Since the turmoil of the financial crisis in 2008, financial planners have become increasingly obsessed about so-called "black swan" and "fat tail" events. As we witnessed one "impossibly rare" volatile day after another that fall, the fact that financial planning models its uncertainty using Monte Carlo analysis with normal distributions suddenly became not a virtue, but a liability. Yet for most clients, who don't invest with leverage, even a black swan event does not result in immediate destitution, but merely sets them on an unsustainable path that must be adjusted in the years that follow to prevent a subsequent depletion of assets. Which means in reality, it's not about more accurately modeling the probability of a black swan... it's about having a plan for dealing with it when the time comes.Read More...
As a part of the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), income limits on Roth conversions were repealed, starting in 2010. However, while TIPRA removed income limits for Roth conversions, it did not eliminate the income limits for new Roth contributions.
As a result, a new creative use of Roth conversions opened up: just contribute to a non-deductible traditional IRA, and then complete a Roth conversion immediately thereafter. Since neither transaction individually has a contribution limit, the client can still get money into a Roth IRA each year, regardless of the still-remaining income limits on Roth contributions. The end result: accomplishing a "backdoor Roth IRA contribution" for someone who wouldn't normally be eligible to make a Roth IRA contribution in the first place.
There's just one problem: the IRS can still call a spade a spade, and the rising abuse of this backdoor Roth IRA contribution "loophole" may bring about its permanent end.
As safe withdrawal rate research gains in popularity, it is both increasing used - and misused - by financial planners and the press. Although the research does have its limitations - which I discuss frequently in my presentations at various financial planning conferences throughout the year - and is built on many assumptions that deserve to be challenged, a rising number of safe withdrawal rate critics appear to criticize the approach based on inaccurate statements. So let's clear up a few points of confusion about safe withdrawal rate assumptions. Read More...
Although the research on safe withdrawal rates has been replicated many times by various researchers to substantiate a safe, sustainable spending level that can withstand at least anything that history has thrown at a retiree, one significant challenge has always lingered: a safe withdrawal rate recommendation is only as good as the time horizon it's associated with. In other words, while the research may support a 4.5% safe withdrawal rate, it's predicated on a 30-year time horizon. If the client planned to retire over a 35- or 40-year time horizon, the safe withdrawal rate would be different. Unfortunately, though, the client may not know that a 35-year time horizon is needed until it's year 31 and there are still a few years left to go! So what's the outlook for a safe withdrawal rate approach if the client outlives the original time horizon?Read More...
Once again, the Social Security and Medicare Boards of Trustees have released their annual report on the fiscal health of the Social Security and Medicare programs, and once again the Trustees report shows that the fiscal health of the two programs has further deteriorated, a combination of primarily slower-than-projected growth, upwards adjustments to long-term costs (Medicare), and increases in estimated longevity (Social Security). With the latest projections, the Social Security trust fund is projected to be exhausted in 2036 (last year it was anticipated to last until 2037), and the Medicare trust fund will be depleted in 2024 (compared to last year's estimate of 2029). But while it's true that the systems are both headed for serious trouble as the trust funds potentially go "bankrupt" - the reality is that the actual depletion of the trust funds may still have a far less severe financial planning impact than many assume, for one simple reason: the overwhelming majority of Social Security and Medicare benefits will actually still be funded, via our ongoing Social Security and Medicare tax system!Read More...
The concept of safe withdrawal rates has been around for almost 20 years now, since it was first kicked off in the Journal of Financial Planning by Bill Bengen in 1994. Over the years, a number of developments have come along that has further elaborated upon and enhanced the body of research above and beyond its original roots. Nonetheless, despite significant advances in the theory and methodologies used to apply safe withdrawal rates in practice, one significant misconception remains, for some inexplicable reason: the idea that safe withdrawal rates are a pure auto-pilot program forcing clients to spend little from their portfolios, even in bull markets, such that the client is expected in any reasonable market environment to pass away leaving an enormous inheritance after a life of 'excessive' frugality. This misconception needs to end; it's not what the financial planning process is about, it's not what the research says, and it's not what is done in practice anyway!Read More...
It has been popular in recent years to bash volatility, and standard deviation as its most common way of being quantified, as a terrible measure of risk. Not just because of the criticisms associated with standard deviation itself and whether market returns are normally distributed, but at a more basic level: is the up-and-down volatility of an investment what a client really cares about? Shouldn't risk be more focused on loss, the impact of losses on goals, and the probability of achieving goals, than just the raw choppy volatility itself? Yes, perhaps, but on the other hand maybe we don't give volatility itself enough credit for the risk that it does create: volatility in investment returns leads to volatility and uncertainty about the timing of retirement and other goals and the risk that they cannot be achieved in the time anticipated.
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For many years, the use of annuities for retirement income guarantees often fell along all-or-none lines - either you annuitized the entire amount of income the client needed, or you didn't. In more recent years, this view has shifted, whether it means just annuitizing a portion of the client's assets to satisfy some of the income needs, or using a variable annuity with income/withdrawal guarantees to insure at least a portion of the income goals.
Although these strategies are viewed by many as a more balanced and "diversified" way to distribute income needs amongst various products and risks - for instance, insuring 50% of the income goal and investing towards the other 50% - it begs a fundamental question: what exactly does it mean to insure half of a client's retirement income goal?Read More...
The proverbial writing has been on the wall for a while, but now it's official: the Social Security withdraw-and-reapply strategy will no longer be available, except under relatively limited circumstances. On the plus side, though, it appears that the strategy has been far more hype than actual value, and the number of people directly affected should be very minimal.
One of the often-professed virtues of financial planning is that while we cannot necessarily completely prevent market declines from impacting client portfolios, at least when they do happen, “we have a plan.” Yet for too many financial planners, the reality is that the “plan” is nothing more than “we’ll keep doing exactly what we have been doing, and wait and hope for things to get better.” Well, if your only plan for dealing with a market decline is waiting it out in the hopes that things will recover in a timely manner, you don’t really have a plan; you just have a hope. A real plan takes more.
