A document known as a Qualified Domestic Relations Order (QDRO), which is a part of a divorce settlement, specifies how retirement assets are divided. A QDRO specifies the amount or portion of a plan participant's benefits that are paid to a spouse, former spouse, child or other party. A QDRO typically governs assets within a retirement plan such as a pension, profit-sharing plan, or a tax-sheltered annuity. Benefits paid to a former spouse typically are considered income for tax purposes. If you contributed to your retirement plan, a prorated share of our investment is used to determine the taxable amount.
Former spouses on the receiving end of a lump-sum distribution mandated by a QDRO may be able to roll over the money tax free to a traditional individual retirement account or to another qualified retirement plan. Following such a transfer, assets within the plan are subject to rules that would normally apply to the retirement plan. If you transfer assets within a traditional IRA to your spouse as part of a divorce decree, the transfer is not considered taxable and the assets are treated as your former spouse's IRA.
Procedural Issues
QDROs are governed by rules established by the US Department of Labor. In most instances, a judge must formally issue a judgement or approve a settlement agreement before it is considered a QDRO. The fact that you and your soon-to-be-former spouse have signed an agreement is not adequate for a QDRO to take effect. Also, following an order issued by a judge, the administrator of the retirement plan affect by the QDRO must determine whether the court order qualifies as a QDRO according to the rules of the labor department.
Note that retirement assets are part of a broader financial picture that may include your home, taxable investments, personal property, and other assets. It is not mandated that your spouse receive a portion of your retirement assets while granting other assets to your spouse. In addition, a prenuptial agreement, depending on its provisions could potentially limit your spouse's rights to your assets. You may want to consult a divorce lawyer and your advisor to determine whether federal laws relating to retirement accounts apply to your situation.
Monday, August 27, 2012
Monday, August 20, 2012
How Much You Need to Save for Retirement
How much money does a typical worker need to save every month in order to have a reasonable chance of financing a secure retirement? New analysis from the Center for Retirement Research at Boston College (CRR) came up with a broad overview of the rates needed by different age groups and income levels.
To estimate necessary savings rates, the researchers first sought to determine what level of retirement income would provide an equivalent standard of living to a retiree's final year of pre-retirement income. After they took account of changes in various tax burdens, commuting expenses, housing costs and other factors, they estimated that a single worker earning $20,000 prior to retirement (the CRR study's "low" income) would need about 88% or $17,600 during retirement, including Social Security benefits calculated according to the current formula. Someone earning $50,000 ("medium" income) would need about 90% or $40,000 after retirement, and someone earning $90,000 ("high" income) would need about 81% or $73,000. Both of those estimates also assume the current levels of Social Security benefits.
Here's how the projected savings rates work out for a consumer at each level, assuming a normal retirement age (67) and an average annual investment return of 4% after inflation is taken into account:
A low income retirement saver would need to set aside 8% of income each years starting at age 25. If the same person were to wait until age 35 to start, the rate would go up to 12% of their income per year. If the same person were to wait until age 45, the necessary savings rate would rise to 20% per year.
A medium income retirement saver starting at age 25 would need to set aside 12% per year. Waiting to start until age 35 to start the savings boosts the rate to 18%. Waiting until 45 pushes it to 31%.
A high earnings saver would have to set aside 16% per year starting at age 25. If he or she waited to start until age 35, the rate would increase to 25%. Waiting until 45 causes the required savings rate to rise to 42%.
Keep in mind that if Social Security were to be cut back, savings rates would have to be increased proportionately to cover any reductions in anticipated benefits. Also keep in mind that if real investment returns average higher than 4% in the future, the amount of savings can be reduced somewhat. But the researchers noted that "...the effect of rate of return on required saving rates, for workers at all earning levels, is smaller than the effect of the age at which saving starts and, especially, the age of retirement." In other words, start your savings program earlier and then working longer could have the greatest impacts on your financial readiness for retirement.
Wednesday, August 15, 2012
Bad Choices Get Rewarded
It can be really hard to behave correctly if we see examples of
people being successful while doing things we know have higher odds of a bad
outcome (e.g., buying lottery tickets). But as you’ve probably learned by now,
investing isn’t always fair. Bad choices get rewarded, while people who made
prudent decisions sometimes appear to be punished—at least in the short run.
So even though it’s tempting, I strongly encourage you to judge the investment advice you receive based on the validity of the principle (process) and not the outcome. Let me share a story about a friend who had stock in his grandmother’s mining company. Over time, the family had invested and lost millions trying to keep the business afloat. As you might imagine, the family stories around the business made it seem like a sacred thing to protect, regardless of the cost.
At this point, the stock had reached a low of $2 a share and my friend didn’t know what to do. He worried that if he sold the stock, then it might recover and his family would regret the sale and wish they’d kept it. I acknowledged that if he sold the stock and it doubled or tripled—which was a real possibility—he’d feel badly. But the catch was that if he kept the stock and it went to zero, he’d feel much, much worse.
The underlying factor was that he needed to make a decision based on a principle (e.g., did owning this stock support his long-term goals?) instead of the emotion and family lore surrounding the stock. There’s no guarantee that good investment decisions won’t lead to a painful result. But we need to remain committed to making good decisions based on sound principles and not just luck or emotions.
So even though it’s tempting, I strongly encourage you to judge the investment advice you receive based on the validity of the principle (process) and not the outcome. Let me share a story about a friend who had stock in his grandmother’s mining company. Over time, the family had invested and lost millions trying to keep the business afloat. As you might imagine, the family stories around the business made it seem like a sacred thing to protect, regardless of the cost.
At this point, the stock had reached a low of $2 a share and my friend didn’t know what to do. He worried that if he sold the stock, then it might recover and his family would regret the sale and wish they’d kept it. I acknowledged that if he sold the stock and it doubled or tripled—which was a real possibility—he’d feel badly. But the catch was that if he kept the stock and it went to zero, he’d feel much, much worse.
The underlying factor was that he needed to make a decision based on a principle (e.g., did owning this stock support his long-term goals?) instead of the emotion and family lore surrounding the stock. There’s no guarantee that good investment decisions won’t lead to a painful result. But we need to remain committed to making good decisions based on sound principles and not just luck or emotions.
This article is
written by one of our senior advisors, Robert W. Hanson Jr., CFP, MS. Bob is a graduate
of DePaul University's College of Commerce, and is a board Certified Financial
Planner, (CFP). He also found time to earn a Masters of Science Degree in
Financial Services from the College for Financial Planning in 2003. Bob
has also taught investments at Northwestern University to students in the
school for Continuing Studies.
Wednesday, July 25, 2012
A Primer on Medicare and Medigap Coverage
Despite all the public discussion about health care, very few people under the age of 65 understand the basics of Medicare, the federal health program for seniors and certain disabled individuals, or Medigap, the supplemental private coverage many buy to cover treatment that shortfalls what the federal program doesn't pay.
Even if you have years before you qualify, why focus on Medicare and Medigap now? Because as big changes happen in our healthcare system, those who understand the programs and products ahead of time will not only be better equipped to plan for their post-retirement healthcare options, but they'll have a better understanding of these critical federal programs change over time.
A visit with your Vermillion Financial Advisor can give a broader view of what the federal government will and won't pay and how you should plan your coverage going forward.
Here's a summary:
Who is eligible for Medicare? More people than you might think believe Medicare is available to anyone over the age of 65 qualify under certain circumstances, including: if they are permanently disabled and have received Social Security disability payments for the last two years, or if they need a kidney transplant, are under dialysis for kidney failure or have Amyotrophic Lateral Sclerosis also known as Lou Gehrig's disease.
How does Medicare cover expenses? Medicare coverage is divided into three primary parts: Part A, Part B, and Part D. And yes,there is a Part C. Here's what each part covers:
Even if you have years before you qualify, why focus on Medicare and Medigap now? Because as big changes happen in our healthcare system, those who understand the programs and products ahead of time will not only be better equipped to plan for their post-retirement healthcare options, but they'll have a better understanding of these critical federal programs change over time.
A visit with your Vermillion Financial Advisor can give a broader view of what the federal government will and won't pay and how you should plan your coverage going forward.
Here's a summary:
Who is eligible for Medicare? More people than you might think believe Medicare is available to anyone over the age of 65 qualify under certain circumstances, including: if they are permanently disabled and have received Social Security disability payments for the last two years, or if they need a kidney transplant, are under dialysis for kidney failure or have Amyotrophic Lateral Sclerosis also known as Lou Gehrig's disease.
How does Medicare cover expenses? Medicare coverage is divided into three primary parts: Part A, Part B, and Part D. And yes,there is a Part C. Here's what each part covers:
- Part A is the segment of the program most associated with hospital care. It covers hospital inpatient care, a limited amount of care at some skilled nursing facilities, and some specific home health care alternatives and hospice care. Most people are enrolled automatically in Part A when they reach 65 and they get this coverage for free. What's important is that Medicare doesn't cover long-term nursing home expenses, so that's why long-term care planning is necessary for all individuals.
- Part B is all about outpatient services. This is the part of the plan that covers doctors' visits, outpatient care and some other medical services that Part A doesn't cover, such as the services of physical and occupational therapists, and other aspects of the home health care. You do have to pay a monthly premium for Part B coverage with a deductible - in 2012, the basic premium is $99.90 per month though it might be higher for some people based on income. By the way, you'll sometimes hear people refer to Part A and Part B coverage as "Original Medicare".
- Part D is Medicare's prescription drug coverage. Part D is administered by a number of private insurance companies that operate in various areas of the country, so this requires some shopping on your part to make sure you're getting the right drugs at the right price. Financial assistance might be available if you need it.
- Part C is actually the Medicare Advantage Plan, which is an optional plan individuals may choose so they receive their Medicare benefits through private health plans. You'll also hear this plan referred to as Medicare+Choice. These private plans include conventional HMO's and PPO's and are required by law to offer benefits that cover everything that Medicare covers, but they don't have to cover everything exactly as Medicare Part A and B do. There might be some customized options that allow for lower co payments or lower total out-of-pocket expenses. In simplest language, Medicare Advantage plans blend the benefits of Original Medicare and Medigap plans (more on this below). By law, you can't buy Medigap supplemental insurance if you've chose Medicare Advantage. However, it's very important to get some expertise on the choice between Original Medicare and Medicare Advantage plans based on your anticipated health needs to make sure the coverage you buy covers what you really need.
What about Medigap? So-called "Medigap" coverage is supplemental coverage that's available for people who opt out to be covered under Original Medicare -- Part A and B coverage. You buy Medigap insurance from a private insurer, and your primary goal is to determine whether that supplementary coverage actually pays for the things you know you'll need that Medicare doesn't cover. You do have to pay a monthly premium for this coverage. And again, if you choose Medicare Advantage (Part C) coverage, you're not allowed to buy Medigap coverage.
To compare Medicare and Medigap coverage, visit the Medicare Personal Plan Finder on the Medicare.gov website.
When do I enroll for Medicare? You have a six-month window to enroll for Medicare that starts three months before your 65th birthday and ends three months after. As mentioned above, if you're already receiving Social Security at age 65, you'll automatically be enrolled in Part A, but if not and you enroll more than three moths after your 65th birthday, you may be subject to a late enrollment penalty.
By the way, what's Medicaid? This is the name for the federal program -- and corresponding state programs -- that pick up healthcare costs for indigent children and adults. Unless you're below the poverty line or you spend out your assets in your senior years, this won't be part of the discussion.
Monday, July 16, 2012
Three Keys to Surviving Market Turbulence
From the desk of Mark LaSpisa, President and Managing Advisor: Three Keys to Surviving Market Turbulence
All too often, investors react to a sharp drop in prices by panic selling or digging in their heels despite deteriorating fundamentals. But more thoughtful investors see a correction or downturn as an opportunity to review the risks in their portfolios and make adjustments where necessary.
Most stock market investors are looking for the same result: strong and steady gains of their investments. Dealing with a period of sustained falling stock prices is not easy. All too often, investors react to a sharp drop in prices by panic selling or digging in their heels despite deteriorating fundamentals. But more thoughtful investors see a correction or downturn as an opportunity to review the risks in their portfolios and make adjustments when necessary.
Any time you are feeling nervous when confronted with any adverse market event -- whether it is a one day blip, a more lengthy market correction (a decline of between 10% to 20%), or a prolonged bear market (a decline of more than 20%) -- take time to review your portfolio and call your Vermillion Financial Advisor. It will help you in dealing with the difficulties that volatility can bring. Here are three suggestions to help you and your portfolio survive market turbulence.
Talk with your Advisor. Your Vermillion Advisor can help you separate emotionally driven decisions from those based on your goals, time horizon, and risk tolerance. Researchers in the field of behavioral finance have found that emotions often lead investors to read too much into recent events even though those events may not reflect long-term realities. With the aid of your Vermillion Advisor, you can sort through these distinctions, and you'll likely find that if your investment strategy made sense before the crisis, it will still make sense afterward.
Keep a long-term perspective. The only certainty about the stock market is this: it will always experience ups and downs. That's why it's important to keep emotions in check and stay focused on your financial goals. A buy-and-hold strategy -- making an investment and then holding on to it despite short-term market moves -- can help. The opposite of buy-and-hold investing is market timing -- buying and selling investments based on what you think the market will do next. Market timing, as most investment professionals will tell you, is risky. If your predictions are wrong, you could invest when the market is on its way down or sell when its on it's on its way up. In other words, you risk locking in a loss or missing the market's best days.
Update your Capital Preservation Policy. While it's important to remember that periods of falling prices are a natural part of investing in the stock market, your written capital preservation policy (CPP) is pre-planned action step(s) to be taken when volatility raises above normal levels. Your advisor has a variety of tools to use to address volatility in your portfolio including automatic stop losses, dollar cost averaging, individual stock and stock index options to hedge their portfolios against a sudden drop in the market. Perhaps the best move you can make is reevaluating your risk profile which limits your CPP for taking overall risk.
All too often, investors react to a sharp drop in prices by panic selling or digging in their heels despite deteriorating fundamentals. But more thoughtful investors see a correction or downturn as an opportunity to review the risks in their portfolios and make adjustments where necessary.
Most stock market investors are looking for the same result: strong and steady gains of their investments. Dealing with a period of sustained falling stock prices is not easy. All too often, investors react to a sharp drop in prices by panic selling or digging in their heels despite deteriorating fundamentals. But more thoughtful investors see a correction or downturn as an opportunity to review the risks in their portfolios and make adjustments when necessary.
Any time you are feeling nervous when confronted with any adverse market event -- whether it is a one day blip, a more lengthy market correction (a decline of between 10% to 20%), or a prolonged bear market (a decline of more than 20%) -- take time to review your portfolio and call your Vermillion Financial Advisor. It will help you in dealing with the difficulties that volatility can bring. Here are three suggestions to help you and your portfolio survive market turbulence.
Talk with your Advisor. Your Vermillion Advisor can help you separate emotionally driven decisions from those based on your goals, time horizon, and risk tolerance. Researchers in the field of behavioral finance have found that emotions often lead investors to read too much into recent events even though those events may not reflect long-term realities. With the aid of your Vermillion Advisor, you can sort through these distinctions, and you'll likely find that if your investment strategy made sense before the crisis, it will still make sense afterward.
Keep a long-term perspective. The only certainty about the stock market is this: it will always experience ups and downs. That's why it's important to keep emotions in check and stay focused on your financial goals. A buy-and-hold strategy -- making an investment and then holding on to it despite short-term market moves -- can help. The opposite of buy-and-hold investing is market timing -- buying and selling investments based on what you think the market will do next. Market timing, as most investment professionals will tell you, is risky. If your predictions are wrong, you could invest when the market is on its way down or sell when its on it's on its way up. In other words, you risk locking in a loss or missing the market's best days.
Update your Capital Preservation Policy. While it's important to remember that periods of falling prices are a natural part of investing in the stock market, your written capital preservation policy (CPP) is pre-planned action step(s) to be taken when volatility raises above normal levels. Your advisor has a variety of tools to use to address volatility in your portfolio including automatic stop losses, dollar cost averaging, individual stock and stock index options to hedge their portfolios against a sudden drop in the market. Perhaps the best move you can make is reevaluating your risk profile which limits your CPP for taking overall risk.
Tuesday, July 10, 2012
Investing Through Life’s Stages
Investing is a lifelong process. The sooner you start, the better off you'll be in the long run. It's best to start saving and investing as soon as you start earning money, even if it's only $10 a paycheck. The discipline and skills you learn will benefit you for the rest of your life. But no matter how old you are when you start thinking seriously about saving and investing, it's never too late to begin. The first part of a successful lifelong investment strategy is disciplined savings habits. Regardless of whether you are saving for retirement, a new house, or just that extravagant dining room set, you will need to develop rigid savings habits. Regular contributions to savings or investment accounts are often the most productive; and if you can automate them, they are even easier.
Factors That Affect Your Investment Decisions
Once you begin saving on a regular basis, you'll soon have to decide how to invest the money you are saving. Regardless of what financial stage of life you are in, you will have to decide what your needs are and how comfortable you are with risk.
Growth or Income
What do you need the money to do? The answer to this question will help determine whether you want to put your savings into investment products that produce income for you, or that concentrate on growing the value of your investment. For instance, a retirement fund does not need to produce income until you retire, so your investing strategy should focus on growth until you are close to retirement. After you retire, you'll want to draw income from your investment while keeping your principal intact to the extent possible.
Time and Risk Tolerance
All investing involves a certain amount of risk. How well you tolerate price fluctuations in your investments will need to be balanced against your required rate of return in determining the amount of risk your investments should carry. An offsetting factor to risk is time. If you plan to hold an investment for a long time, you will probably tolerate more risk because you have the time to make up any losses you may experience early on. For a shorter-term investment, such as saving to buy a house, you probably want to take on less risk and have more liquidity in your investments.
Sound Strategies for Everyone
Everyone lives his or her life differently, and everyone has complicated emotions about money, so investment decisions are highly personal and unique to each person.
But there are some basic rules that apply to most investors.
Investing for Life Stages
Although everyone's attitude toward investing and money is different, most investors share some common situations throughout their lives. For instance, where you are in your life cycle certainly affects how you invest for retirement, but what about other life stages that aren't so closely related to age? Let's say you're 40 and expecting your first child. You'll need to decide how to balance your finances to account for the additional expenses of a child. Perhaps you'll need to supplement your income with income-producing investments.
Moreover, your child will be entering college at about the time you're ready to retire! In these circumstances, your growth and income needs most certainly will change, and maybe your risk tolerance as well.
Factors That Affect Your Investment Decisions
Once you begin saving on a regular basis, you'll soon have to decide how to invest the money you are saving. Regardless of what financial stage of life you are in, you will have to decide what your needs are and how comfortable you are with risk.
Growth or Income
What do you need the money to do? The answer to this question will help determine whether you want to put your savings into investment products that produce income for you, or that concentrate on growing the value of your investment. For instance, a retirement fund does not need to produce income until you retire, so your investing strategy should focus on growth until you are close to retirement. After you retire, you'll want to draw income from your investment while keeping your principal intact to the extent possible.
Time and Risk Tolerance
All investing involves a certain amount of risk. How well you tolerate price fluctuations in your investments will need to be balanced against your required rate of return in determining the amount of risk your investments should carry. An offsetting factor to risk is time. If you plan to hold an investment for a long time, you will probably tolerate more risk because you have the time to make up any losses you may experience early on. For a shorter-term investment, such as saving to buy a house, you probably want to take on less risk and have more liquidity in your investments.
Sound Strategies for Everyone
Everyone lives his or her life differently, and everyone has complicated emotions about money, so investment decisions are highly personal and unique to each person.
But there are some basic rules that apply to most investors.
- To provide liquidity for emergencies, you should probably always have a cash reserve in a money market fund or traditional savings account or CD, no matter what your life stage.
- Also, if you can tolerate even a little risk, you should probably always have some portion of your portfolio in stocks to help protect your savings from being devalued due to inflation.
- Another good idea is scheduling regular reviews of your investments with a financial advisor. This habit will keep you up to date on your investments and help spot potential problems in your investment strategy. Finally, every investment decision should include tax considerations. Investments can be taxable, tax deferred, or tax free. You should be aware of the taxable status of your investments and take that into account when setting up and reviewing an investment strategy.
Investing for Life Stages
Although everyone's attitude toward investing and money is different, most investors share some common situations throughout their lives. For instance, where you are in your life cycle certainly affects how you invest for retirement, but what about other life stages that aren't so closely related to age? Let's say you're 40 and expecting your first child. You'll need to decide how to balance your finances to account for the additional expenses of a child. Perhaps you'll need to supplement your income with income-producing investments.
Moreover, your child will be entering college at about the time you're ready to retire! In these circumstances, your growth and income needs most certainly will change, and maybe your risk tolerance as well.
Three-Step Retirement Plan Tune-Up
Even if your personal outlook hasn't changed, keep in mind that uneven returns provided by different investments may have caused your portfolio to shift from your intended asset allocation.
Conducting an annual review of your retirement goals and strategy is a great way to help ensure that your plans for your financial future remain realistic and on track. With that in mind, taking the three easy steps outlined below will help you conduct your retirement tune-up.
Step 1: Review your retirement goals
Your first step should be to review your retirement savings goals and assess whether anything significant has occurred during the past year that might affect either your outlook for retirement or your current strategies to prepare for it. For example, have you decided to change the date when you'll retire? Or have you experienced any new milestones such as getting married, divorced, or having a child? Any of these events may affect how much you will want to save to fund the retirement you envision.
Step 2: Take a fresh look at your retirement strategy
Your portfolio's specific mix of stocks, bonds, and cash, known as your asset allocation, should complement your financial goals, risk tolerance, and time horizon. If you haven't taken a fresh look at your investments in awhile, don't assume that your old asset allocation is still appropriate for your current needs. Even if your personal outlook hasn't changed, keep in mind that uneven returns provided by different investments may have caused your portfolio to shift from your intended asset allocation. Given the market volatility that has occurred since 2007, if you have not reviewed your asset allocation since that time, there may be a good chance that uneven returns have caused it to change. If your asset allocation needs to be rebalanced, now may be the time for action.
Step 3: Consider saving more
None of us know what the future might hold. A good way to improve the odds that you have saved enough for retirement is to save more, no matter how prepared you may already be. If you have not already done so, consider funding an IRA. To find funding limits for your IRA account, more information can be obtained at www.irs.gov. If you participate in a workplace-sponsored retirement plan -- such as a 401(k), 403(b), or 457 -- you can contribute up to $16,500 for 2011. Those aged 50 and over can add up to another $5,500. If you are eligible for a plan at work, but haven't enrolled yet, what are you waiting for?
Conducting a retirement tune-up is always a great idea, but don't forget to consult with your financial advisor to discuss what else you can do to help achieve retirement security.
Conducting an annual review of your retirement goals and strategy is a great way to help ensure that your plans for your financial future remain realistic and on track. With that in mind, taking the three easy steps outlined below will help you conduct your retirement tune-up.
Step 1: Review your retirement goals
Your first step should be to review your retirement savings goals and assess whether anything significant has occurred during the past year that might affect either your outlook for retirement or your current strategies to prepare for it. For example, have you decided to change the date when you'll retire? Or have you experienced any new milestones such as getting married, divorced, or having a child? Any of these events may affect how much you will want to save to fund the retirement you envision.
Step 2: Take a fresh look at your retirement strategy
Your portfolio's specific mix of stocks, bonds, and cash, known as your asset allocation, should complement your financial goals, risk tolerance, and time horizon. If you haven't taken a fresh look at your investments in awhile, don't assume that your old asset allocation is still appropriate for your current needs. Even if your personal outlook hasn't changed, keep in mind that uneven returns provided by different investments may have caused your portfolio to shift from your intended asset allocation. Given the market volatility that has occurred since 2007, if you have not reviewed your asset allocation since that time, there may be a good chance that uneven returns have caused it to change. If your asset allocation needs to be rebalanced, now may be the time for action.
Step 3: Consider saving more
None of us know what the future might hold. A good way to improve the odds that you have saved enough for retirement is to save more, no matter how prepared you may already be. If you have not already done so, consider funding an IRA. To find funding limits for your IRA account, more information can be obtained at www.irs.gov. If you participate in a workplace-sponsored retirement plan -- such as a 401(k), 403(b), or 457 -- you can contribute up to $16,500 for 2011. Those aged 50 and over can add up to another $5,500. If you are eligible for a plan at work, but haven't enrolled yet, what are you waiting for?
Conducting a retirement tune-up is always a great idea, but don't forget to consult with your financial advisor to discuss what else you can do to help achieve retirement security.
Subscribe to:
Comments (Atom)