Coin stacks

Why I Dropped My Financial Adviser

My financial adviser is smart. She’s ethical. And her special IRS tax certification has come in handy at tax time.

So why did I drop her? Fees.

Every year, her firm extracted 1 percent of my modest retirement account balance. This is less than some advisers charge, but on top of that I pay between 0.8 percent and 1.2 percent in fees to various mutual fund firms for the mostly stock funds she selected for my investments. These aren’t exorbitant fees, either, for actively managed funds. But when you add this up, I was shelling out at least 2 percent of my account every year.

Thanks to fees and my penchant for some international stocks, which were sluggish or declined last year, my retirement portfolio did not grow at all in 2014, despite a booming U.S. stock market that gained nearly 14 percent, based on the Standard & Poor’s 500 index.

I used a simple fee calculator to estimate my savings in fees, and the resulting increase in my investment returns, from letting my adviser go. If I don’t tap my IRA funds until age 70, I would save nearly $40,000. This sum won’t radically improve my retirement. But it’s not chump change either. It would pay for a few really big trips my husband and I hope to take – or a large chunk of a year in a nursing home. …Learn More

Savings Products Deter Senior Fraud

Ken Osborne with his mother.

Ken Osborne became vigilant about safeguarding his 81-year-old mother’s savings as her memory loss set in. She often failed to recall what she’d said during frequent, unsolicited phone calls from people prying into her personal life and financial affairs.

“She’s vulnerable,” Osborne, a resident of Jacksonville, Florida, says about his mother who lives 140 miles away.

Osborne took preventive action. He signed his mother up for a debit card funded by, but segregated from, her primary bank account.  Osborne maintains a $500 balance in the card account, giving his mother the freedom to spend her own money – whether for groceries or a church excursion to North Carolina – while giving him control of the nest egg to protect her from herself and others.

Sold by True Link, the debit card is among a handful of new financial products capitalizing on what the Senate Committee on Aging called an “invisible epidemic.”  The incidence of fraud is rising, especially online, and experts warn that aging baby boomers will increasingly be the targetsTrue Link chief executive Kai Stinchcombe was moved to form his San Francisco start-up after his grandmother started writing small checks adding up to more than $1,000 a month to a multitude of soliciting charities.

Banks, which often become aware of fraud against seniors, are also in a position to help.  California now holds bank employees liable for failing to immediately report suspicious transactions and elder financial abuse to local law enforcement or adult protective agencies.

The Bank of American Fork in Utah went further, introducing anti-fraud accounts for seniors in 2011 after seeing problems ranging from an older woman who repeatedly wired money to a lottery in Spain to a man with a drug problem looting his elderly mother’s account. …Learn More

Navigating Taxes in Retirement

IRS logo

The tax landscape shifts suddenly when most Americans leave the labor force to retire.  The single most important thing to remember is that income taxes can fall dramatically, because retirement incomes are typically lower and because all or a portion of your Social Security benefits will be tax-exempt.

This was among the tax insights supplied by Vorris J. Blankenship, a retirement tax planner near Sacramento, California, who has just finished the 2015 edition of his 5-inch thick “Tax Planning for Retirees.”   The following is an edited version of tax information he supplied to Squared Away:

Lower taxes in retirement. Brian and Janet are a hypothetical couple renting an apartment in Nevada, a state with no income tax. In 2013, Brian earned $40,000 at his job, and Janet’s wages were $20,000, for a total income of $60,000. They took the standard deduction on their federal tax return and paid income tax of $5,111.

Brian retired on December 31, 2013. In 2014, he received Social Security payments of $15,000 – $2,750 of which was taxable – and a fully taxable pension from his former employer of $10,000. About one-third of retirees pay some income taxes on their Social Security benefits, because their retirement income exceeds certain thresholds in the tax code.

In 2014, Janet again earned $20,000, but the couple’s total household income declined to $45,000 from $60,000. They took the standard deduction on their federal tax return and paid income tax of only $1,248.

The 75 percent reduction in their taxes is much larger than the 25 percent decline in their income after Brian retired. …Learn More

couple

Breaking Up (the Pension) Is Hard to Do

In a divorce, splitting up the pension is trickier than dividing the house.

Divorcing couples and their advisers “who aren’t hip to divorce splitting of retirement plan assets often do it improperly,” said Howard Phillips, a Delray Beach, Florida, actuary and author of “Dividing Retirement Plan Assets in a Divorce.”  He knows, because he values pensions for couples negotiating their divorce settlements and then drafts the order that will be entered into the court.

Dividing a house is easy.  Two realtors pouring over sales of comparable nearby properties can readily agree on a value – once the house is sold, the parties pay the realtor and split the proceeds.  But a pension plan’s value greatly depends on how and when it’s counted and the method used to allocate that value between the spouses.

Phillips explained the basics of how defined benefit plans and defined contribution plans – 401(k)s, 403(b)s, and IRAs – may be handled in a divorce during a recent podcast for the Retirement Income Industry Association.  The following methods for splitting a pension 50/50 have strikingly different outcomes for the participant in the pension plan and for his or her former spouse:

Defined contribution plans:

  • Tracing assets: If one spouse comes to the marriage with $50,000 in a 10-year-old 401(k) account, only contributions made during the marriage – and investment returns on the new contributions – are divided.  If the plan now has $150,000, the amount that’s divided up can vary widely – or it can be zero if no new contributions were made during the marriage. The remaining balance goes to the spouse who started the 401(k) account. …
  • Learn More

Photo of someone doing a puzzle

Investment Managers Are Human Too

Mutual fund managers would seem to possess myriad advantages over the average individual investor: a business degree, a deep understanding of corporate finance, and years of experience.

But you wouldn’t know it based on how their personal portfolios fare.

A new study of mutual fund managers in Sweden found that that they “do not exhibit superior security-picking ability” when managing their personal portfolios, compared with similarly situated private citizens who also invest for themselves.

Using detailed tax and investment information contained in Swedish government data bases, researchers from the University of Notre Dame and Michigan State University were able to link individual fund managers to their personal equity portfolios and returns, which were then compared with the returns of non-experts with similar socioeconomic characteristics, such as education and age.

Based on the risk-adjusted returns for each group, the researchers found that the fund managers’ personal equity portfolios – individual company stocks and also the stock mutual funds they hold – performed no better than the private investors’ equity portfolios. …Learn More

Woman reaching for food

Hunger: Unspoken Among the Elderly

Retirees in one Orlando-area community sustain a lively conversation about every topic under the Florida sun, a conversation that threads through their rounds of horseshoes, dinner dances at the club house, and senior yoga.

But one subject must be handled with great discretion: hunger.

Judy Cipra knows this, because she and her late husband, Fran Cipra, started, and she continues to operate, Fran’s Pantry to collect money and buy groceries for 18 seniors who struggle financially in the Palm Valley retirement community, where my mother also lives.

“If you call me and you tell me that you need food, I don’t ask any questions,” Cipra said. “You just get it.”

Cipra said people reliant solely on Social Security are often embarrassed to be barely getting by.  Some fill their food gaps with soda crackers and peanut butter, she said.

But hunger among seniors is not uncommon.  About 15 percent of Americans age 60 and older were threatened with hunger in 2012, according to the National Foundation to End Senior Hunger.  And as the baby boom population ages, the number of these “food insecure” seniors is continuing to rise, exposing growing numbers of retirees to health problems and depression stemming from not having enough to eat. …Learn More

Excerpt of NY Times buyout offer

Evaluating a Pension Buyout Offer

Like many baby boomers, I’ve received an offer from a former employer that’s meant to entice: “The Company is offering you a limited-time opportunity to receive this benefit now, rather than waiting until you otherwise become eligible to receive payments from the Plan.”

My 17-year employment as a Boston Globe reporter entitles me to a $1,762 monthly pension for life, starting at age 65. I’m 57 now. But a few weeks ago, the company put two alternatives on the table: take a smaller pension that starts now or trade my pension for a lump sum of $170,000 in cash. The deadline for accepting the new offer: the day after Christmas.

The New York Times Co., which used to own the Globe, has no doubt made this offer to employees for the same reason most companies do: to reduce burdensome pension liabilities and create financial certainty. But what’s in it for me? And how should other boomers think about similar offers coming over the transom?

My first thought was this: I’m working now and don’t want or need a pension right away. This money is for my retirement. I view my decision as choosing between the remaining two options: my original pension at 65 or the new lump sum offer.

A senior economist here at the Center for Retirement Research, Anthony Webb, helped me compare these two options: …Learn More

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