September 21, 2014

Do You Know What to Expect in Retirement? Part 3 - Common Misconceptions

Over the past three weeks I have received numerous emails with various questions about retirement and social security. Most of the social security related questions revolve around the Windfall Elimination Provision (WEP) or Government Pension Offset (GPO), but a few have "struck" a different tone - and that is what I wish to cover today.

One of the most intriguing comments to me was the notion that paying into Social Security and an educator pension was somehow double paying into retirement. I guess I can somewhat see that point of view, but I want to back up and explain how the corporate world works versus the government/educational world in terms of retirement.

Corporate Retirement - Most corporations did away with pensions 20+ years ago since a "defined benefit plan" (i.e. pension) could potentially be much more expensive than a "defined contribution plan" (i.e. 401K or similar plan). Businesses set up 401(k) plans to entice employees to contribute to their retirement with "matching" contributions and possibly "discretionary" profit sharing contributions. Depending on the plan, the company's matching and contributions "vest" over a set timeframe between immediate and 6 years. The benefit of this type of plan for employees was that they could "see" their retirement accounts, and if they left the company, they could roll the vested balance to an IRA. The bad part is that the employee is responsible for their own retirement.

Essentially, the company has made their contribution to the employee and left it up to them to figure it out. There may be some educational aspect of what they are doing, but the burden of responsibility has shifted. The company is only a contributor and not responsible. Also, if the employee has not contributed enough, it is on the employee...

As a rule of thumb, an employee should be contributing around 15% of their gross income to a retirement plan, so if an employee is putting 10% in the 401(k) and has a 4% match, then they are at 14%... pretty close to what we hope our clients are doing. Then you add on Social Security. The employee still has to contribute to an additional 6.2% (up to the current income limit) to Social Security (the employer does too).

We can all do that math for the employee - 10% to the 401(k), 6.2% to Social Security... 16.2% total, AND the employee is still on the hook for making sure the 401(k) is enough to fund their retirement.

Government/Educational Retirement - Most of the people reading this post will know about their own pensions contributions, so I will try to make this section brief.

In Georgia, educators have the Teachers Retirement System of Georgia (TRS). Currently, employees contribute 6.0% of their salary with employers contributing and additional 13.15%. These contributions are the foundation of your future TRS pension. Think about though - 19.15% of your salary is being contributed to a fund that ultimately helps to pay for your pension.

If the school system does participate in Social Security, then the employee contributes 6.2% (and so does the school system). In total, the employee will have contributed 12.2% of their salary.

If the school system does not participate in Social Security, then the educator does not contribute anything else. The TRS contribution of 6.0% is the total contribution by the educator. While I understand that this amount is not zero, it is also worth noting that corporate employees contribute 10.2% more of their salaries and educators in Social Security contribute 6.2% more.

For the educators that do not contribute to Social Security, the discrepancy between those that do contribute and potentially the lack of any retirement funds outside of TRS are the reasons why I have preached over and over about starting a 403(b) and making contributions. Even contributing only an additional 4% (10% total) to a 403(b) will make your potential retirement income substantially more. Additionally, if/when you are effected by the WEP, these additional funds will help to offset the reduction of Social Security.

In conclusion, corporate and educational/government retirements are quite different in how and by whom they are funded, but in both cases, it is the employee's responsibility to know and understand what their potential retirement looks like. If they do not work to make sure that their retirement is secure early in their careers, employees may end up scrambling at the end to make up for any shortfalls.

September 6, 2014

Do You Know What to Expect in Retirement? Part 2 - Naming a Beneficiary

After last week's two posts, I received numerous emails, and the most troubling questions to me dealt with a lack of knowledge regarding beneficiaries. This post will hopefully be a good basic resource to use for individuals trying to understand why and how to name beneficiaries. This list is not exhaustive though, so please make sure you talk with your financial advisor or attorney if you have one. They should be able to answer any additional questions.

Can't I just make my retirement account a joint account?

A retirement account is only titled to a single individual. It does not matter if it is pension, IRA, Roth IRA, SEP-IRA, 403(b), 401(k), etc. They are only "owned" by a single person. They cannot be made into joint accounts with your spouse, children, etc. One owner only.

Do I really need to name someone as a beneficiary?

YES!!! There are numerous advantages including being easier to access, not having to deal with the probate court, and tax advantages/options for your beneficiaries.

If you are married, a pension or 401(k) account must have your spouse as the primary beneficiary (unless they allow themselves not to be named), but you should always name contingent beneficiaries too. If something happens to both of you, this will direct who should receive the funds.

My brother, Brad, opened a small Roth IRA as an additional savings account with his bank a few years ago, and while completing the application, Brad forgot to name someone as his beneficiary. Not good.

Brad obviously rarely thought of the account, and when Brad and I discussed his financial accounts, he did not even mention the account. It only had a balance of only $500, and I managed essentially all of his money anyway.

Brad passed away in February 2013, and a few months later Wells Fargo alerted my parents to the account. Since Brad was not married and did not have kids, numerous court documents and forms would need to be completed. One of the documents was a small estate claim form that costs $300 to file along with an appearance in probate court. An additional letter signed by an attorney verifying that Brad did not have children. The costs of these items was close to $400 plus personal time... all to get $500.

Honestly, I do not think my family would have cared if Brad had named a charity, relative, friend, or even some random person... any of that would have been better than the cost and hours of time that has been spent (and still being spent) to collect $500.

Yes... name a primary beneficiary(ies) and contingent beneficiary(ies). It will help those you leave behind.

Doesn't my will cover my retirement accounts?

Actually, not necessarily. If your will says your retirement account(s) should go to Joe Smith, but the beneficiary form(s) with the financial institutions say that they should go to Bob Black - the money goes to Bob Black. Joe Smith can try to fight it in court, but I have never seen a single case in which the will overruled the beneficiary form.

If you name "The Estate of 'your name'" as the beneficiary, your will would be used, but this involves going through probate court, and generally takes much, much longer and is far more difficult than simply naming those you wish to name.

Also, changing your will is generally expensive. Changing your beneficiary on a retirement account is usually one form, one signature, and free. You tell me which is the better option?

What if my child(ren) is young?

This is a common question since people are worried that the child(ren) is too young now to handle any funds. Two things - 1) you may not die for many years; 2) the custodian of the child(ren) generally is the one that becomes responsible for the funds. The funds though are the child's under the guidance of the custodian.

One thing to note though is that a custodian of a child's account has a "fiduciary" responsibility to do what is in the best interest of the child. If the custodian mismanages the funds, the child can actually sue the custodian - and it has happened.

Name your children as beneficiaries (normally after your spouse) and in your will, make sure to name a responsible person to serve as custodian for your children and the funds.

How often should I update the beneficiaries?

This is a very good question. We usually try to remind our clients to update their beneficiaries when big life events happen - marriage, children being born, a death of a beneficiary, divorce, etc. There can be other times, but these are the basics.


Remember that the reason you are naming a beneficiary is to make sure that your hard earned retirement funds are going to the person/people that you want. Do not forget to do this one little thing that will save your survivors time, money, and frustration.

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 -

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.