August 28, 2014

Are You Ready for Life's Changes?

“The measure of intelligence is the ability to change.” – Albert Einstein

A few years ago I went to a conference that was aptly titled, "Change is the only constant." We all change. Our bodies, minds, opinions, families, friends, goals, financial situations, investments, etc., etc. In the previous list, every single one of them is important. So when your life changes, what do you do?

As an analytical person that is a financial advisor, I constantly view the financial aspects of change. Changes to employment, health, investment strategies, contribution or withdrawal habits, family situations, tax ramifications, etc. I know, I know... incredibly interesting stuff. Some of these things you can plan for and some you simply must react to, but is there something you can do to help yourself? The answer is yes, but it is not that simple. What I can say is that it is generally better to have made at least some preparations than none at all.

About two years ago my brother, Bradley August, was diagnosed with stage 4 esophageal cancer on his 34th birthday (August 20, 2012). Less than two weeks later (September 2, 2012), I was lucky enough to marry my beautiful wife, Danielle, with our families attending and privileged to have Brad as a groomsman. Danielle threw an incredible surprise 40th birthday party for me with family and friends in attendance (December 10, 2012). Then, six months and one day after his diagnosis, Brad passed away (February 21, 2013). Finally, Danielle and I were blessed to have our daughter, Caroline August (February 1, 2014). All of these events happened in less than 18 months and had obvious meanings on many levels, but how was I prepared for them?

First, Brad's diagnosis and subsequent passing came as a shock to all of us. A problem Brad had swallowing quickly was found to be a malignant tumor in his esophagus during an endoscopy. The next few months were tough times for our family. As an older brother, you never really get over being the protector for your younger siblings. There were numerous weekend trips to Dallas to help and spend time with Brad. Since this is a financial blog, yes, I focused on financial matters - learning about and applying for Social Security Disability Insurance (SSDI) for Brad, and at the very end, I helped with the movement of some of Brad's assets to make things easier after he passed. While they could be construed as minor items at the time, the time and money saved later was well worth the effort.

Next, being "more established" (i.e. older), my financial situation was quite a bit different in planning a wedding. That does not mean that there was not a budget, but we did not rely on our parents or drown in debt to have an incredible wedding and honeymoon. I was fortunate enough to have been able to save and afford a very nice wedding set for Danielle, and together, we paid for the vast majority of our wedding weekend sometimes against the wishes of our parents, and all of our honeymoon. On the financial side, Danielle and I are both pretty inline with each other. She is very much a saver that likes very nice things much like me. We took apart every piece of our wedding weekend and honeymoon to get the most enjoyment possible for our family, friends, and us while knowing that we were being fiscally responsible. I will not dive into the details, but planning ahead, being flexible, negotiating, and really knowing your own wants and desires really can pay off. An important note though - Do not forget the truly important things in life. The best gift to both of us though was being able to have that one great weekend that was full of pictures of family, friends, and Brad. Those photos never get old.

** - As a side note, getting married dramatically changes your financial landscape all in one fell swoop. Wills, Power of Attorneys, accounts, beneficiaries, etc. all need to be updated to reflect the changes that have just happened. For instance, your 401(k), 403(b), pension, etc. will automatically change to have your new spouse as the beneficiary whether you want them to be or not. In fact, if you do not want your new spouse to be the sole primary beneficiary, they must sign off on it. IRAs do not have this same change happen.

I had a great childhood, but I honestly could not begin to tell you the last birthday party I had. Unbeknownst to me though, Danielle orchestrated a surprise 40th birthday for me that included my dad, her entire family, our office, and numerous friends from far and wide. While nothing truly financial happened, my 40th birthday was an occasion that made me really start to work on our long term future. Yes, even financial advisors sometimes need to take a step back, assess, and plan for our futures.

Finally, becoming a parent earlier this year was something that I had always hoped for but wondered if it would ever happen. Thankfully, it did, and our daughter is beautiful (like her mom) and healthy. Now, since I had numerous nights without sleep for the first few months, I had plenty of time to plan our daughter's future... Ok, maybe I was so tired that when I could finally get up the strength, I made the first contribution to her 529 account, but it is a start. Wills, beneficiaries, life insurance policies, etc. suddenly need to be reviewed and altered again, and this is only the beginning.

What changes have happened in your life? How did you react, what did you learn, and are you ready for next time? There is never a good time to deal with everything that needs to be done, but do not forget, it needs to be done.

“We cannot change the cards we are dealt, just how we play the hand.” – Randy Pausch

August 24, 2014

Do You Know What to Expect in Retirement? Part 1 - Retirement Income

Today's post is the first in a series discussing the various parts of retirement. My hope is to discuss the many issues facing today's retirees to make sure that those individuals that are close to retirement are prepared.

For today's topic, let's start with the most basic issue - retirement income.

First, let me say that everyone and his/her situation is different. While the majority of the people reading this will be an educator (or spouse of an educator), your age, degree, number of years of service, marital status, position, school system, state, retirement account(s) - or lack of retirement accounts - and a plethora of other variables will determine what your income during your retirement will be.

Educators generally have very good pensions to rely on, but unfortunately, educators sometimes put too much faith in the school systems to educate them on what to expect. On something this important, that is a big problem.

In Georgia, the Teachers Retirement System of Georgia (TRS) does a fairly good job of trying to keep its members informed, but even the annual statements and projections for retirement can be confusing. I have had numerous educators ask about rolling over "their part" of the annual TRS statement since they thought that this was separate from their pension or not really understanding that once "their part" is gone, their beneficiaries will receive nothing. On the retirement projections, I had one educator recently question me about the benefit I said she was going to receive versus the benefit she calculated online. Essentially, she thought she was going to be receiving more pension than her current salary. She was looking at the "projected salary" to base her pension from and thought that was her "projected benefit." She went from thinking she was set and happy to starting to worry about her retirement income. Luckily, she was still 8 years away, but imagine if she had not talked to someone...

To further complicate the TRS issue, numerous people do not understand the lifelong impact and tax ramifications of taking a lump sum payment. They are generally thinking of paying off debts and simplifying their life. TRS certainly tries to disclose and explain the issue, but sometimes, it really takes a one-on-one discussion to gets to the nuts and bolts the issue at hand.

Also, choosing a payout option is sometimes a tough decision to make. If you take the max option and something happens to you, your spouse may be left with nothing but the plans that together y'all had made... Not a great feeling trying to explain to someone that just lost their spouse that the deceased spouse's pension benefit is also going away. Income from both spouses, life insurance, Social Security, etc. should all be factored into deciding the best pension distribution option.

After TRS, each school system potentially does something different. Some counties - like Cobb and Henry - are part of Social Security, so their retirees will have that benefit. Other counties do their own thing - like Gwinnett County with GRS and Rockdale County that has mandatory 403(b) accounts with matching. Finally, other counties "recommend" contributing to 403(b) accounts, but they never really explain the current benefit of not contributing to Social Security and the future impact of this decision - Windfall Elimination Provision (WEP) and Government Pension Offset (GPO). I am guessing that you are starting to understand my point.

Now, let's talk about having or not having a retirement account - usually a 403(b) and/or IRA. These accounts will be over and above the pension benefit and can be used as needed by the retirees. Yes, their income is taxable at ordinary income rates (unless it is a Roth), but the accounts are flexible and can fill in gaps when/if necessary. I have preached and preached about the benefit of having a 403(b) especially to those that are not paying into Social Security, but I know that the vast majority of educators do not. It is really hard to imagine how even a small amount over 30 years can be something substantial, but it really, really can.

I have seen numerous educators finish their 30 years in the public system only to then go to the private schools for numerous years to help bridge the gaps in their retirement planning. This is a viable option if you figure out the issue early, but seeing the problem years later may make getting a job in private schools tough. Many educators after retiring for a few years honestly cannot begin to get back into the swing of things and simply try to make do... This is something I do not want to see.

Far too many educators and their spouses still do not understand what their income will be in retirement, and they may be at or very near retirement. They have focused on "30 years" for so long that when they get there, they just imagine that it will all work out for the best. Unfortunately, whatever plans that they are envisioning may or may not come true because their retirement income was never fully understood.

So, have you fully analyzed your family's potential retirement income? If not, I beg you to do so especially if you are in 10 years or less from retirement. This is the last window to make changes to set yourself up for your dream retirement.

Do you need a full Retirement Income Analysis? If the answer is yes, then I would like to help. First, let me say that the analysis and any meeting/discussion are absolutely free with ZERO costs or future obligations.

Through my firm, we have come up with a pretty robust yet understandable retirement income analysis tool that can help to predict your family's retirement income. We look at the individual (or both spouses') pensions, Social Security, outside investments, and any other potential income streams to predict where we see your income at retirement and beyond. The cost to you is zero with the ultimate goal being to help.

The offer is out there... now, will you make sure you know/understand what your family's potential retirement income is? If you want to get started, simply send me an email - rschultz@rollinsfinancial.com.

Whether I help you or not, the goal here is for you to be ready at retirement. Do not think that this is something that you can simply handle later... There are very, very few things more important than knowing your retirement income for the rest of your life.

August 9, 2013

Coming to Terms with the Windfall Elimination Provision and Government Pension Offset

Each week I receive emails from readers of The Educator's Retirement discussing wide ranging topics from different state pensions to 403(b)/457 questions, yet the one subject that I receive the most emails about is the Windfall Elimination Provision (WEP) and Government Pension Offset (GPO). I read about stories where soon-to-be or current retirees suddenly find themselves without a benefit (Social Security) that they thought they would receive. I answer every single email and sometimes have more dialogue with the writers. Sometimes, I just read/listen and confirm what they have been told, and other times, I try to point them in a direction that they might be able to receive some help. I know that far too often my responses are not what the writers want to hear...

Today, I want to tell everyone a story... It is not a story where someone beats the WEP/GPO, but to me, it is a positive story that I wish more people would start to understand about the WEP/GPO.

I am lucky in my job as an investment adviser that I get to see numerous clients that span the complete spectrum of wealth. I treat each one the same since whatever problems/issues they are facing are real to them. To one person it could be an estate tax issue, to someone else it might be trying to convince them to contribute to their retirement plan or pay down debt, and to another it might be discussing their investments. All of their issues are real.

When I started at my firm 15+ years ago, I had never heard of WEP or GPO. As far as I knew, those issues were remote and had no bearing on me. When I started to learn about the issue a few years later from a group of educators that included a family member and their friends, I took a long, hard look at the issue. I read everything I could find on the web, and yet, both the WEP and GPO seemed to get little attention. I discussed the issue with a few clients at the time and explained what I had found...

A very short time later, a different family member (who was also an educator) needed some help making some career decisions that could possibly have retirement income repercussions. I read more and made some phone calls to Social Security, Georgia's Teacher Retirement System (TRS), and even both local school systems being discussed. The issue was important, it was relevant, and the advice I could be giving was going to have very real long term positives or negatives for this family member. Imagine dealing with THAT every family get together!!??!!

Since I became an "expert" on the WEP/GPO, whenever one of my firm's clients had questions about either the WEP or GPO, I was routinely called in to discuss the ramifications with them. Unfortunately, sometimes even the client did not have any idea that they could/would be affected by this rule. To make it more confusing, around Atlanta some school systems do contribute to Social Security and some do not. Some that do not have mandatory replacement retirement plans (instead of Social Security) and others simply "promote" participation in 403(b) plans. A group of 10 educators from various school systems around Atlanta may be in completely different retirement income situations and not even know it.

So... now to the story...

"Mary" and her family have been clients of my firm since the early 90's - well before my time here. When I started to learn about the WEP/GPO and discussed Mary's situation with her many, many years ago, she was pretty much surprised and astounded that she did not know anything about it. She talked to friends, did some research on her own, and even discussed it with TRS, and she started to understand what was going to happen to her Social Security benefits.

Mary's husband, "John," had a very good job and had been paying in to Social Security since college. Mary and John had always believed that Mary would receive her "spousal benefits" based on John's Social Security earnings/benefits. Even if something happened to John, they still believed that Mary would reap the rewards of John's Social Security benefits. I mean it works for everyone else, right?

Every year, John and Mary would come to our office to discuss their taxes, investments, retirement income, etc. And, every year, we would get around to discussing potential Social Security benefits for both of them. We always had projections for John's benefits, but we always omitted Mary's completely. I always told her that if she received anything, just consider it found money.

After being an educator in Georgia's public schools for 30 years, Mary retired from her public school position. Later that summer, she was offered a position at a private school, and while the salary and benefits were less, she loved it - AND was paying to Social Security. Additionally, Mary was lucky enough to have had 30 years in the Georgia TRS system, so she was eligible for her educators' pension.

John and Mary have continued to come in to our office for their annual "check up" and discuss their situation. It has now been seven years since Mary "retired" as a public school educator and took a position at the private school. Since our first conversation regarding the WEP/GPO, John and Mary made some changes. Mary started a 403(b) account (even though it was late in her career), she took the private school position (when some would have retired completely), and she learned to never expect a penny from Social Security. This is not to say that Mary squirrels away every penny she makes, but she is watchful of their money and thinks about the long term. John and Mary enjoy their life, family, and have fun, but they learned to set limits and stay within those limits.

Last week, Mary sent me her Social Security statement with a note that the next day she was having a conference call with Social Security because she turns 66 later this year (Mary's Full Retirement Age with Social Security). I went through Mary's potential benefits page and then researched her earnings page. While Mary had 39 years in which she contributed to Social Security, I calculated that she only had 19 years of "substantial earnings" thus she was going to be subject to the maximum WEP. I did the quick calculation to get my projected benefit for her, then gave Mary a call.

We discussed what I had calculated and how I had come to my figure. She was pretty sure I was going to be right, but the Social Security conference call would verify everything for her the next day. I did ask her to do me one favor though during her conference call. Even though I knew the answer, I wanted her to ask Social Security what, if any, "spousal benefit" she could receive...

The next afternoon, Mary called me to discuss the outcome of the conference call. Just as we discussed and I calculated, her benefit was reduced by the maximum WEP. Also, she did ask Social Security about her "spousal benefit," and it had been reduced to zero as we had suspected - but had hoped otherwise. In the end, Mary's benefits had been greatly effected by the WEP, and Mary's "spousal benefits" were reduced to zero by the GPO... so where is the positive here?

As we finished up discussing the conference call with Social Security, Mary surprised me by thanking me. Mary told me that while she had hoped her benefits would not be effected and that I was simply wrong, she knew what the end result would be. Since we had been talking about this 10+ years, Mary had been able to change. Change her thinking on her Social Security benefits, change her spending habits, change her savings habits and goals, and even change her "ultimate" retirement date. Was she happy about the reduced benefits? Of course not, but Mary has been able to help herself and her family by altering those ideas that she had 10+ years ago.

We can all get mad at the system and listen to the empty campaign promises of those in Washington, but ultimately, with the problems facing the national debt, social security, and healthcare systems, is the WEP/GPO really going to go away? I wish the answer was yes, but I see the answer continuing to be no. I am not saying that anyone should stop being against it, but I am also saying that the realistic view is that it does not seem to be going away anytime soon.

My hope for all of those that are affected by the WEP/GPO is that they learn about the issue early enough to be able to help themselves like Mary did. I know it will not be easy. But, if we are able to be proactive and educate those that will be subject to the WEP/GPO, hopefully, some of them will be able to take the bull by the horns themselves.

Good luck!

May 15, 2013

How Do You Make Your (Financial) Decisions?

This week I have been attending an AICPA Employee Benefit Plan conference in Dallas, Texas. This is my first conference of this type, so I was a bit apprehensive as to what I would "get" from the conference. That apprehension did not last long.

The very first session was a general session with a recorded video from the Assistant Secretary of Labor (note - due to a meeting, she was unable to attend). Of course, there were numerous parts of the video that did not really interest me, but then the speaker stated...

"How do you make your (financial) decisions?"

Suddenly, I was listening to the speaker talk my kind of language...

She was talking about how the Department of Labor (DOL) was interested in how employees made their financial decisions. One of the quick things the speaker stated was that the DOL had come to the decision that bad, conflicted advice was worse than no advice... Um, not good.

The DOL was looking for things like:

  • How do you make retirement decisions?
    • Do you read, talk to someone, "just know," or ???
  • If you do talk to someone,
    • How do you choose?
    • How do you know this person has your best interest in mind?

So, if the DOL is interested in this information, I should be too. Please tell me your answers by emailing me rschultz@rollinsfinancial.com.

The speaker then mentioned how a SEC registered investment advisor representative has a fiduciary standard whereas a broker usually has only a suitability standard.

In case I have lost you, the standards above are not the same thing.

The "Fiduciary Standard" is the highest standard of care. A fiduciary must work in the best interest of the client only and not in the interest of the fiduciary. In fact, by being an SEC registered investment advisor representative, the representative has stated that they will follow the fiduciary standard.

The "Suitability Standard" is different in that the investment that is being offered only has to be considered "suitable" not necessarily in the client's best interest. Broker-Dealers and their representatives are usually held to this standard.

What does this mean to you? Well, it depends. I have reviewed hundreds of portfolios over the years. Some have been suitable but benefit the representative more than the client due to commissions and fees that might be hidden from the client (think annuities as an example). Some have clear fees and are setup to help the client, but maybe the funds are just lackluster and the representative does not trade much or ever. Some have been spot on with clearly defined fees, well regarded funds, and a good track record...

What I am trying to tell you is that not all your "advisors" are created equal or even follow the same guidelines. Do you know how your advisor gets paid? I promise - your advisor is being paid.

In another class at the conference, the speaker stated, "Most employees think that their plans are 'free' or 'very low cost' since they are not 'charged' fees." As I have discussed before, there are numerous investment products that charge very high fees, but some could be hidden in the "fund expenses" of the plan. Do you know what you are really paying for your accounts?

All of these questions are important, and if you do not know the answer, do not be afraid to ask. The markets have been great since March 2009, but that does not mean that you cannot question your advisor.

I would enjoy hearing from you about your answers to all of these questions, and if you wish to ask me questions, feel free. My email is rschultz@rollinsfinancial.com.