Happy New Year!

Happy New Year!

 

2020 brought many expected and unexpected challenges – on top of a political election year, we faced a pandemic, a challenged economy, and turbulent markets, to name a few.

We don’t yet know what 2021 will bring for the economy, for markets, or for our own lives, but there are still some things we can control.

As we welcome in a new year with hopeful expectations, let’s take a moment to recommit to those factors within our control:

 

Sharing Our Dreams and Values

As we reflect on the strange and challenging times this year, many find themselves wondering what their families did in the past to get through difficult times. We may remember snippets of stories told by our elders or passed on through our family, but often wish we knew more.

As wealth advisors we know firsthand the importance of legacy planning through legal documents. We also believe in the value of sharing the essence of who you are, your values, and experiences for future generations to come, through the creation of a Family Legacy Letter.

 

Building Better Financial Behaviors

Too many investors focus on markets when they should focus on themselves, their hopes, their goals, and their dreams. Identifying the choices in our control isn’t just a good financial lesson, it’s a great life lesson dating back to ancient Greece, when the Stoic philosopher Epictetus said:

“The chief task in life is simply this: to identify and separate matters so that I can say clearly to myself which are externals not under my control, and which have to do with the choices I actually control.”

 

Understanding Our Biases

Daniel Kahneman and Amos Tversky are famous for their work on human behavior, particularly around judgment and decision making. We can apply much of their discoveries to investor behavior. While we can’t completely eliminate biases, we can learn about them and how they impact our decision making, allowing us to take action to address them and avoid costly mistakes.

 

May you and your family enjoy the warmth this season has to offer and a new year filled with hope, love and success!

 

 

Why Do I Need A Financial Plan?

Why Do I Need A Financial Plan?

 

If you fail to plan, you are planning to fail. This adage, generally attributed to Benjamin Franklin, is as true for financial planning as it for other endeavors. At Merriman, we want to help clients meet their financial goals. Any successful goal-setting strategy includes a detailed plan. But this plan is not only helpful for increasing chances of success. It is also one method we use to minimize potential failures.

When you first met your advisor, did you start your relationship and immediately hand over your hard-earned resources to their management, or did they put you through a rigorous due-diligence process to develop an agreed-upon plan before moving forward?

While the latter requires a lot more time and energy upfront from both parties, this hard work pays off and makes the relationship more valuable and more productive in the long-term. (Short-term pain, long-term gain). It can especially add value during times of uncertainty or major life transitions, such as retirement. When the unexpected happens, the plan serves as the basis for deciding how to react. Without a plan, it is easy to act impulsively or without fully considering future consequences. A good plan has already taken into account potential pitfalls or trouble spots and has a strategy to overcome them. With a plan in place, you are able to adjust course, if needed, and ultimately still get to your desired outcomes.

At Merriman, we build a plan together from the beginning of our relationship and stress test your resources to determine the likelihood of achieving your most important financial goals. We start with a discovery meeting where we map out all aspects of your life—financial and otherwise—so we can provide a truly customized plan to help you achieve your goals. To make this meeting as productive as possible, we ask that if you have a spouse or partner, have them join us, as the plan we are building together is for the both of you.

As part of our due diligence, we securely collect important items such as tax documents, insurance statements, estate planning documents, paystubs, budgeting and expenses, financial accounts and retirement income statements, and debts, among other information. This may seem like a lot to ask for at the start, but these documents provide clues to potential weak spots in your plan.

Think of it this way: when you meet with a physician for the first time, do they judge your health based solely on your physical appearance, or do they ask tough questions and run a gamut of tests before providing a diagnosis? The collected samples and information serve as the inputs and the test results are the outputs based on the criteria used in the examination. A financial plan can be thought of the same way.

While test results are useful, they are in themselves really just data. We then interpret this data, informed by our education and experience, to provide comprehensive advice on how best to achieve your financial goals.

Why do you need a financial plan? Because in good times and difficult times, a financial plan is your best opportunity to meet your financial goals. At Merriman, that’s our mission, and that’s why we take financial planning as seriously as we do. You should expect the same attention to detail from anyone with whom you choose to work.

Reach out to us to discuss your specific goals and the necessary next steps to achieve them.

 

What to Do When the Pandemic Forces an Early Retirement

What to Do When the Pandemic Forces an Early Retirement

 

 

Because of the pandemic, many companies are trying to rapidly reduce their workforces. Boeing recently offered their voluntary layoff (VLO) to encourage employees near retirement to do so. Other companies will resort to traditional layoffs.

What should you do when you find yourself unexpectedly retired—whether voluntarily or not?

 

Assess the Situation—Review Your Numbers

Retirement is a major life change for everyone—even more so when it happens unexpectedly. The first step financially is to get a clear picture of your assets. This includes investment accounts and savings. It also includes debts like credit cards and mortgages. In addition, you’ll want to identify current or future sources of income such as pensions or Social Security.

Next, you’ll want to be clear about how much you’re spending. Free or low-cost tools like mint or YNAB can help you easily track how much you’re spending as well as categorize your expenses. That may make it easier to see if there are ways to reduce costs, if needed.

Knowing your minimum monthly costs is a major part of determining if you have the resources to retire successfully or if you need to find another way to work and earn money before retirement.

 

Identify Adjustments

If you’re unexpectedly retired, identify if you need to reduce your expenses. Some of those reductions may happen automatically—most families aren’t spending as much on travel right now—while other reductions may require more planning.

You’ll want to account for healthcare costs. For some, employers may continue to provide health coverage until Medicare begins at age 65. For others, health insurance will have to be purchased either through COBRA to maintain the current health insurance or through the individual markets. These policies can cost significantly more than when the employee was working, although by carefully structuring income, it may be possible to get subsidies to reduce this cost.

Identify if you need additional sources of income. This may come from part-time employment. It may also come from reviewing your Social Security strategy. Social Security benefits can begin as early as age 62, although doing so will permanently reduce your benefit. Take time to compare the tradeoffs of starting your Social Security benefit at different ages.

Finally, review your investment allocation. You’ll want to make sure you have an appropriate percentage providing stability (cash, CDs, short-term bonds) to protect you from the fluctuation of the market when you need the money. With a retirement period of 30 years or more, stocks will likely be an important part of your investment strategy, too.

 

Do Some Tax Planning

It’s important to identify what mix of accounts you have. IRA, Roth, and taxable accounts are all taxed differently. It’s often best to spend from the taxable account first, then the IRA, and save Roth accounts for last, although there may be times where it’s better to use a mix from different types of accounts each year.

Many early retirees temporarily find themselves in a lower tax bracket because they don’t have a salary and they haven’t yet started Social Security. This may be a time to take advantage of Roth conversions. Moving money from a traditional retirement account to a Roth account now, while you’re in a lower tax bracket, can significantly reduce taxes over your lifetime.

 

Planning Beyond Money

When a major change like this occurs, it’s important to take care of your finances. It’s also important to take care of your mental health. Retirees often have years to plan for this major life change. Because of the pandemic, many are making this change suddenly and unexpectedly.

It’s essential to take the time to set a new routine and identify new hobbies or other activities to incorporate into your life.

 

Conclusion

When retirement is unexpected, it doesn’t have to be scary. Building a financial plan to determine if you’re on track to meeting your goals, to discern what adjustments should be made to help you reach those goals, then to execute that plan can help provide the peace of mind brought about by a successful retirement—even when it comes sooner than expected. If you want help with this process, reach out to us

  

Ask Merriman: SIPC Coverage

Q: Brokerage houses have additional insurance that covers certain events relative to my deposit. Should I be concerned when the funds on deposit at a major brokerage exceed the insurance limits?

Let’s assume this refers to SIPC coverage brokerage firms use. While loosely similar to the more familiar FDIC insurance to cover bank deposits, SIPC insurance is much more limited in scope.

Essentially, SIPC insurance provides coverage from loss due to the brokerage firm going out of business. It provides up to $500,000 of protection on securities and up to $250,000 in cash in excess of what is recovered. It does not provide coverage from a decline in the value of investments.

To help visualize an example of when SIPC would come into play, let’s use an example of a $5 million client account:

· Assume the brokerage firm fails, resulting in $5 billion of client claims on assets.

· Assume 90% of clients’ assets ($4.5 billion) are recovered. The actual historical recovery rate is 98.7% according to SIPC.

· The client in this example holding $5 million in SIPC eligible assets would receive $4.5 million from recovered assets and $500,000 from SIPC. The loss to the $5 million client account would be zero.

It’s exceedingly rare for a client to be entitled to recover damages under SIPC and not be made whole because of the $500,000 limit.

Also, most large brokerage firms purchase “excess of SIPC” insurance, which insures clients for any losses above the $500,000 limit.

Ultimately, clients do not need to be concerned when funds at a brokerage exceed the coverage limits.

More detailed information about SIPC coverage can be found here.


 

Do you have a question about investments, taxes, retirement or insurance? Send it to “Ask Merriman” and one of our financial advisors will help you find an answer.

Ask Merriman: Required Minimum Distribution (RMD)

Q: I turned 70 ½ in 2016, but waited until March 2017 to take my first required minimum distribution (RMD). I planned to wait until 2018 to take my next distribution. Am I understanding correctly that I must take the second RMD in 2017, too?

You are only allowed to delay your RMD the first year you take it. You can delay as late at April 1 of the year after you turn 70 ½.

In every subsequent year, the RMD must be completed by December 31 of that year. If you delay taking your RMD the first year, it means you will have to take two RMDs in your second year.


 

Q: Are Roth accounts subject to an annual required minimum distribution (RMD)? I thought only traditional retirement accounts were, but I’ve been hearing differently.

Roth IRAs are not subject to an annual RMD. However, if your employer offers a Roth 401(k), that is subject to annual RMDs upon reaching age 70 ½.

Fortunately, if you want to avoid taking distributions, it’s possible to complete a rollover from the Roth 401(k) to the Roth IRA. This should allow you to avoid having to take an annual RMD from your Roth money.


 

Q: Do the required minimum distributions (RMDs) from IRAs that become effective in the year I turn  70 ½ apply only to IRAs, or do they also apply to 401(k)s? More specifically, if I am still working full time, does the RMD requirement apply to my 401(k)?

If you’re still working when you turn 70 ½, you may not need to take an RMD from the 401(k) at your current employer if the following conditions are met:

  • You’re employed throughout the entire year
  • You own no more than 5% of the company
  • You participate in a plan that allows you to delay RMDs

You must take your first RMD from the 401(k) the year you retire. In that year, you have until April 1 of the following year to take the distribution. However, if you delay, you‘ll end up taking two RMDs the second year.

The RMDs that become effective the year you turn 70 ½ still apply to all traditional IRAs, and all other 401(k)s and Roth 401(k)s.


 

Q: If I decide to give my RMD to my church, do I need to give the entire withdrawal amount required by the IRS, or can I just give a portion and keep the rest for other living expenses?

You don’t need to give the entire RMD amount to your church (or any charity) to complete a Qualified Charitable Distribution (QCD). The QCD can be less than or more than the RMD, up to a $100,000 limit per taxpayer per year.

A taxpayer with a $19,480 RMD in 2017 could certainly make a $5,000 QCD, and take the rest as a regular distribution for living expenses.

The key points to remember when completing the qualified charitable distribution from an IRA to a charity are that the IRA owner must:

  • Already be age 70 ½ on the date of distribution.
  • Submit a distribution form to the IRA custodian requesting that the check be made payable directly to the charity.
  • Ensure that no tax withholding is being made from the QCD to the charity.
  • Send the check directly to the charity, or to the IRA owner to be forwarded along to the charity.

 

Do you have a question about investments, taxes, retirement or insurance? Send it to “Ask Merriman” and one of our financial advisors will help you find an answer.