. With that in mind, it makes sense for you to develop a retirement income strategy.

Consider when to start taking Social Security. The longer you wait to begin your benefits (up to age 70), the greater your benefits will be. Remember, though, that currently up to 85 percent of your Social Security income is considered taxable if your income is over $34,000 each year.

Be cognizant of what tax bracket you fall into. You may be in a lower tax bracket in retirement, so you’ll want to monitor your income levels (Social Security, pensions, annuity payments) and any withdrawals to make sure you don’t take out so much that you get bumped into a higher bracket.

Think about your withdrawal sequence. Generally speaking, you should take withdrawals in the following order:

  • Start with your required minimum distributions (RMDs) from retirement accounts. You’re required to take these after all.
  • Since you’re paying taxes on taxable accounts, make this the second fund you withdraw from.
  • Withdraw from tax-deferred retirement accounts like IRAs, 401(k)s, or 403(b)s third. You’ll pay income tax on withdrawals, but do this before touching Roth accounts.
  • Lastly, withdraw from tax-exempt retirement accounts like Roth IRAs or 401(k)s. Saving these accounts for last makes sense, as you can take withdrawals without tax penalties. These accounts can also be used for estate planning.

These factors are complex, and you may want to consult a tax professional to help you apply these tips to your own financial situation. You can test different strategies and see which ones can help you minimize the taxes you’ll pay on your savings and benefits.

DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Lutz Financial (“Lutz”), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Lutz.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Lutz is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.  A copy of the Lutz’s current written disclosure Brochure discussing our advisory services and fees is available upon request. Please Note: If you are a Lutz client, please remember to contact Lutz, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Lutz shall continue to rely on the accuracy of information that you have provided.

For more important disclosure information, click here.

RECENT LUTZ FINANCIAL POSTS

New IRS Indexed Limits for 2020

New IRS Indexed Limits for 2020

The Internal Revenue Service today announced that employees in 401(k) plans will be able to contribute up to $19,500 next year. The IRS announced this and other changes in Notice 2019-59 (PDF)…

read more

Toll-Free: 866.577.0780  |  Privacy Policy

All content © Lutz & Company, PC

 

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

601 P Street, Suite 103

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850

Are We Headed for a Recession?

Are We Headed for a Recession?

 

LUTZ BUSINESS INSIGHTS

 

Are we headed for a recession?

josh jenkins, cfa, senior portfolio manager & head of research

 

Each morning I craft a Market Update email that I share with our advisors. This email provides commentary on what is happening in the markets and the economy. It includes data related to asset class performance and economic indicators, and links to some top stories that I think are interesting and relevant.

As I review the daily news flow, I consistently come across articles that suggest we are entering a recession. It’s not surprising the financial media focuses on this topic. Their business model is reliant on attracting eyeballs for advertisers. Nobody is going to click on an article titled “We Don’t Know Why This Happened, and it’s Not Important.” Fear sells. You get people’s attention when you tell them the economy is heading for ruin and it’s taking investors down with it.

In light of the barrage of negativity in the financial news, we frequently field questions from our clients related to recessions. “Is one coming? If so, when? And what does this mean for my investments?” One of these questions can be answered with a level of certainty. The other two cannot. I’ll address each question below.

Is a Recession Coming?

Yes, a recession is coming. We know this to be true with some level of certainty. The economy is cyclical, oscillating between periods of expansion and contraction.

The table below illustrates the 15 recessions the U.S. economy has endured over the last (roughly) 100 years. On average, they have lasted one year and two months. They have been as short as seven months (the early 1980s) and as long as three years and eight months (the Great Depression).

Source: FRED Database. Recession indicators calculated by NBER based on peak through trough. Data from February 1926 through August 2019.

The table also illustrates the average expansionary period has lasted five years and three months. Frequently referred to as “bull markets,” the expansions have varied widely in length. They have been as short as eleven months, and as long as ten years (and still going).

Despite the variation among the bull markets, they do share one common trait. At a certain point, every one of them eventually came to an end. One hundred years of data suggests the current expansion will meet the same fate as those that preceded it.

When Will the Recession Begin?

While it is easy to understand that a recession will come, it is much more challenging to accurately predict WHEN it will happen. A few pundits, economists, or investors may correctly foreshadow a large downturn, but it is seldom the same group from one episode to the next. There is little evidence that it is possible to consistently anticipate change in a system as large and complex as the economy or stock market. A common industry tactic is to call for a recession one to two years down the road. Eventually, they’ll be proven right! But how long are they wrong before that happens? Sitting on the sidelines during an upmarket carries a high opportunity cost.

We have already discussed the media’s pension for alarming headlines. As we pulled out of the last recession, they wasted no time speculating on the next one:

  1. “Dr. Doom Sees Double-Dip Recession Risk, in Remarks Down Under” (WSJ, 8/3/2009)
  2. “Double-Dip Recession Fears Creep Back Into the Market” (CNBC, 2/25/2010)
  3. “On the Verge of a Double-Dip Recession” (NY Times, 9/7/2011)
  4. “Earnings Show Recession May be ‘Fast Approaching’” (CNBC, 7/22/2012)
  5. “U.S. Recession is Nigh… and the Fed Can’t Stop It: SocGen’s Edwards” (CNBC, 11/28/2013)
  6. “Can The Fed Stop The Next Recession? Business Can’t Bank On It” (Forbes, 2/23/2014)
  7. “It’s Time to Start Talking About a U.S. Recession” (Business Insider, 10/11/2015)
  8. “A Recession Worse Than 2008 is Coming” (CNBC, 1/15/2016)
  9. “U.S. Heading for Recession After 2 Years of Unsustainable Growth, Economist Says” (CNBC, 3/28/17)
  10. “Another Warning that a 2019 Recession is Coming” (Forbes, 12/17/2018)
  11. “Parts of America May Already Be Facing Recession” (The Economist, 8/31/2019)

Despite the bad news prompted these stories, both the economy and stocks continued their ascent:

 

Source: FRED Database and Morningstar Direct. The stock market is based on the growth of $10,000 invested in the S&P 500 TR Index. The Economy is based on the Bureau of Economic Analysis’ Real GDP in Billions of 2012 Chained dollars. Data from July 2009 through June 2019.

Earlier this year the current bull market became the longest on record, surpassing the nearly ten-year expansion that spanned the 1990s. The record has sparked a commonly held view the expansion cannot keep going, simply because one has never lasted this long before. On the surface, this view makes sense, but it ignores a critical variable. It considers the length of time the economy has been expanding but overlooks the rate of change. 

 

Source: FRED Database. The Length of bull markets was calculated with the NBER based on peak through trough recession indicators. Start and end dates were rounded to the nearest quarter. GDP is based on the Bureau of Economic Analysis’ Real GDP in Billions of 2012 Chained dollars. Data from Jan 1947 to June 2019.

As it turns out, the economy has been growing at a much slower pace than in past expansions. In fact, it has not even cracked the top three in terms of cumulative GDP growth. This steady pace could suggest the economy has more room to grow before the imbalances that contribute to a recession begin to form.

How Will a Recession Impact My Investments?

What if I told you that I knew with certainty which month the recession would begin? How much do you think you could profit from this knowledge? I think the typical investor would expect to improve their investment returns dramatically with this information. After all, stock prices plummet during recessions, right? A review of history shows us that reality is not that simple. You may be surprised to see equity returns were positive during eight of the last fifteen recessions, and the median return during these episodes was +4.1%!

 

Source: FRED Database and Morningstar Direct. Recession indicators calculated by NBER based on peak through trough. Stock market returns were calculated using the IA SBBI Large Cap Index. Data from February 1926 through August 2019.

It is important to understand that the stock market is a discounting mechanism. Stock prices represent an aggregation of all current information, as well as expectations about the future. As a result, market returns can and will deviate from the real economy.

Amid substantial economic growth, the market may anticipate there is trouble ahead, leading to lower prices before any actual contraction in economic activity occurs. Conversely, during the depths of a recession, the market may anticipate better times ahead, leading to higher prices prior to the resumption of growth.  In the case of a mild economic downturn, the market may assess that the long-term prospects for businesses may not be so impaired that a large (or any) devaluation is necessary.

While recessions share common features, no two are exactly alike. The playbook that was successful during the last contraction may not work the next time. Selling out at the onset may have allowed you to avoid some pretty severe drawdowns, but it also would have caused you to miss out on significant gains.

A third of the recessions in the above table coincided with the stock market generating double-digit returns. This is illustrative of why market timing is so hard. Not only must you accurately foresee the event, but you must also correctly gauge the market’s reaction to the event. You then need to time your entry back into the market successfully. It does you no good to sell your investments ahead of a 20% drawdown, to then miss out on a subsequent 30% recovery.

Preparation is Key

It is critical for investors to prepare for the next recession. Preparation, however, may not entail what you think. It has nothing to do with forecasting when a recession will hit or standing ready to sell out of your investments ahead of the next big drawdown. Preparation means sitting down with a financial advisor, mapping out your goals, and devising a plan you can stick to.

At Lutz Financial, we believe the best approach is to hold a low cost and well-diversified portfolio that is appropriately calibrated to your goals and risk tolerance. The beauty of this approach is you don’t have to play any guessing games. Although your investments will experience volatility from time to time, you can take comfort in knowing it can weather the storm. While we don’t know when it will begin, the next recession is inevitable. Are you prepared?

 

 

IMPORTANT DISCLOSURE INFORMATION
PLEASE REMEMBER THAT PAST PERFORMANCE MAY NOT BE INDICATIVE OF FUTURE RESULTS.  DIFFERENT TYPES OF INVESTMENTS INVOLVE VARYING DEGREES OF RISK, AND THERE CAN BE NO ASSURANCE THAT THE FUTURE PERFORMANCE OF ANY SPECIFIC INVESTMENT, INVESTMENT STRATEGY, OR PRODUCT (INCLUDING THE INVESTMENTS AND/OR INVESTMENT STRATEGIES RECOMMENDED OR UNDERTAKEN BY LUTZ FINANCIAL), OR ANY NON-INVESTMENT RELATED CONTENT, MADE REFERENCE TO DIRECTLY OR INDIRECTLY IN THIS NEWSLETTER WILL BE PROFITABLE, EQUAL ANY CORRESPONDING INDICATED HISTORICAL PERFORMANCE LEVEL(S), BE SUITABLE FOR YOUR PORTFOLIO OR INDIVIDUAL SITUATION, OR PROVE SUCCESSFUL.  DUE TO VARIOUS FACTORS, INCLUDING CHANGING MARKET CONDITIONS AND/OR APPLICABLE LAWS, THE CONTENT MAY NO LONGER BE REFLECTIVE OF CURRENT OPINIONS OR POSITIONS.  MOREOVER, YOU SHOULD NOT ASSUME THAT ANY DISCUSSION OR INFORMATION CONTAINED IN THIS NEWSLETTER SERVES AS THE RECEIPT OF, OR AS A SUBSTITUTE FOR, PERSONALIZED INVESTMENT ADVICE FROM LUTZ FINANCIAL.  TO THE EXTENT THAT A READER HAS ANY QUESTIONS REGARDING THE APPLICABILITY OF ANY SPECIFIC ISSUE DISCUSSED ABOVE TO HIS/HER INDIVIDUAL SITUATION, HE/SHE IS ENCOURAGED TO CONSULT WITH THE PROFESSIONAL ADVISOR OF HIS/HER CHOOSING.  LUTZ FINANCIAL IS NEITHER A LAW FIRM NOR A CERTIFIED PUBLIC ACCOUNTING FIRM AND NO PORTION OF THE NEWSLETTER CONTENT SHOULD BE CONSTRUED AS LEGAL OR ACCOUNTING ADVICE.  A COPY OF LUTZ FINANCIAL’S CURRENT WRITTEN DISCLOSURE STATEMENT DISCUSSING OUR ADVISORY SERVICES AND FEES IS AVAILABLE UPON REQUEST.

ABOUT THE AUTHOR

402.763.2967

jjenkins@lutz.us

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JOSH JENKINS, CFA + SENIOR PORTFOLIO MANAGER & HEAD OF RESEARCH

Josh Jenkins is a Senior Portfolio Manager & Head of Research at Lutz Financial with over nine years of investment experience. He is responsible for assisting clients in the construction, selection, and risk assessment of their investment portfolios. In addition, Josh will provide on-going research and trade support.

AREAS OF FOCUS
  • Asset Allocation & Portfolio Management
  • Investment & Market Research
  • Trading
AFFILIATIONS AND CREDENTIALS
  • Chartered Financial Analyst (CFA)
  • Chartered Financial Analyst Institute, Member
  • Chartered Financial Analyst Society of Nebraska, Member
EDUCATIONAL BACKGROUND
  • BSBA, University of Nebraska, Lincoln, NE

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December Retirement Plan Newsletter 2019

October Retirement Plan Newsletter 2019

 

LUTZ BUSINESS INSIGHTS

 

OCTOBER RETIREMENT PLAN NEWSLETTER

3(38) OR 3(21): WHICH FIDUCIARY SERVICE IS RIGHT FOR YOU?

Looking to reduce your fiduciary risk as a plan sponsor? A little outside help can yield big reductions in risk, provide the best for the people on your company’s payroll, and help you feel good about your qualified retirement plan. Remember though, what’s good for the plan participants isn’t always best for the company – and as the plan sponsor, the company takes on substantial legal and financial liabilities. If you’re listed as the plan administrator, some of those liabilities accrue to you as well. Best practices suggests that any plan sponsor who doesn’t possess the technical knowledge and experience to manage investments consider hiring an advisor – and your choice of advisor can significantly lower your fiduciary risk.

Why hire a fiduciary?

Hiring an outside fiduciary can reduce some or most of that liability by putting the plan in the hands of a professional that affirmatively accepts fiduciary responsibility in section 3(21) and 3(38) of the Employee Retirement Income Security Act of 1974 (ERISA). These 3(21) and 3(38) fiduciaries are not stockbrokers; instead of taking commissions on investments purchased for your plan, they’re compensated by a stated fee. This helps reduce potential conflicts of interest in constructing and managing your plan’s investments.

What’s the difference between a 3(38) Fiduciary and a 3(21) Fiduciary?

There are two types of fiduciaries recognized under ERISA standards. A 3(21) fiduciary advises and makes recommendations, but as the plan sponsor still have ultimate responsibility for the legal operation of the plan and making plan-level investment choices. A 3(38) fiduciary takes over management of plan investments, makes investment choices, executes investments and monitors their performance. The 3(38) advisor is solely authorized to make (and is responsible for) those decisions. Because they have this responsibility, they can often be in a position to act more quickly in terms of making any changes to the plan, since such decisions need not go through the plan sponsor’s committee for any approval process. A 3(38) fiduciary may also be advantageous for smaller firms with fewer resources in their benefits department. Hiring a 3(21) fiduciary relieves the plan sponsor of part of the labor and part of the investment fiduciary responsibility, and provides the plan fiduciary a professional opinion in decision-making. A 3(38) fiduciary relieves the vast majority of the labor and almost all of the responsibilities. In short, whereas a 3(21) fiduciary advises and assists; a 3(38) fiduciary can function in a broader role for plan sponsors.

Remember – even if you hire a fiduciary, you’re still involved.

With a 3(38) fiduciary, the sponsor is still required to provide oversight of the fiduciary. Also, hiring a 3(38) fiduciary doesn’t relieve the sponsor from liability for poor investment decisions made by participants. However, ERISA Section 404(c) does create a “safe harbor” for plan sponsors if they meet specific requirements that include stipulations regarding investment selection, plan administration and certain disclosures.

What about Full Service Fiduciaries?

Firms that offer both 3(21) and 3(38) fiduciary services may also provide professional investment advice through staff or partnerships along with educational services to help meet the section 404(c) safe harbor standards. With the help of these outside professionals, you can lower your fiduciary risk by doing right by your employees while addressing all applicable regulations.

For more information about hiring a fiduciary, or questions regarding 3(21) or 3(38) fiduciaries reach out to your plan advisor.

THE IMPACT OF AUTO-ENROLLMENT INTO RETIREMENT PLANS

Americans are saving more for retirement, according to a survey released by the Plan Sponsor Council of America.1 In fact, employees put 6.8 percent of their paychecks into 401(k) and profit-sharing plans in 2018 compared to 6.2 percent of their salaries in 2010. Why the increase? One reason may be that 57.5 percent of retirement plan sponsors have included an automatic enrollment feature in their plans.

An automatic enrollment feature in a retirement plan allows employers to enroll eligible employees in their retirement plans unless the employee chooses to opt out of the plan. It’s often used for 401(k) plans, but can also be included in 403(b) plans, 457(b) plans for government employees, Salary Reduction Simplified Employee Pension plans (SARSEPs), and Savings Incentive Match Plans for Employees (SIMPLE) IRA plans. Automatic enrollment clearly boosts retirement plan participation.

Automatic enrollment taps into a basic psychological trait, inertia. The field of behavioral finance suggests that people tend to resist change and don’t always take action even when the action is clearly beneficial. However, behavioral finance can turn that weakness into a strength. Retirement plan sponsors that use automatic enrollment are taking action for their employees, and then that same inertia keeps employees from opting out of the retirement plan.

https://www.psca.org/PR_2018_60thAS 

FOUR WAYS TO INCREASE EMPLOYEE RETIREMENT CONTRIBUTION PARTICIPATION

As a retirement plan sponsor how can you encourage your employees to save and save more? Improving both employee participation and their saving rates is easy when you’re prepared. Here are four simple ways you can help your employees start building a confident retirement.

1. Boost employee participation with automatic enrollment.

Choosing to automatically enroll all new employees in your retirement plan can dramatically improve your participation rates. According to the Center for Retirement Research (CRR) at Boston College, in one study of automatic enrollment, participation increased by 50 percent, with the largest gains among younger and lower-paid employees. While auto-enrolled employees are allowed to opt out of the retirement plan, most generally stay enrolled.

2. Set the initial default contribution rate higher. 

Many companies who use auto-enrollment set their default contribution rate relatively low at three percent, according to the CRR, which is lower than the typical employer match rate of six percent. Workers who might have contributed more to their savings passively accept the lower default rate, which means they’re sacrificing employer matching funds along with saving less of their own pay.

3. Adopt auto-escalation.

Plans that use auto-escalation automatically increase their participants’ contribution rate every year, typically by one percent. Over time, that can significantly improve savings rates among workers. The CRR cites a 2013 study of Danish workers that the majority of workers who experienced automatic increases simply accepted them, and savings rates dramatically increased.

4. Automate investment decisions with target-date investment products.

Investing is complicated, and many employees don’t want to take the time to learn how to manage their portfolios. Target-date strategies automatically adjust an employee’s investment allocations over time, shifting them to a more conservative asset mix as the target date (typically retirement) approaches. The ease of use of target-date funds means their popularity is increasing. The CRR notes that in 2014, nearly 20 percent of all 401(k) assets were in target-date funds, and about half of plan participants used target-date funds.

PARTICIPANT CORNER: RETIREMENT READINESS - PLANNING FOR THE FIRST DAY OF THE REST OF YOUR LIFE

MUCH HAS BEEN MADE OF THE CURRENT STATE IF THE AMERICAN WORKER as it pertains to their retirement savings. According to a recent study by the General Accountability Office, 29% of Americans 55 and older do not have any retirement savings or pension plan and those who have saved are woefully behind with 55-64 year olds averaging $104,000 in retirement assets.

The bleak outlook can largely be attributed to a lack of education when it comes to retirement planning – and more specifically investment allocation. With a growing number of millennials feeling ill equipped to make investment related decisions – even within their own retirement plans, the numbers prove that ignorance is not bliss. 61% of millennials say they want to invest but are deterred because they don’t know how.2

These numbers alone should serve as a call to action for younger workers who are increasingly finding themselves behind the eight ball when it comes to saving for retirement. A sound, long term, roadmap to retirement can be centered on three key areas.

Develop healthy financial habits.

In a society that has become increasingly driven by social media it is very easy to fall prey to a “keeping up with the Jones1” philosophy toward spending. Do you have “friends” that tweet and share every purchase and activity in their lives? Believe it or not, this subconsciously drives the temptation to spend on things we don’t need! Finding a balance and delaying gratification on purchases can single handedly make or break your financial wellbeing and it starts with making tough budgeting decisions.

Live below your means.

Try contributing an extra one or two percent to your company’s retirement plan, or open up an IRA.  You won’t miss the contribution and your standard of living will adjust accordingly.  Seek to live below your means today to ensure a strong financial future tomorrow.

Reduce your debt.

The average American household carries a whopping $15,762 in credit card debt. According to a study this year, the average household is paying a total of $6,658 in interest per year3 – translating to lost dollars that could be pumped in to retirement savings and wealth accumulation. In some situations debt, such as a mortgage or a student loan, can improve one’s financial position long term – however, credit card debt in particular carries the highest interest rates and should be paid off as quickly as possible. Try working with an independent financial planner if necessary to consolidate debt and come up with a game plan to attack it head on.

At the end of the day there’s no magic bullet the can singlehandedly solve the retirement shortfall for millions of Americans. Only you can take steps to educate yourself and make prudent, financially savvy choices in your day to day life which will translate in a significantly healthier financial standing. Don’t just hope that the retirement picture in your life becomes clearer as the day gets closer, because the opposite is true. Take measured steps to build confident savings and investment solutions for your household by starting today!

DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Lutz Financial (“Lutz”), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Lutz.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Lutz is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.  A copy of the Lutz’s current written disclosure Brochure discussing our advisory services and fees is available upon request. Please Note: If you are a Lutz client, please remember to contact Lutz, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Lutz shall continue to rely on the accuracy of information that you have provided.

For more important disclosure information, click here.

RECENT LUTZ FINANCIAL POSTS

New IRS Indexed Limits for 2020

New IRS Indexed Limits for 2020

The Internal Revenue Service today announced that employees in 401(k) plans will be able to contribute up to $19,500 next year. The IRS announced this and other changes in Notice 2019-59 (PDF)…

read more

Toll-Free: 866.577.0780  |  Privacy Policy

All content © Lutz & Company, PC

 

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

601 P Street, Suite 103

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850

Am I Ready to Retire? Finding Your Sweet Spot

Am I Ready to Retire? Finding Your Sweet Spot

 

LUTZ BUSINESS INSIGHTS

 

Am i ready to retire? finding your sweet spot

justin vossen, investment adviser, principal 

If you could trade places with Warren Buffett, would you do it? While you would immediately be worth billions of dollars, you would also be 88 years-old. Perhaps you would consider trading places with a recent college graduate? You may be 22 years old again, but you could also be starting over: career, family, lifestyle, and location, coupled with the fact that the average college graduate has more than $28,000 worth of student loans (Institute for College Access and Success), it may not be worth it for you to go back?

While these are some extreme examples, the point is that your answer probably depends on your current situation and its relationship to the alternative. Factors such as your age, financial situation, and life perspectives affect how you would answer switching places with another. These considerations often factor in financial planning as there is no right or wrong answer, only “your” answer.

We do financial planning for clients every day, and we hear many of the same questions. Many clients come to us asking, “what is normal when it comes to retirement? When is the typical time to retire? What does everyone do in retirement? How much does everyone spend? How much does the average retiree travel? When do people start Social Security? How much do most people save each year?”

Often, clients come in looking for answers based on what their friends, neighbors, and co-workers are doing. However, we view our job as providing the roadmap to get to the “right answer” for their own personal situations. The answers to their individual situations may differ, but their roadmaps may be similar.

Ultimately, one’s roadmap can be viewed as an algebra equation. There are many variables to this equation, some we can control and others we cannot. So, it’s important to isolate the variables we can control, and incorporate the ones we can’t, to get to the right answer. Most of the time, the question of which variable we need to solve for differs with each family.

The Key Variable: Spending in Retirement

Spending is often the last variable solved for in retirement, but it may be the most critical. Many falsely assume that the age or timing of retirement is more important to the success of the outcome. However, your lifestyle may be the biggest determinant on when you can retire, and if you will be fulfilled during retirement. One thing we have consistently found is that most people underestimate what they will spend annually. They also fail to leave any room for unexpected expenses that could come about in the future.

An old rule of thumb was that 4% is the proper amount of your assets that you can spend each year in retirement and maintain corpus. However, there are a few things wrong with this generalization. First of all, if your assets are tax-deferred, you could be losing 10-50% of your distribution to taxes, depending on how much you pull out each year and the state you live. Also, the 4% rule came from a time in history when bonds were paying 5-6% per year. Now they are yielding less than 2% in many cases. These two things alone can cause a massive over-assumption.

On the flip side, many facets of life may bring about reduced expenses in retirement. Rotating on to Medicare may cut your health expenses by 75%. You may eventually pay a mortgage off. Your kids will (hopefully) be off the payroll. Others don’t account for the general slowing in their spending habits because of age and the reduced desire to do expensive activities, such as travel.

Before you take the retirement plunge, it is VITAL that you spend some time examining your current and future spend rate to make sure you can have a successful retirement. It’s challenging for someone to ratchet back their lifestyle to fit their budget into the funds they’ve saved for retirement after the fact. This self-examination may be eye-opening and humbling, but one that you could regret not doing after taking the retirement plunge.

Timing of Retirement

Sometimes the timing of retirement is out of one’s control. Sometimes, due to an unfortunate illness, family issue, or loss of a job forces retirement under duress. In this case, the variable we solve for in the retirement equation is someone’s age. This could potentially require adjustments in the spend or lifestyle to accommodate. Often this is not an ideal scenario and requires some planning immediately so as not to jeopardize the future.

Others who have an exact age in their mind for retirement need to plan as early as possible. Savings rates must be met and monitored to make sure that you are advancing at a pace that will allow for it to happen. If retiring before Medicare eligibility, one of the most significant expenses will probably be healthcare. Is this being factored in? Those who retire “early” may have a lot of changes occur over the years in the tax code. Do their funds have the ability to be flexible upon distribution? This means having the ability to “tax optimize” your funds needed from various accounts such as Roth IRAs, IRAs, 401-ks, and taxable accounts. This allows you to minimize your taxes on distributions in any given year whatever the tax code changes bring.

Sometimes people continue to work because they don’t know if they have enough to retire. It’s essential to, at least, establish a timeline in the future and work back from it. If not, you cannot reasonably plan, and savings becomes arbitrary and lacks direction. Often this leads to more immediate gratification in the present and a lack of savings because one doesn’t know how much it will take in the future. This is an “ignorance is bliss” concept that too many people use in their retirement approach.

Managing to a Number

Often, many people tend to base retirement on getting their savings to a number. Arbitrarily let’s say that this number is $1,000,000. A person saves to the point that their assets reach $1,000,000 and then at that point, they feel that they can retire.

The problem with this is that the number you need has more to do with how much you spend, and how long you will live. One variable is easy to calculate (spending), and one is not (life expectancy). Does the amount saved fit a reasonable timeline?

 

Predicting the Future

Even with advanced planning, you may find that you have over or underestimated some assumptions in retirement. These assumptions and their compounding effect over time may be critical to the success of your outcome. We find that many overestimate the returns that they will receive. For example, since 1926, the S&P 500 has returned 10.14% annually as of 6/30/2019. We see many people use that historical proxy as the basis of their future returns. This proxy is overly simplistic and contains a massive oversight. Generally, we would recommend that your portfolio will inevitably include some more conservative investments like bonds and other asset classes that aren’t the S&P 500. This time period also takes us through the industrial and technological revolution in a country with rapid economic growth. That growth is now decelerating (albeit still growing at a good pace) from its industrial boom period. A reasonable rate of return must be ascertained with more than historical factors in mind.

If you plan to retire, there are many other “future” assumptions that need to be taken into consideration. What are the assumptions for travel, living expenses, long-term care, medical costs, and taxes? On the income side, what are the assumptions for social security, pension, rental income, or even a future business sale? These all have an impact on today and future years as when factoring in assumptions for growth rates and inflation. Many of these assumptions are general, but most can vary from family to family.

YOUR Retirement Sweet Spot

Another thing our experience has taught us is that it’s okay not to know exactly when you will retire, what you need, or even how much you will spend to the penny. What is important is that you make some reasonable assumptions and make sure you leave enough room or “cushion” for the unexpected.

However, to create a roadmap to your destination, you need to pick a starting place on the map. There will inevitably be some forks in the road as time passes, but planning will allow you to navigate those twists and turns easier. Most importantly, planning for everything you know, while leaving some room for error, will give you peace of mind for when you finally decide to retire!

 

 

Important Disclosure Information

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Lutz Financial), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Lutz Financial.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Lutz Financial is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.  A copy of the Lutz Financial’s current written disclosure statement discussing our advisory services and fees is available upon request.

ABOUT THE AUTHOR

402.827.2300

jvossen@lutzfinancial.com

LINKEDIN

JUSTIN VOSSEN, CFP® + INVESTMENT ADVISER, PRINCIPAL

Justin Vossen is an Investment Adviser and Principal at Lutz Financial with over 20 years of relevant experience. He specializes in wealth management and financial planning.

AREAS OF FOCUS
  • Financial Planning
  • Wealth Management
AFFILIATIONS AND CREDENTIALS
  • Certified Financial Planner™
  • Financial Planning Association, Member
EDUCATIONAL BACKGROUND
  • BSBA in Economics and Finance, Creighton University, Omaha, NE
COMMUNITY SERVICE
  • St. Augustine Indian Mission, Board Member
  • Nebraska Elementary and Secondary School Finance Authority, Board Member
  • St. Patrick's Church, Trustee
  • March of Dimes Nebraska, Past Board Member

SIGN UP FOR OUR NEWSLETTERS!

We tap into the vast knowledge and experience within our organization to provide you with monthly content on topics and ideas that drive and challenge your company every day.

Toll-Free: 866.577.0780  |  Privacy Policy

All content © Lutz & Company, PC

 

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

601 P Street, Suite 103

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850