Maximize Social Security

On January 31, 1940 Miss Ida May Fuller received the very first Social Security payment. Since then, social security benefits have become a major part of retirement income for most retirees in the U.S. today. As a result, maximizing social security benefits is paramount to retirement income planning, and is accomplished by strategically deciding when and how to claim the benefit.


*The foregoing content reflects the author's personal opinions which may not coincide with the opinions of the firm, and are subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that these statements, opinions, or forecasts provided herein will prove to be correct. Past performance is not a guarantee of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. All investing involves risk. Asset allocation and diversification does not ensure a profit or protect against a loss. Finally, please understand that–as with other social media–if you leave a comment, it will be made public.

The Big Picture of Retirement

Many people hope to retire early and dream of leisurely days and evenings filled with fun, food, and family.  For other people retirement feels like it’s being thrust upon them unexpectedly.  At the same time the media touts that Americans have the ability to work longer in their careers and should do so. Conflicting messages and the proverbial “shoulda-coulda-woulda” thoughts that emerge when the topic of retirement surfaces can create fear, doubt, and confusion. So let’s set the record straight…working until age 80 or retiring into your dream life at age 50 are two extremes that rarely happen.  Instead, most people find solid middle ground in which they can enjoy retirement and honestly plan for an appropriate retirement age given their unique situation. Statistics are demonstrating that people are working longer, but only by two years, meaning women are now working until age 62 and men are remaining in the workforce until age 64. This suggests that rather than set your sights on the extremes, planning should be focused toward a more typical scenario. What can you do to prepare for your upcoming retirement? Here are some tips that can help you assess your retirement viability, no matter what age you leave the workforce.  

1.    Assess Your Savings and Emergency Funds
Men and women tend to save differently. Women tend to save less for retirement, mostly due to earning less in their lifetime than most men. Couples who work together on their finances generally have a better nest egg of savings and emergency funds. Fidelity recommends that people begin saving 15% of their annual salary from the start of their careers in order to retire by age 67. Unfortunately, few people have followed that recommendation. Instead, most people save more rigorously after the kids are out of the house, saving closer to 30% of income during final 10-15 years of their careers. Of course, procrastinating increases the risk of not having enough money to support retirement needs. The bottom line is this: take an honest look at your saving habits now and consider how you can improve these habits to ensure better retirement viability in the future. 

2.    Think About Your Goals in Comparison to Your Spending Habits
The Baby Boomer generation has been characterized as the largest spending generation in the history of America. This was generally caused by a cultural belief that money could be made easily, so money spent now could be made up later in life. Unfortunately, the upward momentum of our economy was struck down by the Great Recession, causing many people in their 50's to re-evaluate spending habits.  Before cutting your expenses, it’s important to consider your retirement goals.  It’s typically a good idea to consider these goals in dollars and cents rather than in general terms, such as, “I want to maintain my lifestyle into retirement.” All successful plans have an end-goal in mind.  Determine your end-goal and then talk with a Certified Financial Planner® in order to better understand how to modify your spending habits in order to reach your goals. 

3.    Consider the implications of your retirement on Social Security benefits
Most people think about Social Security in terms of bottom line monthly income. However, social security strategies should be assessed in order to determine the long-term implications of whether one begins drawing Social Security before full retirement age, at full retirement age, or at age 70. Many Americans begin receiving Social Security benefits prior to full retirement age, and this means they’re potentially missing out on tens of thousands of dollars over their lifetime (potentially 25%-30% of the lifetime Social Security benefit). Be sure that you understand how your Social Security choices will impact your lifestyle during retirement.

4.    Re-evaluate Your Insurance Needs
Insurance is meant to protect individuals during specific seasons of life. It is not meant as an inheritance vehicle.  Insurance needs during peak income-producing years may be very different from insurance needs in retirement. For example, let’s consider Joe.  He is the primary bread-winner in his family and has two children. Years ago, Joe bought a million-dollar life insurance policy to ensure his children had the resources needed to attend college if he came to an unexpected death. Today, Joe is 68 years old.  This policy on which he continues to pay premiums may be overkill now that his children are past college and living independently. However, disability and long-term care insurance may become more important during Joe’s later years. Prior to meeting with an insurance agent, connect with your FEE-ONLY Financial Planner to determine which products are most appropriate for your goals.  This will arm you with the knowledge you need to purchase only the products that are most beneficial to you and your overall retirement plan. 

5.    Review Your Investment Portfolio
An investment strategy is typically designed around a primary goal and risk tolerance. As individuals and couples approach retirement, investment portfolios become a more dynamic and critical component to financial success. As retirement creates gaps in income, the investment portfolio can be adjusted to fill that gap by increasing the amount of income-producing securities.  As age limits the ability to recover from significant economic downturns, investments can be shifted from a growth orientation to a more defensive approach. Developing an estate and wealth transfer plan will also potentially modify investment approaches.  Talk with a financial advisor prior to retirement in order to develop a comprehensive investment strategy that will meet your changing needs.

6.    Plan for Your New Lifestyle
Retirement planning goes beyond financial considerations.  Accomplished people who retire without a holistic plan may find themselves at a loss for how to spend their days.  Before retirement, decide on the activities, hobbies, and social events that will create a consistently active lifestyle.  This is important to ensure that financial assets are available to enjoy these activities and it has been proven to increase happiness in newly retired individuals.  Boredom or a loss-of-purpose can be detrimental components to experiencing a successful, joyful retirement. Select social engagements and groups that keep you active and participating in life in significant ways. This will keep doldrums at bay.

Sources
1. Center for Retirement Research, Boston College. http://crr.bc.edu/briefs/the-average-retirement-age-an-update/ .
2. Fidelity Investments. https://www.fidelity.com/viewpoints/retirement/how-much-money-do-i-need-to-retire. 
3. Kiplinger’s Retirement Planning 2017 Magazine. Summer Edition. Ready, Set, Retire, by Jane Bennett Clark, pg. 9.


*The foregoing content reflects the author's personal opinions which may not coincide with the opinions of the firm, and are subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that these statements, opinions, or forecasts provided herein will prove to be correct. Past performance is not a guarantee of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. All investing involves risk. Asset allocation and diversification does not ensure a profit or protect against a loss. Finally, please understand that–as with other social media–if you leave a comment, it will be made public.

Why ETFs are a Better Choice than Mutual Funds

By William Hernandez, CFA, CFP
Analyst, Trader

The battle between mutual funds and Exchange-Traded Funds (ETFs) is all but over. ETFs are standing in the victory circle with the investment world cheering from the stands, while mutual funds are suffering from waning investor interest. While mutual funds have a place in portfolios, in recent years ETFs have earned a reputation for being a better approach to long-term investing. Here are four key characteristics that clinched the ETF win. 

1.    Low Cost Options

ETF’s have won the battle against mutual funds as the low-cost security offering. This does not apply to all ETFs, but investors are reaping the benefits as most fund families cut fees. Mutual funds currently can’t compete on cost, due to the fact that mutual funds are saddled with additional administrative requirements. According to a Wall Street Journal article, the average expenses incurred inside mutual funds was 1.37% in 2014 while the equivalent ETF charged about 0.45%.1 Let’s consider this a different way, if you invested $100,000 into a mutual fund that returned 7% for 10 years, you would lose $1200 every single year due to internal costs in comparison to the average ETF alternative. This reduction in the portfolio means that you have less resources to build toward your long-term goal. 

2.    Tax efficiency

Mutual funds can sometimes contain what has come to be known as “phantom gains.” An extreme, but common “phantom gain” example is a situation in which a mutual fund is purchased in December, and even though the fund declines in price during the month, the investor receives a 1099 tax document indicating that he is responsible for capital gains built up in the years before he ever owned the fund. The reason this occurs is that the underlying investments in the mutual fund are not held to the same administrative requirements as the mutual fund itself and these underlying investments report gains and losses by different time frames. This administrative harness placed on mutual funds traps them into tax inefficiency. Even mutual funds designed to be tax efficient have trouble competing with typical ETFs.4 In contrast, most of the tax gains incurred by the ETF are generally controlled by the investor’s own buy/sell patterns in the ETF’s rather than a third party administrator.3 This means you control the timing of capital gains. Of course, everyone’s situation is unique, so please consult with your tax advisor before making investment decisions.

3.    Transparency

Transparency is one of the most obvious reasons for utilizing ETFs. On any given business day, the underlying weights and all holdings contained within an ETF can be downloaded daily. In contrast, mutual funds typically update their complete data on a quarterly basis.  Additionally, ETFs have the ability to trade like a stock, meaning they can be bought or sold at the going price throughout the trading day. Mutual funds, on the other hand, are not valued (and cannot be traded) until the end of the day, potentially several hours after you have decided to make a purchase! This means that no matter what time of day you sell a mutual fund, the sale price will always be the closing value rather than the value at the time of the transaction. Lastly, ETF transparency means that timely metrics are available that can assist in the decision-making process of the ETF strategy. Accurate and current data is critical when navigating through the 8th year of a bull market. The bottom line is that ETF transparency allows for more efficient and informed trading opportunities.

4.    Liquidity

Unlike mutual funds, ETFs trade throughout the day and their prices fluctuate accordingly. The pricing of an ETF closely tracks the price changes in its underlying securities. For most ETFs there is a highly liquid market, meaning that enough shares trade each day to satisfy buyers and sellers. This makes it possible for investors to execute buy or sell orders as soon as market conditions change. The pricing of an ETF is efficient because ETFs offer shares through a creation and redemption process. In other words, the number of outstanding shares may be increased or decreased daily as necessary to reflect demand. This is known as an “in-kind” exchange.

In general, ETF selections are a better option in comparison to mutual funds. While ETFs are much newer investment vehicles (introduced in 1993 vs. mutual funds dating back to 1924), they serve a valuable role in many portfolios today. ETFs were first created with the goal of providing investors with a simple, transparent trade in which verification of appropriate tracking was easily obtained. This sense of ease and minimalism have been two reasons for their growing popularity among institutional and retail investors. 

As a side note, always do your research and verify that your investment selection is a true ETF. Today, there are hybrid securities known as Exchange Traded Managed Funds (ETMFs) that may look like an ETF, but lack the transparency so critical to its original ETF form. Pure ETFs provide an effective method to low-cost, tax-efficient, transparent, and liquid management of a portfolio. As with all investment decisions, always complete your due diligence and proper vetting before making a purchase.

Sources
1.  http://www.etf.com/sections/blog/23864.html?nopaging=1
2. According to bankrate calculator: http://www.bankrate.com/calculators/retirement/mutual-funds-fees-calculator.aspx
3. Leveraged and ETF’s containing derivatives are just a few exceptions
4. Wall Street Journal, Tax-Wise Fund vs. ETFs by Veronica Dagher

 


*The foregoing content reflects the author's personal opinions which may not coincide with the opinions of the firm, and are subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that these statements, opinions, or forecasts provided herein will prove to be correct. Past performance is not a guarantee of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. All investing involves risk. Asset allocation and diversification does not ensure a profit or protect against a loss. Finally, please understand that–as with other social media–if you leave a comment, it will be made public.