Category Archives: Retirement / Savings Plans

Understanding the SIMPLE IRA Plan

In the world of small business retirement plans, there are many options. Some plans give the employer sole authority to make contributions, others are contributed to by employees only, and some are a hybrid of the two in which employees make contributions and employers can make matching payments or make random contributions to the plan. The SIMPLE IRA is an interesting option for small and mid-sized businesses (up to 100 employees) which allows a mix of employer and employee contributions. Some would say IRA plans like the SIMPLE are becoming obsolete as the 401k vehicle has become more flexible but that’s not entirely true. 401k plans still have more onerous rules on business owners in terms of tax reporting requirements and the fairness surrounding contribution levels. For that reason many people stick with plans like the SIMPLE IRA which have lower contributions limits but are easy to administer and achieve the goal of socking away tax-deferred funds for retirement.

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Retirement 2.0

The latest trend in retirement is, well, not retiring at all. Retirement itself is no longer the goal. The goal seems to be adapting to a lower key phase of life and making sure each individual or family is prepared to deal with the personal and financial issues which apply to them. Despite the dozens of articles I’ve read which aim to teach advisors about what the ‘new retirement’ looks like, the more telling sign for me is listening to what my clients are saying. Frankly, they don’t even like saying the word retirement because it makes them feel old, unable, disconnected, etc.

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Why Variable Annuity Popularity May be Increasing

I’ve noticed an increasing number of people contacting me about variable annuities lately. I think this can be explained by a fear increase among investors. In the past investors may have been willing to forego a guaranteed income stream for the chance at having substantially more assets during retirement. That mentality made sense at a time when the stock market averaged 10-12% growth per year and government entitlement programs were well funded. But during this ‘lost decade’ investors find themselves clinging to cash and prioritizing guaranteed income over growth. Variable annuities actually offer both which is probably why investors are asking questions.

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Comparing & Contrasting Variable Annuity Riders

As most of my readers know, my blog is designed to inform clients about issues related to financial planning, investment products, and the economy. Lately I’ve been fielding more questions than usual about the various annuity products out there and which ones are best, the worst and potentially the most interesting. It’s also no surprise that variable annuity features and riders change frequently to correspond to changing market conditions and current client needs. It would be nearly impossible for the average investor to be fully informed about the differences between variable annuities offered by Prudential, Jackson National, Nationwide, AXA, Sun Life, Transamerica, etc. Well, this post should provide some clarity and also give you insight into how the insurance companies think about and price these products.  Note: While some of the information below is still accurate, the various annuity riders and pricing have changed over the past few years. If you are looking for product specifics which are accurate for 2013 forward, please send me an e-mail or give me a ring.

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Retirement Plans for Small Business Owners

As a small-business owner, one of your goals is to be as productive as possible while minimizing costs. This basically defines efficiency. It is during these tough economic times that cutting expenses becomes increasingly important. While many small-business owners are occupied with expanding their business, some tend to overlook their legal obligations in terms of providing a retirement plan for employees. It is indeed the case that if you promised, in writing, to provide a retirement plan for your employees, and you haven’t changed any of your documents by 12/31/2008, then you must, as both a retirement plan sponsor and de facto fiduciary, provide a plan for your employees. Assuming most small business owners still view having a plan as a mutually beneficial concept, having a cost-effective plan for your employees is a great way to control the employer-employee relationship, which consequently fosters an enhanced workstation atmosphere. In the end, many employers end up paying onerous fees (upon review of the retirement plans for many small-businesses, The Rogers Company found that many people are paying up to 375 basis points when they should be paying around 110-120 basis points*) and have outdated paper work (regulatory requirements have changed drastically since the inception of the original retirement strategies). Small-business owners are often ignorant or not cognizant of their retirement plan options. Thankfully, I am here to detail them for you.

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A Closer Look at the Roth Conversion

Roth IRAs are very trendy right now. “Trendy” isn’t a word I usually use to describe financial products and services but in this case I think it applies. Many investors are so concerned about upcoming tax rate hikes that they are more than willing to forego a tax deduction today if it means not having to worry about rising rates in the future. Starting in 2010, anyone can convert a traditional IRA to a Roth. SEP and SIMPLE IRAs can be converted as well. Before 2010, only individuals with adjusted gross incomes below 100K could do the Roth conversion. So, this opens the door for lots of wealthier Americans to make this switch. No surprise the government is looking for new sources of tax revenue now as they have plenty of fiscal problems to deal with. Below is a list of questions I’ve been fielding regarding IRAs and the Roth conversion.

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Bringing Real Reform to the 401(k) Industry: H.R. 2989

I’ve written at length about problems within the retirement plan system here in America. Perhaps the biggest drawback for employees is that those secure pensions of the 80’s and 90’s are, for the most part, being replaced by employee-funded 401(k) and 403(b) plans. While it may seem like only an operational switch, it’s actually a huge downgrade for most employees. Instead of having definite figures to rely on for future financial security, workers have to rely on themselves to save and the markets to make their savings grow. As we’ve seen over the past decade, the markets don’t always do us favors. Most investors, especially those nearing retirement, would have been better off putting that money into a bank account with little or no interest from 2000 to now. That would at least have eliminated the panic and emotional madness which most investors have been experiencing. Since we can’t predict what the markets will do in the future and trillions of dollars remain in retirement plan investments, the best we can do is hope for some real and genuine reform:

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Fixing the 401k Problem

The 401k industry is in a pretty sweet spot. Corporate pensions are quickly becoming obsolete and now more than ever employees need to rely on their own ability to save money. What could be easier than an automatic payroll deduction plan such as a 401k or 403b which provides tax-deferred growth and in some cases an employer match? Many people I know who really don’t have much investment savvy accept the 401k as one of those investment programs which they need to sign up for and that’s all there is to it. Sounds a little hasty, right? Well, according to a 2008 survey discussed in the November, 2009 issue of Registered Rep magazine (Introducing 401k 2.0), about 77% of 401k plan participants claim to have little, basic or no level of investment understanding. And despite Department of Labor requirements regarding improved efforts to educate participants, the reality is that many people simply don’t have the time or energy or desire to educate themselves about stock and bond investments. What they really need is good advice—a person or team of people whom they can reach out to on short notice to provide specific advice relevant to each participant’s situation.

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Stability of Principal vs. Stability of Income – CDs vs. Variable Annuities

Many conservative investors like Certificates of Deposit (CDs) because of their stability. It is true that your principal rarely fluctuates with a CD. However, the rate you get is variable, volatile and highly unpredictable as has been evidenced by interest rates in the economy over the past 15 years. As a result, if you were rolling over one-year CDs from the late 90’s until now, your income would have fluctuated dramatically. From 1996-1999, one-year rates ranged from about 4.5% – 6.5%: a respectable return for a conservative investor. Keep in mind that the stock market in those years was on fire, so that 5% CD rate may not have felt as warm and fuzzy as it would today. After year 2000, interest rates plunged and you were lucky to get 2% on a one-year CD. The same applies today as interest rates are low and CD investors find themselves scrambling for a ‘good rate’ such as 3% or maybe 4% if you lock in for years. So the new important question becomes, what is more important: stability of principal or stability of income?

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The Changing Mindset of Variable Annuity (VA) Providers

A year ago it was hard for me to keep variable annuity (VA) wholesalers out of my office. The features offered by various insurance companies would change so rapidly that I’d have to take meetings to stay up-to-date.* There was essentially a competition between insurers to load more and greater guarantees onto their products to attract the most new money. But when the stock market started collapsing, the reaction by insurers was very interesting. You see, a large number of annuity contract holders never use the guarantees they pay for. The rider expenses and other fees paid by contract holders which provide them the peace-of-mind they are looking for also keep the insurance companies running profitable businesses. When many contracts became worth dramatically less than the initial premiums, insurers had to hope that there wasn’t a rush to exercise those income benefits, which could have potentially put some insurer’s VA divisions out of business. Not only was each insurer’s ability to ‘hedge’ well enough to pay their riders in question, but their overall balance sheets, in many cases full of bonds and other investments were also cracking at the same time. The snowball effect can lead to ratings cuts which ultimately leads to broken trust and confidence by investors.

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