Alternative Approaches to Retirement Planning

Alternative Approaches to Retirement Planning

Is the conventional wisdom for everyone? 

Provided by Jose Medina    

Questioning traditional assumptions about retirement planning can be illuminating. Some retirement planners and economists argue that they need to be reexamined.

Does most retirement planning focus on the future at the expense of the present? One noted economist makes that case. Laurence Kotlikoff, the former White House economic advisor who writes for PBS NewsHour, contends that your retirement savings effort should be structured in a way that allows you to protect your standard of living today and tomorrow.1

A key question in retirement planning is “How much will you need to spend in the future?” Kotlikoff thinks the appropriate question should be “How should you gradually adjust your household spending as you grow older?” He argues that basing your retirement planning on a projected retirement income target is faulty.1

As an illustration, he references the example of what you do when you have errands to run before you catch a flight. The wisest thing to do is to start with your departure time and think backward. (How early do you have to be at the airport? How much time will you need to complete errand A and errand B? How much time should you allow for travel between A & B and after B?) This is what we usually do, and how we figure out when to leave home with enough time to accomplish everything. You plan by looking backward from the future.1

Kotlikoff thinks that typical retirement planning only looks forward. It projects an income target and implies that you have to save $X per year or per paycheck for X years to build a sufficient nest egg to generate that income. This amounts to mere guesswork, he believes, and invites two potential problems. One, if the retirement income target is set too high, you can end up saving more for retirement than you really need and injure your standard of living before retiring. Two, if the retirement income target is set too low, you can end up spending more than you should before you retire and saving less than you need. (And there’s another question. Will your household spending in retirement match what it was years before? Maybe, maybe not.) Kotlikoff thinks that lifetime spending and saving plans have more merit – again, planning by looking backward from the future.1

Is saving overrated? It is pounded home that Americans aren’t saving enough for retirement, but some people don’t think saving is the only step to retiring well. In 2013, retirement planner Joe Hearn (one of MarketWatch’s RetireMentors) posted a column noting several other tips to entering retirement in better financial shape. One, retire without debt. Two, retire with a paycheck (start a small business or work part-time). Three, don’t claim Social Security at 62. There were other pointers, such as retiring to a cheaper part of the country (or world) and going overseas for major surgeries. (As an example, the largest cardiac hospital in the world is India’s Narayana Hrudayalaya Health Center, which is highly regarded and charges about $2,000 for open heart surgery.) If you haven’t saved much for retirement, alternative financial moves like these (and others) could conceivably leave you with lower expenses and more money to live on or invest.2

Should you borrow money & invest it for retirement? This idea definitely isn’t for everyone; it was championed in 2010 by Yale University economists Ian Ayres and Barry Nalebuff. As twenty-somethings have time on their side but not usually a lot of money, Ayres and Nalebuff contended that young people would do well to borrow money and invest it in equities. You don’t need to see a loan officer to make this happen, as there are ways to do it through brokerages; a family loan could also be made pursuant to the same goal. As the risks are potentially major for borrower and lender, you don’t see many such arrangements.3

How about asking your employer for a second retirement plan? Some people have the leverage to pull this off. In particular, doctors and executives without much in the way of savings can make a valid argument that they need (and should have) a deferred compensation plan in addition to the usual qualified retirement plan, as Social Security payments won’t seem large enough when retirement comes. It helps, of course, if they have worked for the employer for quite some time. A reasonable benefit from such a plan would = number of years that the executive or doctor has worked for the employer x 2.0%.

With many people finding it a challenge to save for their futures, it isn’t surprising that these unconventional moves are getting a look.

Jose Medina may be reached at 469-777-8082 or info@medinaadvising.com

www.medinaadvising.com

This material was prepared for J I Medina Investments, and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – pbs.org/newshour/making-sense/make-your-standard-of-living-the-basis-for-all-financial-planning/ [3/31/14]

2 – marketwatch.com/story/7-alternatives-to-saving-for-retirement-2013-09-27 [9/27/13]

3 – money.usnews.com/money/retirement/articles/2010/07/06/3-unconventional-retirement-investing-strategies [7/6/10]

Tax Scams & Schemes

Tax Scams & Schemes

The “dirty dozen” that criminals & cheats try to get away with year-round.  

Provided by Jose Medina

Year after year, criminals try to scam certain taxpayers. Year after year, certain taxpayers resort to schemes in an effort to put one over on the IRS. These cons occur year-round, not just during tax season. In response to their frequency, the IRS has listed the 12 biggest offenses – scams that you should recognize, schemes that warrant penalties and/or punishment.

Identity theft. Theft of federal tax refunds climbed 400% from 2011 to 2013. Cyberspace isn’t always the scene of the crime: thieves can steal your mail or rifle through your trash. If you are a victim, the IRS isn’t even obligated to tell you if the crook has been caught.1 

Phishing. If you get an unsolicited email claiming to be from the IRS or the Electronic Federal Tax Payment System (EFTPS), it is a scam. Neither agency emails taxpayers out of the blue seeking information. If such an email lands in your inbox, forward it to phishing@irs.gov.2

Phone shakedowns. Each year, criminals call up taxpayers and allege that they owe the IRS money, which must be paid quickly via wire transfer or a pre-loaded debit card. Visual and aural tricks can lend authenticity to the ruse: the caller ID may show a toll-free number and background noise may suggest a call center. The caller may know the last four digits of your Social Security Number, or mention a phony IRS employee badge number. After the initial call, there may be a follow-up call or email from “the DMV” or “the police”. Such behavior can be reported to the Treasury Inspector General for Tax Administration at (800) 366-4484.2

Sham tax preparation services. While there are many good, legitimate small businesses providing tax preparation, there are also some con artists out there who aim to rip off SSNs and personal information and grab phantom refunds. Worth noting, as always: you are legally responsible for what’s on your 1040 form, even if a third party prepares it.2

Tax preparers exaggerating/swiping refunds. In this scenario, the scammers do prepare and file 1040s, but they charge big fees up front, claim refunds that are way out of line, and deposit some or all of the undeserved refund in a bank account. They also avoid giving the taxpayer a copy of the filed return.2

Bogus charities. An old wisecrack says that you can make a lot of money running a non-profit organization. Some taxpayers try to, claiming that they are gathering funds for hurricane victims, an overseas relief effort, an outreach ministry, and so on. You can always ask them for visual proof of their charity’s tax-exempt status, and if you are near a computer or smartphone, you can visit irs.gov and use their Exempt Organizations Select Check search box. A specious charity may ask you for cash donations and/or your SSN and banking information.2 

Phony income, expenses & exemptions. Some taxpayers exaggerate or falsify incomes in pursuit of the Earned Income Tax Credit, the fuel tax credit and other big federal tax perks. A fraudulent claim for the fuel tax credit can backfire into a penalty of as much of $5,000. Once caught, taxpayers may be on the hook for repaying the credit and refund amounts with interest and penalties, and may face criminal prosecution.2

Lying on Forms 4852 or 1099. Some individuals send the IRS “corrected” 1099s or 4852s that are lies, claiming they earned nothing last year despite what their employers reported.2 

Concealed offshore income. Not all taxpayers adequately report offshore income, and if you don’t, you are a lawbreaker to the IRS. You could be prosecuted, or at least contend with fines and penalties. The IRS restarted its Offshore Voluntary Disclosure Program (OVDP) in 2012 to give taxpayers who were negligent or guilty a chance to come clean.2

Deceits using LLCs, LLPs & offshore credit/debit cards. While the entities and credit/debit cards may be legitimate, some taxpayers use them in multi-layered, flow-through schemes to hide taxable income or true ownership of assets.2

Incredible trusts. Properly structured trusts can help taxpayers defer or reduce taxes, and in some cases legally avoid them. Specious trusts – created with or without the “help” of unprincipled tax and estate consultants – can result in an IRS crackdown.2

Frivolous arguments. There are seminar speakers and books claiming that federal taxes are illegal and unconstitutional, and that Americans only have an implied obligation to pay them. These and other arguments crop up occasionally when people owe back taxes, and at present they carry little weight in the courts and before the IRS. Section 1 of the Internal Revenue Code imposes income tax on all Americans, specifically 26 U.S.C. § 1 and 26 U.S.C. § 1(a). IRC Section 6072 establishes April 15 as the annual federal tax deadline.2,3

Watch out for these ploys – and watch so you don’t run afoul of tax law.          

Jose Medina may be reached at 469-777-8082 or info@medinaadvising.com

www.medinaadvising.com

This material was prepared for J I Medina Investments and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – money.cnn.com/2014/04/16/pf/taxes/refund-identity-theft/ [4/16/14]

2 – irs.gov/uac/Newsroom/IRS-Releases-the-%E2%80%9CDirty-Dozen%E2%80%9D-Tax-Scams-for-2014;-Identity-Theft,-Phone-Scams-Lead-List [2/21/14]

3 – docs.law.gwu.edu/facweb/jsiegel/Personal/taxes/JustNoLaw.htm [4/17/14]

The Retirement We Imagine, the Retirement We Live

The Retirement We Imagine, the Retirement We Live

Examining the potential differences between assumption & reality. 

Provided by Jose Medina

Financially, how might retirement differ from your expectations? To some degree, it will. Just as few weathercasters can accurately predict a month’s worth of temperatures and storms, few retirees find their financial futures playing out as precisely as they assumed.

As you approach or enter retirement, you may find that your spending and your exit from your career don’t quite match your expectations. You may be surprised by these developments, even pleasantly surprised by some of them.

Few retirees actually outlive their money. If this was truly a crisis, we would see federal and state governments and social services agencies addressing it relentlessly. The vast majority of retirees are wise about their savings and income: they don’t spend recklessly, and if they need to live on less at a certain point, they live on less. It isn’t an ideal choice, but it is a prudent one. Health crises can and do impoverish retirees and leave them dependent on Medicaid, but that tends to occur toward the very end of retirement rather than the start.

You may not need to retire on 70-80% of your end salary. This is a common guideline for new retirees, but according to some analysts, you may not need to withdraw that much for long.

In the initial phase of retirement, you will probably want to travel, explore new pursuits and hobbies and get around to some things you may have put on the back burner. So in the first few years away from work, you might spend roughly as much as you did before you retired. After that, you could spend less.

Bureau of Labor Statistics data is very revealing about this. JP Morgan Asset Management recently studied U.S. household spending and found that it peaks at age 48. The average U.S. household headed by people aged 65-74 spends only 63% as much as a household headed by people aged 55-64. Additionally, the average household headed by people 75 and older spends only 72% as much as the average household headed by people aged 65-74.1

In the big picture, households run by those 75 and older typically spend about half as much per year as households headed by people in their late forties.1 

Further interesting analysis of BLS statistics and retirement spending patterns comes from David Blanchett, the head of retirement research at Morningstar Investment Management. He sees a correlation between career earnings and retirement spending, one contrary to many presumptions. Comparatively speaking, he notes that higher-earning retirees commonly have to replace less of their income once their careers conclude. As he commented to Money Magazine, “the household that makes $40,000 a year might have an 85% replacement rate, and the household making $100,000 a year might need 60%.”2

Why, exactly? The upper-income household is watching its costs fall away in retirement. The home loan, the private school tuition, dining out due to convenience, the professional wardrobe, the car payment, the workplace retirement plan contribution – this is where the money goes. When these costs are reduced or absent, you spend less to live. Blanchett believes that the whole 70-80% guideline may “overestimate the true cost of retirement for many people by as much as 20%.”2

Your annual withdrawal rate could vary notably. Anything from healthcare expenses to a dream vacation to a new entrepreneurial venture could affect it. So could the performance of the stock or bond market.

You could retire before you anticipate. You may want to work well into your sixties or beyond – and the longer you wait to claim Social Security benefits after age 62, the greater your monthly payout. Reality, on the other hand, shows that most people don’t retire at age 66, 67 or 70: according to Gallup, the average retirement age in this country is 61. The aforementioned JP Morgan Asset Management study determined that less than 2% of Americans wait until age 70 to claim Social Security benefits. So if your assumption is that you will work to full retirement age (or later), you should keep in mind that you may find yourself electing to claim Social Security earlier, if only to avert drawing down your retirement savings too quickly.1 

You don’t have to be a millionaire to have a happy retirement. In a 2011 Consumer Reports poll of U.S. retirees, 68% of respondents were “highly satisfied” with their lives irrespective of their financial standing. Backing that up, JP Morgan Asset Management found that retiree satisfaction increased only incrementally the more retirement spending surpassed $40,000 a year.1 

The retirement you live may be slightly different than the retirement you have imagined. Fortunately, retirement planning and retirement income strategies may be revised in response.

Jose Medina may be reached at 469-777-8082 or info@medinaadvising.com

www.medinaadvising.com

This material was prepared for J I Medina Investments  and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – reuters.com/article/2014/03/12/us-column-stern-advice-idUSBREA2B1R020140312 [3/12/14]

2 – money.cnn.com/2014/02/26/retirement/retirement-spending.moneymag/index.html [2/26/14]

Retirement Seen Through Your Eyes

Retirement Seen Through Your Eyes

After you leave work, what will your life look like?

Provided by Jose Medina 

How do you picture your future? If you are like many baby boomers, your view of retirement is likely pragmatic compared to that of your parents. That doesn’t mean you have to have a “plain vanilla” tomorrow. Even if your retirement savings are not as great as you would prefer, you still have great potential to design the life you want.

With that in mind, here are some things to think about.  

What do you absolutely need to accomplish? If you could only get four or five things done in retirement, what would they be? Answering this question might lead you to compile a “short list” of life goals, and while they may have nothing to do with money, the financial decisions you make may be integral to achieving them. (This may be the most exciting aspect of retirement planning.)

What would revitalize you? Some people retire with no particular goals at all, and others retire burnt out. After weeks or months of respite, ambition inevitably returns. They start to think about what pursuits or adventures they could embark on to make these years special. Others have known for decades what dreams they will follow … and yet, when the time to follow them arrives, those dreams may unfold differently than anticipated and may even be supplanted by new ones.

In retirement, time is really your most valuable asset. With more free time and opportunity for reflection, you might find your old dreams giving way to new ones. You may find yourself called to volunteer as never before, or motivated to work again but in a new context.

Who should you share your time with? Here is another profound choice you get to make in retirement. The quick answer to this question for many retirees would be “family”. Today, we have nuclear families, blended families, extended families; some people think of their friends or their employees as family. You may define it as you wish and allocate more or less of your time to your family as you wish (some people do want less family time when they retire).

Regardless of how you define “family” or whether or not you want more “family time” in retirement, you probably don’t want to spend your time around “dream stealers”. They do exist. If you have a grand dream in mind for retirement, you may meet people who try to thwart it and urge you not to pursue it. (Hopefully, they are not in close proximity to you.) Reducing their psychological impact on your retirement may increase your happiness.

How much will you spend? We can’t control all retirement expenses, but we can control some of them. The thought of downsizing may have crossed your mind. While only about 10% of people older than 60 sell homes and move following retirement, it can potentially bring you a substantial lump sum or lead to smaller mortgage payments. You could also lose one or more cars (and the insurance that goes with them) and live in a neighborhood with extensive, efficient public transit. Ditching land lines and premium cable TV (or maybe all cable TV) can bring more savings. Garage sales and donations can have financial benefits as well as helping you get rid of clutter, with either cash or a federal tax deduction that may be as great as 30-50% of your adjusted gross income provided you carefully itemize and donate the goods to a 501(c)(3) non-profit.1

Could you leave a legacy? Many of us would like to give our kids or grandkids a good start in life, or help charities or schools – but given the economic realities of retiring today, there is no shame in putting your priorities first.

Consider a baby boomer couple with, for example, $285,000 in retirement savings. If that couple follows the 4% rule, the old maxim that you should withdraw about 4% of your retirement savings per year, subsequently adjusted for inflation – then you are talking about $11,400 withdrawn to start. When you combine that $11,400 with Social Security and assorted investment income, that couple isn’t exactly rich. Sustaining and enhancing income becomes the priority, and legacy planning may have to take a backseat. In Merrill Lynch’s 2012 Affluent Insights Survey, just 26% of households polled (all with investable assets of $250,000 or more) felt assured that they could leave their children an inheritance; not too surprising given what the economy and the stock market have been through these past several years.2

How are you planning for retirement? This is the most important question of all. If you feel you need to prepare more for the future or reexamine your existing plan in light of changes in your life, then confer with a financial professional experienced in retirement planning.

Jose Medina may be reached at 469-777-8082 or info@medinaadvising.com

www.medinaadvising.com

This material was prepared for J I Medina Investments and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – http://www.bankrate.com/finance/financial-literacy/ways-to-downsize-during-retirement.aspx [2/28/13]

2 – wealthmanagement.ml.com/Publish/Content/application/pdf/GWMOL/Report_ML-Affluent-Insights-Survey_0912.pdf [9/12]

How Do You Know When You Have Enough to Retire?

How Do You Know When You Have Enough to Retire?

There is no simple answer, but consider some factors. 

Provided by Jose Medina

You save for retirement with the expectation that at some point, you will have enough savings to walk confidently away from the office and into the next phase of life. So how do you know if you have reached that point?

Retirement calculators are useful – but only to a point. The dilemma is that they can’t predict your retirement lifestyle. You may retire on 65% of your end salary only to find that you really need 90% of your end salary to do the things you would like to do.

That said, once you estimate your income need you can get more specific thanks to some simple calculations.

Let’s say you are 10 years from your envisioned retirement date and your current income is $70,000. You presume that you can retire on 65% of that, which is $45,500 – but leaving things at $45,500 is too simple, because we need to factor in inflation. You won’t need $45,500; you will need its inflation-adjusted equivalent. Turning to a Bankrate.com calculator, we plug that $45,500 in as the base amount along with 3% annual interest compounded (i.e., moderate inflation) over 10 years … and we get $61,148.1 

Now we start to look at where this $61,148 might come from. How much of it will come from Social Security? If you haven’t saved one of those mailers that projects your expected retirement benefits if you retire at 62, 66, or 70, you can find that out via the Social Security website. On the safe side, you may want to estimate your Social Security benefits as slightly lower than projected – after all, they could someday be reduced given the long-run challenges Social Security faces. If you are in line for pension income, your employer’s HR people can help you estimate what your annual pension payments could be.

Let’s say Social Security + pension = $25,000. If you anticipate no other regular income sources in retirement, this means you need investment and savings accounts large enough to generate $36,148 a year for you if you go by the 4% rule (i.e., you draw down your investment principal by 4% annually). This means you need to amass $903,700 in portfolio and savings assets.

Of course, there are many other variables to consider – your need or want to live on more or less than 4%, a gradual inflation adjustment to the 4% initial withdrawal rate, Social Security COLAs, varying annual portfolio returns and inflation rates, and so forth. Calculations can’t foretell everything.

The same can be said for “retirement studies”. For example, Aon Hewitt now projects that the average “full-career” employee at a large company needs to have 15.9 times their salary saved up at age 65 in addition to Social Security income to sustain their standard of living into retirement. It also notes that the average long-term employee contributing consistently to an employer-sponsored retirement plan will accumulate retirement resources of 8.8 times their salary by age 65. That’s a big gap, but Aon Hewitt doesn’t factor in resources like IRAs, savings accounts, investment portfolios, home equity, rental payments and other retirement assets or income sources.2

For the record, the latest Fidelity estimate shows the average 401(k) balance amassed by a worker 55 or older at $150,300; the Employee Benefit Research Institute just released a report showing that the average IRA owner has an aggregate IRA balance of $87,668.2

Retiring later might make a substantial difference. If you retire at 70 rather than at 65, you are giving presumably significant retirement savings that may have compounded for decades five additional years of compounding and growth. That could be huge. Think of what that could do for you if your retirement nest egg is well into six figures. You will also have five fewer years of retirement to fund and five more years to tap employer health insurance. If your health, occupation, or employer let you work longer, why not try it? If you are married or in a relationship, your spouse’s retirement savings and salary can also help.

Can anyone save too much for retirement? The short answer is “no”, but occasionally you notice some “good savers” or “millionaires next door” who keep working even though they have accumulated enough of a nest egg to retire. Sometimes executives make a “golden handshake” with a company and can’t fathom walking away from an opportunity to greatly boost their retirement savings. Other savers fall into a “just one more year” mindset – they dislike their jobs, but the boredom is comforting and familiar to them in ways that retirement is not. They can’t live forever; do they really want to work forever, especially in a high-pressure or stultifying job? That choice might harm their health or worldview and make their futures less rewarding.

So how close are you to retiring? A chat with a financial professional on this topic might be very illuminating. In discussing your current retirement potential, an answer to that question may start to emerge.    

Jose Medina may be reached at 469-777-8082 or info@medinaadvising.com

www.medinaadvising.com

This material was prepared for J I Medina Investments, and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – bankrate.com/calculators/savings/simple-savings-calculator.aspx [5/30/13]

2 – marketwatch.com/story/how-to-know-if-you-have-enough-to-retire-2013-05-25 [5/25/13]

Will Teachers Get the Retirement That They Deserve?

Will Teachers Get the Retirement That They Deserve?

Classroom educators are coping with hybrid plans and pension fund shortfalls.

Provided by Jose Medina 

Arizona. Kentucky. Massachusetts. Michigan. Pennsylvania. Rhode Island. Tennessee. In these states and others, teachers are concerned about their financial futures. The retirement programs they were counting on have either restructured or face critical questions.1,2

Increasingly, states are transferring investment risk onto teachers. Hybrid retirement plans are replacing conventional pension plans. These new plans combine a 401(k)-style account with some of the features of a traditional pension program. Payouts from hybrid retirement plans are variable – they can change based on investment returns. The prospect of a fluctuating retirement income is making educators uneasy, especially in states such as Kentucky where teachers do not pay into Social Security.1 

Traditional pensions have vanished for teachers starting their careers in Michigan, Rhode Island, and Tennessee. In 2019, that may also happen in Pennsylvania.1

In some states, educators are being asked to offset a shortfall in pension funds. Arizona teachers now must contribute 11.3% of their pay to the Arizona State Retirement System, compared to 2.2% in 1999. (What makes this situation worse is that the average Arizona public schoolteacher earns 10% less today than he or she did in 1999, adjusted for inflation.)2

Classroom teachers in Massachusetts already have 11% of their salaries directed into the state retirement fund; in California, almost 10% of teacher pay goes into the state retirement system. (The national average is 8.6%.) Make no mistake, some of these pension fund problems are major: New Jersey’s state retirement system is only 37% funded, and Kentucky’s is just 38% funded.1,3

How can teachers respond to this crisis? One way is to plan for future income streams beside those from underfunded or reconceived state retirement systems. A talk with a financial professional – particularly one with years of experience helping educators make sound, informed financial decisions – may help identify the options.

That conversation should happen sooner rather than later. Educators in some states are no longer assured of fixed pension payments – and unfortunately, the ranks of these teachers seem to be growing.

Jose Medina may be reached at 469-777-8082 or info@medinaadvising.com

www.medinaadvising.com

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This material was prepared for J I Medina Investments and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – money.cnn.com/2018/04/04/retirement/teacher-pensions-kentucky/index.html [4/4/18]

2 – money.cnn.com/2018/04/20/pf/arizona-teacher-pay/index.html [4/20/18]

3 – yankeeinstitute.org/2018/04/bill-seeks-to-lower-teacher-pension-contribution/ [4/11/18]

Different Types Of IRAs

The Different Types of IRAs

This popular retirement savings vehicle comes in several varieties. 

Provided by Jose Medina 

What don’t you know? Many Americans know about Roth and traditional IRAs, but there are other types of Individual Retirement Arrangements. Here’s a quick look at all the different types of IRAs: 

Traditional IRAs (occasionally called deductible IRAs) are the “original” IRAs. In most cases, contributions to a traditional IRA are tax deductible: they reduce your taxable income, and as a consequence, your federal income taxes. Earnings in a traditional IRA grow tax deferred until they are withdrawn, but they will be taxed upon withdrawal, and those withdrawals must begin after the IRA owner reaches age 70½. I.R.S. penalties and income taxes may apply on withdrawals taken prior to age 59½.1 

Roth IRAs do not feature tax-deductible contributions, but they offer many potential perks for the future. Like a traditional IRA, they feature tax-deferred growth and compounding. Unlike a traditional IRA, the account contributions may be withdrawn at any time without being taxed, and the earnings may be withdrawn, tax-free, once the IRA owner is older than 59½ and has owned the IRA for at least five years. An original owner of a Roth IRA never has to make mandatory withdrawals after age 70½. In addition, a Roth IRA owner may keep contributing to the account after age 70½, so long as he or she has earned income. (A high income may prevent an individual from making Roth IRA contributions.)1,2 

Some traditional IRA owners convert their traditional IRAs into Roth IRAs. Taxes need to be paid once these conversions are made.1

SIMPLE IRAs are traditional IRAs used in a SIMPLE plan, a type of retirement plan for businesses with 100 or fewer workers. Employers and employees can make contributions to SIMPLE IRA accounts. The annual contribution limit for a SIMPLE IRA is more than twice that of a regular traditional IRA.3 

SEP-IRAs are Simplified Employee Pension-Individual Retirement Arrangements. These traditional IRAs are used in SEP plans, set up by an employer for employees, and funded only with employer contributions.4 

Spousal IRAs really do not exist as a distinct IRA type. The term actually refers to a rule that lets non-working spouses make traditional or Roth IRA contributions as long as the other spouse works and the couple files joint federal tax returns.1 

Inherited IRAs are Roth or traditional IRAs inherited from their original owner by either a spousal or non-spousal beneficiary. The rules for Inherited IRAs are very complex. Surviving spouses have the option to roll over IRA assets they inherit into their own IRAs, but other beneficiaries do not. No contributions can be made to Inherited IRAs, which are also sometimes called Beneficiary IRAs.5 

Group IRAs are simply traditional IRAs offered by employers, unions, and other employee associations to their employees, administered through trusts.6

Rollover IRAs (occasionally called conduit IRAs) are IRAs created to store assets distributed from another qualified retirement plan, often an employer-sponsored retirement plan. If the original plan were a Roth, then a Roth IRA must be created for the rollover. Assets from a non-Roth plan may be rolled over into a Roth IRA, but the rollover will be viewed as a Roth conversion by the Internal Revenue Service.6,7 

Education IRAs are now mainly referred to by their proper name: the Coverdell ESA. A Coverdell ESA is a vehicle that helps middle-class investors save for a child’s education. Taxes are deferred on the assets saved and invested through the account. Contributions to a Coverdell ESA are not deductible, but withdrawals are tax-free, provided they are used to pay for qualified higher education expenses.8

Consult a qualified financial professional regarding your IRA options. There are many choices available, and it is vital that you understand how your choice could affect your financial situation. No one IRA is the “right” IRA for everyone, so do your homework and seek advice before you proceed.    

Jose Medina may be reached at 469-777-8082 or info@medinaadvising.com

www.medinaadvising.com

Click Subscribe to receive our newsletter that includes financial tips and tools from top financial gurus. Subscribe.

This material was prepared for J I Medina Investments and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – thestreet.com/story/14545108/1/traditional-or-roth-ira-or-both.html [4/4/18]

2 – forbes.com/sites/catherineschnaubelt/2018/04/25/choosing-the-best-ira-to-maximize-your-retirement-savings/ [4/25/18]

3 – fool.com/retirement/2017/10/28/2018-simple-ira-limits.aspx [10/28/17]

4 – investopedia.com/university/retirementplans/sepira/ [11/14/17]

5 – investopedia.com/terms/i/inherited_ira.asp [4/30/18]

6 – fool.com/retirement/iras/the-eleven-types.aspx [4/30/18]

7 – investor.vanguard.com/401k-rollover/options [4/30/18]

8 – investopedia.com/terms/c/coverdellesa.asp [4/30/18]

Retirement Planning Weak Spots

Retirement Planning Weak Spots

They are all too common. 

Provided by Jose Medina 

Many households think they are planning carefully for retirement. In many cases, they are not. Weak spots in their retirement planning and saving may go unnoticed.

Couples should recognize that they may face major medical expenses. Each year, Fidelity Investments estimates how much a pair of newly retired 65-year-olds will spend on health care throughout the rest of their lives. Fidelity says that on average, retiring men will need $133,000 to fund health care in retirement; retiring women, $147,000. Even baby boomers in outstanding health should accept the possibility that serious health conditions could increase their out-of-pocket hospital, prescription drug, and eldercare costs.1

Retirement savers will want to diversify their invested assets. An analysis from StreetAuthority, a financial research and publishing company, demonstrates how dramatic the shift has been for some investors. A hypothetical portfolio split evenly between equities and fixed-income investments at the end of February 2009 would have been weighted 74/26 in favor of equities exactly nine years later. If a bear market arrives, that lack of diversification could spell trouble. Another weak spot: some investors just fall in love with two or three companies. If they only buy shares in those companies, their retirement prospects will become tied up with the future of those firms, which could lead to problems.2

The usefulness of dollar cost averaging. Recurring, automatic monthly contributions to retirement accounts allow a pre-retiree to save consistently for them. Contrast that with pre-retirees who never arrange monthly salary deferrals into their retirement accounts; they hunt for investment money each month, and it becomes an item on their to-do list. Who knows whether it will be crossed off regularly or not?

Big debts can put a drag on a retirement saving strategy. Some financial professionals urge their clients to retire debt free or with as little debt as possible; others think carrying a mortgage in retirement can work out. This difference of opinion aside, the less debt a pre-retiree has, the more cash he or she can free up for investment or put into savings.

The biggest weakness is not having a plan at all. How many households save for retirement with a number in mind – the dollar figure their retirement fund needs to meet? How many approach their retirements with an idea of the income they will require? A conversation with a financial professional may help to clear up any ambiguities – and lead to a strategy that puts new focus into retirement planning.

Jose Medina may be reached at 469-777-8082 or info@medinaadvising.com

www.medinaadvising.com

Click Subscribe to receive our newsletter that includes financial tips and tools from top financial gurus. Subscribe.

This material was prepared for J I Medina Investments and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – marketwatch.com/story/youre-probably-going-to-live-longer-what-if-you-cant-afford-it-2018-04-23 [4/23/18]

2 – nasdaq.com/article/how-to-prepare-your-income-portfolio-for-volatility-cm939499 [3/26/18]

Backdoor Roth IRA

The Backdoor Roth IRA

A move that high earners can make in pursuit of tax-free retirement income.

Provided by Jose Medina 

Does your high income stop you from contributing to a Roth IRA? It does not necessarily prohibit you from having one. You may be able to create a backdoor Roth IRA and give yourself the potential for a tax-free income stream in retirement.

If you think you will be in a high tax bracket when you retire, a tax-free income stream is just what you want. The backdoor Roth IRA is a maneuver you can make in pursuit of that goal – a perfectly legal workaround, its legitimacy further affirmed by language in the Tax Cuts & Jobs Act of 2017.1

You establish a backdoor Roth IRA in two steps. The first step: make a non-deductible contribution to a traditional IRA. (In other words, you contribute after-tax dollars to it, as you would to a Roth retirement account.)1

The second step: convert that traditional IRA to a Roth IRA or transfer the traditional IRA balance to a Roth. A trustee-to-trustee transfer may be the easiest way to do this – the funds simply move from the financial institution serving as custodian of the traditional IRA to the one serving as custodian of the Roth IRA. (The destination Roth IRA can even be a Roth IRA you used to contribute to when your income was lower.) Subsequently, you report the conversion to the Internal Revenue Service using Form 8606.1,2

When you have owned your Roth IRA for five years and are 59½ or older, you can withdraw its earnings, tax free. You may not be able to make contributions to your Roth IRA because of your income level, but you will never have to draw the account down because original owners of Roth IRAs never have to make mandatory withdrawals from their accounts by a certain age (unlike original owners of traditional IRAs).1,3

You may be wondering: why would any pre-retiree dismiss this chance to go Roth? It comes down to one word: taxes.

The amount of the conversion is subject to income tax. If you are funding a brand-new traditional IRA with several thousand dollars and converting that relatively small balance to a Roth, the tax hit may be minor, even non-existent (as you will soon see). If you have a large traditional IRA and convert that account to a Roth, the increase in your taxable income may send you into a higher tax bracket in the year of the conversion.2

From a pure tax standpoint, it makes sense to start small when you create a backdoor IRA and begin the process with a new traditional IRA funded entirely with non-deductible contributions. If you go that route, the Roth conversion is tax free, because you have already paid taxes on the money involved.1

The takeaway in all this? When considering a backdoor IRA, evaluate the taxes you might pay today versus the tax benefits you might realize tomorrow.

The taxes on the conversion amount, incidentally, are calculated pro rata – proportionately in respect to the original, traditional IRA’s percentage of pre-tax contributions and earnings. If you are converting multiple traditional IRA balances into a backdoor Roth – which you can do – you must take these percentages into account.1

Three footnotes are worth remembering. One, a backdoor Roth IRA must be created before you reach age 70½ (the age of mandatory traditional IRA withdrawals). Two, you cannot make a backdoor IRA move without earned income because you need to earn income to make a non-deductible contribution to a traditional IRA. Three, joint filers can each make non-deductible contributions to a traditional IRA pursuant to a Roth conversion, even if one spouse does not work; in that case, the working spouse can cover the non-deductible traditional IRA contribution for the non-working spouse (who has to be younger than age 70½).1

A backdoor Roth IRA might be a real plus for your retirement. If it frustrates you that you cannot contribute to a Roth IRA because of your income, explore this possibility with insight from your financial or tax professional.

Jose Medina may be reached at info@medinaadvising.com

www.medinaadvising.com  

Click Subscribe to receive our newsletter that includes financial tips and tools from top financial gurus. Subscribe.

This material was prepared for J I Medina Investments and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – investors.com/etfs-and-funds/retirement/backdoor-roth-ira-tax-free-retirement-income-legal-loophole/ [4/19/18]

2 – investopedia.com/retirement/too-rich-roth-do/ [1/29/18]

3 – irs.gov/retirement-plans/retirement-plans-faqs-regarding-required-minimum-distributions [11/16/17]