Getting Your Financial Ducks In A Row Rotating Header Image

How to Pay Off Students Loans and Save for Retirement

Businessman juggling fruit

Businessman juggling fruit

Very often in my classes I get asked the question “What should I do first, pay off student loans or save for retirement?” My goal is to give some perspective on approaching these two very important issues.

Generally, holding student loans and making the minimum payments can lead to an unnecessary amount of interest being paid. For example, if an individual has a student loan at 6%, then that loan is earning 6% but for the lender not for the student. Many individuals find themselves wanting to pay off their student loans as quickly as possible.

On the other hand, recent college graduates are also faced with the decision to save for retirement.  Many of them have heard that it is wise to start saving when they are young in order to let compounding work its magic. However, many individuals are confused as to which situation they should take care of first.

Here’s my take. If an individual has a 401k with employer matching, then it makes perfect sense to save to the maximum possible in order to receive the full the employer match. The employer match is essentially free money and is a guaranteed return on the employee’s deferral. If an individual does not have an employer match, they could still consider saving a percentage of their income – say 15% to start.

Once that is done, the individual can accelerate payments to their student loans. Essentially, the individual is earning a guaranteed rate of return equal to the amount of interest on the loan. I don’t know about you, but a 6% guaranteed return without risk is extremely difficult to achieve elsewhere. The beauty of this plan is that once the student loan is paid off the individual can take the money that was being allocated to the loan and reallocate to the retirement savings. Individuals finding themselves maxing out their 401k should consider contributing to an IRA once that happens.

Finally, a key to making this work is making the payments automatic.  Saving to a 401k is automated easily since the deferrals are coming directly from the paycheck. However, accelerating student loan payments is less convenient.  That being said, an individual can set up automatic payments through their bank to be made at periodic intervals (say, monthly) to their loan in order to put this on autopilot. Individuals may also consider allocating pay raises and bonuses to chip away at the loan.

This is one way an individual can take care of two priorities early in her career. The key will be to make these priorities above and beyond the temptations of everyday wants such as dining out or cable TV. More information on student loan payback options can be found here. 

401(k) & Qualified Domestic Relations Orders (QDRO)

An exception to the 10% penalty on distributions from a qualified plan (but not an IRA, an IRA is split via a transfer incident to a divorce, which is not an automatic exception) Qualified Domestic Relations Order, or QDRO (cue-DRO).  A QDRO is often put into place as part of a divorce settlement, especially when one spouse has a qualified retirement plan that is a significant asset.

qdroWhat happens in the case of a QDRO is that the court determines what amount (usually a percentage, although it could be a specific dollar amount) of the qualified retirement plan’s balance is to be presented to the non-owning spouse.  Once that amount is determined and finalized by the court, a QDRO is drafted and provided to the non-owning spouse. This document allows the non-owning spouse to direct the retirement plan custodian to distribute the funds in the amount specified.

In the case of a QDRO, the owning spouse will not be taxed or penalized on the distribution.  In addition, if the non-owning spouse chooses to roll the distribution into an IRA, there would be no tax or penalty on that distribution to her either.  If the non-owning spouse chooses to use the funds in any fashion other than rolling over into another qualified plan or IRA, there will be tax on the distribution, but no penalty.

Many times it may make sense for the non-owning spouse to leave the account with the qualified plan (rather than rolling into an IRA) if there may be a need for the funds at some point in the future.  This will be dependent upon just how “divorce friendly” the qualified plan custodian will be. Sometimes plan administrators do not look favorably on long-held accounts by non-participants. This may require a rollover of the account, eliminating your QDRO special treatment.

Of course other 72(t) exceptions could apply, but if there was a need that did not fit the exceptions and the distributee did not wish to establish a series of substantially equal payments for five years, the QDRO would still apply to the distribution from the qualified plan (as long as the funds are still in the plan that the QDRO was written to apply to).

As an example, let’s say Lester and Edwina (both age 40) are divorcing, and as a part of the divorce settlement, Edwina’s 401(k) plan is to be shared with Lester, 50/50, with a QDRO enforcing the split.  After a couple of years Lester decides he would like to use some of the funds awarded to him from the divorce to purchase a new fishing boat.  As long as the funds are still held in the 401(k) plan, Lester can request withdrawal and receive the funds without penalty, due to the existence of the QDRO.  However, had Lester rolled over the funds into an IRA (or other qualified plan), the QDRO would no longer be in effect, and he would be unable to access the funds without paying the penalty for early withdrawal.  (It is important to note that, in either case, Lester would be required to pay ordinary income tax on the distribution.)

Remember Your 2016 RMD

300px-IRS.svg_It’s hard to believe that 2016 is coming closer to an end. For some individuals that are required to take required minimum distributions (RMDs) from their retirement plans, it may be a good idea to double check to make sure that happens. If it doesn’t the penalties are harsh.

According to the IRS the penalty for not taking and RMD or not taking the full RMD is 50% of the amount not withdrawn.  This can lead to significant losses to a retiree that must take RMDs.  Generally, most financial planners and or custodians we’ll be able to help the individual and remind them that they have and RMD and how much that amount needs to be.

If an individual finds themselves in the precarious position of having forgotten to take the RMD or did not take out enough, there is a remedy.  The IRS allows an individual to file form 5329 and attach a letter explaining the reason why the distribution was not taken.

Additionally, the individual will want to correct the mistake as soon as possible.  In other words, the individual will want to call their custodian or financial advisor and instruct them to immediately distribute the amount that was required.  This shows a good faith effort on the part of the individual and the IRS may be much more likely to grant the exception.

Finally, individuals holding Roth 401ks are required to take minimum distributions at age 70 ½.  Even though the distribution is required the amount distributed will not be subject to taxation.  Individuals who would rather not take the required minimum distribution from their Roth 401k can roll their Roth 401k to their Roth IRA.  Roth IRAs do not have RMDs.  However, it is important to note that the rollover must occur from the principal amount and not the distribution.  In other words, an individual is not allowed to take an RMD and roll it into another qualified account.  Individuals that must take the distribution but do not want to spend the money can simply deposit the amount into a savings account or an after-tax non-qualified investment account.

Social Security Benefits After First Spouse Dies

spouse diesWhen your spouse dies there are a few things that happen to your Social Security benefits that you need to be aware of. These things will affect your benefits significantly if your own benefit is less than that of your late spouse’s benefit (or Primary Insurance Amount). These changes to available benefits could also result in increased benefits if your own benefit is the larger of the two.

These same impacts are apparent for ex-spouses as well. While reading the below, just replace “your spouse” with “ex-spouse” and all provisions are the same.

Spousal Benefits cease

When your spouse dies, the spousal benefits that you may have been receiving will cease. This means that your own benefit is the only retirement benefit that you will receive at this point.

For example, Jane and John, both age 64, have been receiving Social Security benefits for a couple of years. Jane’s PIA (Primary Insurance Amount) is $600 and John’s PIA is $2,000. Since both of them started benefits at age 62, both are receiving reduced benefits.

John is receiving $1,500 (75% of his PIA) and Jane is receiving a combination of her own reduced PIA ($450) and a reduced “excess” spousal benefit in the amount of $280. (For more details on the calculation of reduced spousal benefits, see the following article: Calculating the Reduced Social Security Spousal Benefit.)

When John dies at age 64, Jane’s Social Security benefit is reduced to only her own benefit – $450 per month. The spousal benefit ceases to be paid at all upon John’s death.

But all is not lost – if you were eligible for a spousal benefit, you are also eligible for a survivor’s benefit when your spouse dies.

Survivor Benefits (can) begin

After your spouse dies and the spousal benefits cease, you are eligible for a survivor benefit based on your late spouse’s record.

Using our example from above, where Jane’s total benefit had reduced to $450 upon John’s death – Jane is now eligible for a survivor benefit based on John’s record.

There is a complication to the calculation since John started his own benefit prior to his full retirement age: the minimum “basis” for calculation of the survivor benefit is 82.5% of John’s PIA. John’s benefit upon his death was 75% of his PIA, so the “basis” for the survivor benefit will be increased to 82.5% or $1,650, instead of $1,500.

In this case, Jane has a couple of options:

1) She can begin receiving the survivor benefit immediately upon John’s death. This survivor benefit will be reduced since Jane is under Full Retirement Age (FRA). Since Jane is 64, the reduction is 11.4% from the basis of $1,650 – to a total of $1,461.90.

2) Jane could delay receiving the survivor benefit to her age 66, when there would be no reduction. She would receive her own reduced benefit of $450 per month for the coming two years, and then at age 66 she’d start receiving the unreduced survivor benefit in the amount of $1,650.

There is no point in delaying the survivor benefit past Jane’s FRA – the survivor benefit will not increase beyond that unreduced basis that we described earlier.

There is no impact to the survivor benefit due to Jane’s early filing for her own benefit. So if she had not filed for her own benefit prior when her spouse dies, Jane could start her own benefits immediately upon John’s death. This would allow her a benefit in the amount of $520, having filed for the benefit at age 64 (no spousal benefit “excess” is available since John is deceased). Later upon reaching FRA she would be eligible for the survivor benefit at the unreduced amount, $1,650.

On the other hand, there is also no impact to your own benefit if you start the survivor benefit early. If the example changed and Jane dies before John, if John has not filed for his own benefit by Jane’s death, he could receive the survivor benefit based on Jane’s record until he files for his own benefit. Granted, at his age 64 this would work out to a maximum of $531.60, but it’s better than nothing at all. Later, John could file for his own benefit, either at FRA or later, to receive an increased benefit.

Survivor benefit basis updates

As we reviewed above, in the original case where John starts his benefit prior to his Full Retirement Age, the basis against which Jane’s survivor benefit is calculated can increase to the minimum of 82.5% of John’s PIA.

On the other hand, imagine if John had not started his benefits by the time of his death.  The basis against which Jane’s survivor benefit is calculated will increase to John’s full, unreduced PIA. In this case Jane, being 64 at John’s death, is eligible for John’s PIA reduced by 11.4%, or a total of $1,772. If Jane waits until her FRA she is eligible for a survivor benefit of $2,000.

On the third hand, consider if John was older than Jane. John is older than his Full Retirement Age (FRA) at his death and still has not filed for his own benefit. The resulting survivor benefit for Jane is updated differently. In this case, the delay credits (8% per year) are applied to John’s PIA to determine the basis for the survivor benefit. So if (for example) John was 67 at his death, the basis for the survivor benefit would be $2,160, and at age 64 Jane could receive $1,913. Waiting until her FRA would garner her $2,160 in survivor benefits.

WEP impact eliminated

The fourth thing that occurs when a spouse dies is that Windfall Elimination Provision (WEP) impact to the decedent spouse’s benefits is eliminated.

Considering John’s benefits, if he was subject to full WEP because of a government pension, his benefits are reduced to $1,179 (versus $1,500 without WEP). Upon John’s death, his WEP impact is eliminated, restoring his PIA to the full $2,000. Since John started benefits early, the basis for the survivor benefit reduces as above.

So regardless of the previous WEP impact to John’s benefits, Jane would still be eligible for a survivor benefit with a basis of $1,650.

Key Takeaways

Since the spousal benefit ceases when the first spouse dies, it’s important to know that total benefits will likely reduce for the surviving spouse until survivor benefits begin. This can cause significant hardship as demonstrated in the example above. Jane’s household income from Social Security reduced from $2,230 (John’s $1,500 and Jane’s total of $730) to only $450 upon John’s death. The survivor benefit will replace some of this but not all, of course.

In addition, determining when to start survivor benefits can be critical as well. Jane could start survivor benefits at this point in the amount of $1,463, or she could wait until age 66 to receive $1,650. If she waits she will receive her $450 benefit in the interim.

Timing of the higher benefit is important as well. Using our examples from above, John’s filing date has a significant impact on Jane’s potential survivor benefit. The potential increase could make a huge difference for Jane. This is why so many experts recommend delaying the filing for the larger of a couple’s two benefits as long as possible – it will impact the other spouse’s survivor benefit if she lives longer.

The last key takeaway is that you need to keep the WEP elimination in mind when planning for survivor benefits. This can make a significant difference for the surviving spouse – up to $428 a month from our example.

Should You DIY Your Financial Planning?

DIY FailMany individuals may consider doing their own financial planning over the course of their lives. Although financial planning is generally not too terribly difficult, to answer the title’s question, the answer should be “No.”

Here are some reasons why.

  1. Get a second opinion. Even if you do it yourself, it’s wise to have another professional take a look at what you’re doing. A good financial professional will confirm good decisions you’ve made and will politely tell you if there’s a gap in your plan or if you may be making mistakes or omissions here and there. Even good financial professionals have another professional look at their plans. Be wise enough to realize you don’t know everything.
  1. Time management. Although many individuals are smart enough to learn how to do their own financial plans, many aren’t willing to take the appropriate amount of time. It takes quite a bit of time to learn a skill or trade. Financial planning is no different. Although some financial planners’ recommendations may come easily, they took years to learn. And they are still learning – as any professional should.
  1. Leverage. Think of it this way. Many individuals are qualified to study and learn how to become doctors and attorneys.  However, many of us do not have the time to learn these professional skills. What we do however, is leverage these professionals’ knowledge in exchange for a payment. It is much more cost and time effective in most cases to pay a small sum out of pocket in exchange for valuable information or recommendations in return.
  1. Behavioral accountability. Although we would be the first to agree that an index investment strategy is not rocket surgery, a financial professional can add value in helping control investors’ emotions. This includes recommending an investor not sell at a market bottom nor make devastating financial decisions trying to beat the market. Additionally, in times of stress such as divorce or death a financial professional can provide an ear and a calm voice of reason to help an investor through difficult times.
  1. Work with a fiduciary. When seeking a financial professional it is imperative to work with a fiduciary. An individual doing it on their own is thus their own fiduciary. The question is, is the investor going to act in their own best interest? Many individuals would say yes however, this can be difficult to do during times of market volatility and stressful situations. Working with a fiduciary can help provide objective, fiduciary advice to help an individual stay true to their financial plan and goals.

Missed Rollover Automatic Waivers

missed rolloverWhen you rollover funds from one retirement plan to another, a missed rollover occurs if you can’t complete the rollover within 60 days. A missed rollover results in a taxable distribution. However, there have always been certain specific situations that provide for exceptions to this rule, but any reasons outside that limited list required the taxpayer to request a Private Letter Ruling (PLR) from the IRS. The PLR request process could result in some significant costs for lawyers and fees.

Rev Proc 2016-47: Missed Rollover Waivers

Recently the IRS published a new procedure for handling an expanded list of exceptions for a missed rollover. This procedure, Rev. Proc. 2016-47, outlines eleven possible exceptions to the missed rollover rule. The eleven exceptions are:

  1. an error was committed by the financial institution receiving the contribution or making the distribution to which the contribution relates;
  2. the distribution, having been made in the form of a check, was misplaced and never cashed;
  3. the distribution was deposited into and remained in an account that the taxpayer mistakenly thought was an eligible retirement plan;
  4. the taxpayer’s principal residence was severely damaged;
  5. a member of the taxpayer’s family died;
  6. the taxpayer or a member of the taxpayer’s family was seriously ill;
  7. the taxpayer was incarcerated;
  8. restrictions were imposed by a foreign country;
  9. a postal error occurred;
  10. the distribution was made on account of a levy under § 6331 and the proceeds of the levy have been returned to the taxpayer; or
  11. the party making the distribution to which the rollover relates delayed providing information that the receiving plan or IRA required to complete the rollover despite the taxpayer’s reasonable efforts to obtain the information.

There are some more rules that apply – such as, you must not have requested an exception in the past and that exception was denied – but otherwise it’s a self-certification. The IRS has even provided a sample letter that the taxpayer will use to provide this self-certification. The sample letter is provided at the bottom of the procedure notice: Rev. Proc. 2016-47.

Investing Your 401k – a 2-step plan

two-stepsIf you’re like most folks, when you look at a 401k plan’s options you’re completely overwhelmed. Where to start? Of course, the starting point is to sign up to participate – begin sending a bit of your paycheck over to the 401k plan. A good place to start on that is at least enough to get your employer’s matching funds, however much that might be. In this article though, we’re looking at investing your 401k money. It’s not as tough as you think. In fact, it can be done in just two steps – taking no more than 30-45 minutes of your time.

Step 1 – Look at your options

When you’ve signed up for the 401k plan, review your options for investing your 401k. Look at the list of investments available – and from here you can take a shortcut if you like.

If your plan has a “target date” investment option that coincides closely with your hoped-for retirement date, start with that fund as your investment choice. This is an excellent place to start, especially when you have a relatively small amount of money in the plan. Choose this and you’re done – skip down to the “Follow up” section below.

If you’ve been participating for a while and have built up some money while investing your 401k, look at your options more closely. Among your options should be a large-cap stock fund (such as an S&P 500 index). In addition, there should be a broad-based bond fund as an option as well.

If there are multiple choices that fit those two categories, look a bit closer. Somewhere in your documentation should be information about the expense ratios of the funds. Choose the large-cap stock and bond fund with the lowest expense ratio when there is a difference.

There will likely be other investment options available to you, but for simplicity’s sake, you should just stick with these two for the time being. As you build your experience investing your 401k plan, add other investment choices to the mix.

Note: if you’re still overwhelmed, look at “Follow up” below for information about advisors to help you with the process.

Step 2 – Consider your risk tolerance

Risk tolerance is a fancy term that we financial-types use to describe how much you can stand the ups and downs of the market when investing your 401k funds. If you’re a nervous investor, watching your balance every day or week, you have a low risk tolerance; if you are a “set-it-and-forget-it” type, your risk tolerance is higher. Stocks are (generally) the more risky investment versus bonds, so if you have a lower risk tolerance your stock investment should be a bit lower. Vice versa if you have a higher risk tolerance.

Generally, when choosing between the two options we outlined above (stock and bond funds), you should select a ratio of no less than 25% of either, and the remainder of your selection should be no more than 75%.

A good starting point is 50% in each of the stock fund and the bond fund. If you’re really skittish about investing your 401k, and/or there are only a few years remaining before your retirement date, you might choose to invest a bit less in the stock fund and more in the bond fund. On the other hand, if you’re okay with the market’s up and down movements and recognize that investing your 401k is a long-term activity, investing more in stocks and less in bonds may be the better choice.

If it seems like I’m vague about this part, that’s because this part is personal and can be different for each person. Without knowing your circumstances, I can’t tell you how to invest. However, as a rule, it’s better to put more in stocks than in bonds, as this will give you a better chance of experiencing growth of your 401k plan over time. If you start out skittish and become more comfortable, you can always increase your stock investment later on.

Follow up – investing your 401k

After you’ve had some experience investing your 401k funds, you may become more comfortable with the process. Even if you’re not comfortable with it, it does pay off to review your investment options again over time. Especially if you chose the target date option above, you may want to adjust your investment process over time.

Your employer may offer access to a service to guide you through the process of investing your 401k. Take advantage of this service if you have it available.

In addition, there are plenty of books that can help you with the investment process. You’ll never regret educating yourself on investing. If it’s just not your thing, you can choose to find an advisor to help you with the follow up process. There are many advisors who can help you look over the options for investing your 401k. Many do this for an hourly fee. Even if it costs you $500 to $1000 to get this advice, it’s money very well spent. The advisor will help you understand what’s going on with your 401k.

Two good options to find advisors are the Garrett Planning Network and the National Association of Personal Financial Advisors (NAPFA). Click on the link to go to each website for more information.

Perspective on Market Direction

stock-market-rising-4180159From time to time we are asked about where we think the market is heading, whether or not another crash or “correction” is imminent and whether or not investing in the stock market is a wise investment.

To give a little perspective on this, I want to share a story with you.

In January of 1995 I was starting the second semester of my senior year in high school. Like many high school seniors, I was excited for graduation and ready for my learning to be over (oh, the ignorance!). In my senior social studies class we had an assignment. We were to pick a major, recurring news theme that we could track and report on for the entire semester.

Naturally, when the time came for us to initially report on the news theme we had selected, I had completely forgotten about the assignment and the due date. In a rush, I ran over to the stack of newspapers in the back of the class room and feverishly tore through the pages to find something relevant and recurring. By that time, other students had claimed most of the fun, easy topics. Taken topics included pop culture, sports, and others.. This left the business and financial section relatively untouched.

In my haste, my eyes stumbled on a headline: Dow at 3,838.48. At the time, this boring subject (and arguably still boring) was at least something I could report on throughout the semester. Quickly, I cut out the article, taped it to a piece of tag board and voila! – Mission accomplished.

The reason why I am sharing this is to offer perspective on what has happened over the last 20 years. Today (as of this writing) the Dow stands at 18,305 – almost 5 times its value in January of 1995! Why is this important? There are many reasons.

First, it gives perspective to individuals who worry about day-to-day market fluctuations. In other words, don’t watch the market daily. Second, it also gives perspective on how the market has weathered major events such as the October 1997 mini-crash, the Dotcom bubble bursting, 9/11, the Great Recession (Financial Crisis), the May 2010 Flash Crash and 2016’s Brexit. Third, it also lets individuals know that diversification is critical to any investment portfolio. That is, during these volatile times, other asset classes aside from stocks acted differently.

Does anyone know where the market is going? I would argue the answer is no; when time horizon is measured in days or months. For our clients, and personally, that’s why we look at long-term time horizons – in this case, just over 20 years.

If your hobby makes money, read this

hobbyLots of us have a hobby – whether it’s collecting stamps, raising honeybees, restoring old Jeeps, or mounting a wild-cat – and sometimes these hobbies can produce income. If you have a hobby that makes money, you may need to claim this money as income, net of your expenses, on your tax return.

Recently the IRS published their Summertime Tax Tip with Five Tax Tips about Hobbies that Earn Income, providing useful information about income-producing hobbies. The text of the Tip is below:

Five Tax Tips about Hobbies that Earn Income

Millions of people enjoy hobbies. Hobbies can also be a source of income. Some of these types of hobbies include stamp or coin collecting, craft making and horse breeding. You must report any income you get from a hobby on your tax return. How you report the income from hobbies is different from how you report income from a business. There are special rules and limits for deductions you can claim for a hobby. Here are five basic tax tips you should know if you get income from your hobby:

  1. Business versus Hobby. There are nine factors (below) to consider to determine if you are conducting business or participating in a hobby. Make sure to base your decision on all the facts and circumstances of your situation. Refer to Publication 535, Business Expenses, to learn more. You can also visit and type “not-for-profit” in the search box.  You generally must consider these nine factors to establish that an activity is a business engaged in making a profit:
    • Whether you carry on the activity in a businesslike manner.
    • Whether the time and effort you put into the activity indicate you intend to make it profitable.
    • Whether you depend on income from the activity for your livelihood.
    • Whether your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business).
    • Whether you change your methods of operation in an attempt to improve profitability.
    • Whether you or your advisors have the knowledge needed to carry on the activity as a successful business.
    • Whether you were successful in making a profit in similar activities in the past.
    • Whether the activity makes a profit in some years and how much profit it makes.
    • Whether you can expect to make a future profit from the appreciation of the assets used in the activity.
  2. Allowable Hobby Deductions. You may be able to deduct ordinary and necessary hobby expenses. An ordinary expense is one that is common and accepted for the activity. A necessary expense is one that is helpful or appropriate. See Publication 535 for more on these rules.
  3. Limits on Expenses. As a general rule, you can only deduct your hobby expenses up to the amount of your hobby income. If your expenses are more than your income, you have a loss from the activity. You can’t deduct that loss from your other income.
  4. How to Deduct Expenses. You must itemize deductions on your tax return in order to deduct hobby expenses. Your costs may fall into three types of expenses. Special rules apply to each type. See Publication 535 for how you should report them on Schedule A, Itemized Deductions.
  5. Use IRS Free File. Hobby rules can be complex. IRS Free File can make filing your tax return easier. IRS Free File is available until Oct. 17. If you make $62,000 or less, you can use brand-name tax software. If you earn more, you can use Free File Fillable Forms, an electronic version of IRS paper forms. You can only access Free File through

IRS Tax Tips provide valuable information throughout the year. offers tax help and info on various topics including common tax scams, taxpayer rights and more.

Additional IRS Resources:

Pregnant Men and Tattooed Aristocrats


SeahorseWhen you read the title to this article your mind immediately processed the words as unfamiliar and not particularly logical. After all, how many pregnant men do you see and how many tattooed aristocrats do you run into? The title was actually taken from the book, Thinking, Fast and Slow by Daniel Kahneman. I’m currently in the middle of my third time through the book and it seems like each time I read it I gain valuable insight as to how our minds work and how we perceive things.

Most notably, these words stuck with me as a way to inform our readers of other financial words and pairings they may encounter and to make readers aware that these word combinations will seem and are illogical. The goal is to help inform readers that should they see some of the following phrases, they should immediately realize that something doesn’t seem right – and is likely illogical.

High-powered Roth – If you ever encounter this phrase it is very likely in reference to a variable universal life insurance policy (VUL). These policies offer policyholders a method to invest the cash value of their premiums into underlying stock and bond mutual fund subaccounts. The cash value grows tax-deferred and may be potentially available tax-free to the policyholder. However, they are not even in the same ballpark as Roth IRAs. VULs carry high fees, expenses and surrender charges and should only be used when the underlying need is strictly life insurance, not an investment. Only in the most-rare of circumstances do they make sense for anything other than their life insurance component. If you have a salesperson who disagrees with this, ask them to use the terminology in front of a rep for the SEC or FINRA.

Life insurance as an investment – While certainly an investment in your family’s piece of mind and well-being after your death, life insurance is not an investment in the sense that it should be used as a vehicle for accumulating retirement savings or college savings. As noted above, these policies have “insurance drag” which means that the investment performance is hindered by the actual cost to insure the policy holder’s life in addition to the normally exorbitant expense ratios of the underlying sub-accounts. Additionally, it takes a very long time for the cash value to build. Max out your 401k and IRAs.

Beating the market – Beating the market is exceptionally difficult for even the most skilled fund managers. Generally, if a fund manager beats the market (very rare) it is even more difficult to consistently beat the market (extremely rare). To see how difficult this is, click here. Also note that managers that report they beat the market do so before fund expenses and fees are accounted for; hardly an apples to apples comparison. Active management is a zero-sum game. When one fund wins, another has to lose; and that’s usually the fund you’ll own.

Free lunch – This should be obvious. As they saying goes – there’s no free lunch. For that matter, there’s no free dinner or breakfast either. Often these free meals are touted to individuals to entice them to come to a seminar which is really a sales pitch. Postcard invitations to these events should be immediately thrown away. What these salespeople are preying on (or praying for) is the quid pro quo of giving you something free so you’ll feel obligated to do business with them. It’s how good-natured people get sucked into bogus investments schemes and time-shares.

Unlimited income potential – This is more directed to new or seasoned advisors looking for greener grass. Many job descriptions in the financial services industry brag about unlimited income potential as an enticement to “be your own boss” and “be in business for yourself but not by yourself”. Malarkey! In theory, this can be true. But it would also mean there’s an unlimited number of prospects, clients, hours in the day, etc. Theoretically, a stock can have unlimited potential and rise infinitely, but that has yet to happen. Your income is limited.

Downside protection, income locks (guarantees), and forecasting – These phrases are often used to sell riders and endorsements on specific products such as annuities. Downside protection generally refers to indexed annuities that offer caps on returns in exchange for protection from losses when markets go sour. However, the downside protection does not imply there aren’t fees.

Income guarantees are provided on annuities as rider to guarantee a certain withdrawal amount subject to anniversary dates and amounts in the annuity. Naturally, these are not free and the expenses of such riders need to be carefully considered before entering into such contracts.

Finally, forecasting (or any attempt thereof) the market really boils down to an educated (or ignorant) guess. However, both educated and ignorant guesses can devastate portfolios and be very expensive. Forecasting has an element of luck; and a lot of hindsight bias. It’s easy to brag about a forecast when it comes to fruition. If you hear forecasts and predictions, think of the wise words from Mark Twain, “It ain’t what you know that gets you into trouble. It’s what you know for sure that just ain’t so.”

Social Security for Ex-Spouses – Swim with Jim Video

In the video cast above I am talking with Jim Ludwick, of Mainstreet Financial Planning, Inc. about benefits from Social Security for ex-spouses. Let me know if you have any questions!

If for some reason the video is not showing up in the article – you can find it on YouTube at

Book Review: Making Social Security Work For You

This book, by my friend and colleague Emily Guy Birken, is a great book for gaining a better understanding of Social Security benefits. I recommend Making Social Security Work for You to anyone looking for answers about Social Security benefits. Birken is also the author of The Five Years Before You Retire, another excellent retirement planning tome.
Birken’s style of writing is easy-to-follow. She has a subtle sense of humor that comes out in her writing. This makes the material enjoyable to read, even for a dry subject like Social Security.

Making Social Security Work for You

I especially like the way author Birken presents the material. Having written a book on the subject, I know full well the challenge she faced when putting this information together. It is difficult to make such a technical subject understandable and engaging. Birken presents the material in a cohesive manner, with a review (Takeaways) at the end of each chapter.

Birken also does an excellent job of explaining the various benefits, timing strategies, and options available to an individual in all sorts of circumstances. There are explanations for the single filer, married couples, and divorced individuals. The information presented includes all of the changes to the rules that came into effect with the Bipartisan Budget Act of 2015. Grandfathered rules are covered as well.

Birken presents excellent examples throughout the text, which help the reader to understand the principles. These are real-world situations that are easily adapted to your own situation as you see fit.

The book rounds out with a list of the Pitfalls and Problems for you to be aware of as you plan your Social Security benefit filing. These are important to know about so that you don’t make mistakes in your filing process.

All in all – I highly recommend Making Social Security Work for You for your education process as you determine the best filing methods for yourself and your family. Emily Guy Birken has done an excellent job with this book, you can learn a lot from it.

How to Take a Frugal Vacation

2016-07-25 20.39.35Vacations don’t have to be expensive. They certainly can be, but there’s no rule that dictates vacations must exceed a certain monetary threshold in order for the individual to enjoy it. Here are some ideas that readers may consider in order to take much needed vacations, but keep expenses from running out of control.

  1. Shop around for the best deals. Some simple research while sitting in front of the TV can pay huge dividends. There are many websites that offer coupons and discounts for stays at various hotel chains, bed and breakfasts, etc. Websites such as Airbnb,, Expedia, etc., offer visitors the ability to search out different homes or condos that individuals have for rent (Airbnb and or prices on the best hotels in the area (Expedia). Many of these sites have reader reviews that can inform the future traveler about the cleanliness, ambiance and overall satisfaction with a particular stay.
  1. Brown bag it. Many individuals spend almost as much if not more on dining out that they do on their other vacation expenses. Add kids to this scenario and eating on vacation can get ridiculously expensive. Instead, try packing a cooler full of your essentials for the stay such as breakfast items, cooking utensils, and other food for the week. Choose a place to stay that has a cooking area and a fridge. Pack snacks for the kids from your home pantry. Often, the expense of groceries for the week will be less than one meal out at a restaurant. If packing is difficult (if you’re flying) find where the nearest grocery store is in the area you’re staying and plan for a few hours of shopping.
  1. Travel when others don’t. Many times you’ll get the best rates when you travel and stay in non-peak times. Generally, this means during the week when others are still working. It also means avoiding the crowds and hassles of packed freeways and airports when everyone else is traveling such as major holidays and weekends. Additionally, prices are usually lower during non-peak travel times. This is true for airfare, hotels, gas, and theme parks.
  1. Plan ahead. Just because you’re on vacation doesn’t mean you have to always fly by the seat of your pants. For example, an inquiry into the pricing of flights to a certain destination showed that airfare was over $300 less if I would have booked 6 months prior. When you’re on your stay, ask around for the best deals. Ask your hotel if they have coupons to various places. Ask locals in the area where the best places are for the best prices. Don’t be afraid to call the place you’re going to stay and bargain. Sometimes directly bargaining with the individual or place will yield better savings than the discount websites. For dining, plan your meals in advance and pack your cooler or shop accordingly.
  1. Invest in experiences. When you’re on your vacation, do your best to invest in experiences. Think about the last time you went on vacation. If you remember anything you purchased that you regret or would not buy again, keep that focus on your next trip. Instead, focus on the experiences your money will buy. This includes precious time with growing kids, maintaining a relationship with a spouse, and creating memories that are priceless. This isn’t to say some souvenirs aren’t warranted, but be smart about it. Often these trinkets are expensive junk. I don’t need a coffee mug telling me the city I stayed.
  1. Stop keeping up with the Jones’s! Your vacation and relaxation is not and should not be dependent on your friends’ or neighbors’ vacations. Who cares where they went and who cares what they did. Of course, be happy for them and listen when they explain their excitement, but don’t be jealous or envious. You don’t know how they paid for it or what circumstances surround it. If your peers’ vacations make you jealous or envious, see a counselor. You’ve got bigger issues.
  1. Don’t finance your vacation with debt! As a financial planner, I’ve seen too many individuals finance their vacations with credit cards. Often, it’s a symptom of keeping up with the Jones’s. And likely, the Jones’s are doing the same thing. Instead of financing your vacation with credit card debt, save up and use that saved money for the trip. If you find yourself with little saved, then plan a less expensive trip. This may mean a small, three or four-day weekend trip instead of a two week stay. The only time credit cards should be used for vacation is to not carry cash on the trip, foreign travel, or to take advantage of discounts offered by the card company for the specific trip. A good rule of thumb, any amount put on the credit card should already be in the account where the credit card bill is paid from – in full! The credit limit doesn’t mean a spending maximum.

A Small Step (and it’s free!)

Quick – can you tell me your net worth?

How about the balance on your credit card (okay, cards)?  Your savings account balance?

by dbking For many folks (okay, face it, most of us) the answer to those questions is only available after a multi-hour session of digging through statements, online accounts, possibly tax returns, and the like.  But it doesn’t have to be that way.  Getting a handle on questions like this doesn’t have to cost a lot of money, when you use free account aggregation tools.

One of the first tenets of sound financial planning involves an understanding of where we are right now.  What is our current financial picture?  What assets do we have?  What liabilities do we owe?  What is coming due soon?  What income can we expect?  Without an understanding of where we are, it’s hard to figure just how we’ll move toward our goal, be it financial independence, comfortable retirement, or a new home.

I have written in other posts about the various ways you can use the internet to help you with your financial records, and so in a way this is just an update.  The difference is that we’re focused primarily on organizing our information here.

One very good free options that I have had experience with is Mint (  This type of site is commonly referred to as an “account aggregator”, meaning you will have all of your account information in one place once you’ve set things up.

Mint provides you with the ability to link all of your accounts – checking, savings, retirement, IRA, credit card, etc. – in one place.  This takes a little while to set up the first time, because you have to go through all of your accounts to set up your aggregation with the passwords, account numbers, and such. Once you’ve gone through this process, you’ve got all of that information available at your fingertips, and this is where the real power of the site comes in…

Now, you can see at a glance what all of your balances are, up-to-date as of the moment you clicked on “update”.  I’ve tested this out, and, while your mileage may vary, Mint has been current on activity that has happened within an hour or two.  I went to the ATM and withdrew some cash, and within an hour or so I went to Mint and updated, and voila!, the account was already current.

In addition to the ability to see your balances, Mint will notify you when a bill is coming due (such as for a credit card), as well as to project your income and bills for the coming month or two.  There are built-in tools that alert the user when spending in a particular category is above the norm. A rudimentary budget can be automatically built for you as well, with alerts sent to you when you spend more in a particular category than the plan, for example.

Granted, Mint is not the only aggregation tool out there, and it will probably not be the only tool you will use to organize your finances.  You could also use the likes of Quicken or other checkbook-type organizers, which include online account aggregation tools as well – but many of these products comes with a price tag, albeit pretty low cost in the scheme of things.

With free tools like Mint available, there is little reason to *not* get your information organized these days.  And for many folks, just getting things organized is the small step that becomes a giant leap for your personal financial situation.  So get going – Aggregate!

Forget Your New Year’s Resolutions?

4931290496_cf1027c38a_mSix months ago I wrote a price regarding New Year’s resolutions. I’d like to follow up to ask whether or not readers have followed through and are making good on the promises they made at the beginning of the year. If you find yourself as one of the individuals that has put together a plan of action and you’re moving forward – good for you! If not, what happened?

Understandably, many individuals renege on their promises made at the beginning of the year. Many factors can be the culprit. From not having enough time, not making goals a priority or simply lacking a plan of action, many folks struggle to make their resolutions a reality. So how do we get back on track? Or better yet, how do we even start?

The good news is that while making good on the resolutions does take work, the plan of action is relatively straight forward.

  1. Write down your goals. This is more than a simple “wish list” or things you aspire to do. Rather, your goals should be detailed, dated, specific and actionable. For example, a wish would be me saying “I want to save money for retirement.” That statement lacks clarity, specificity, and direction. Instead, I can write down “I save $5,500 per year to my Roth IRA. I do this by saving $458.33 monthly with automatic deductions from my checking account.” Here. I’m accomplishing the goal of saving money for retirement and I’ve given myself a specific number, and a way to take action.
  1. Very often I hear the excuse that there’s not enough time in the day to do this or that. The problem is that if we continue to let ourselves believe that thinking, we’ll be right – and our goals won’t be achieved. Instead, why not ask ourselves how can we make the time? By asking ourselves how we can accomplish a task our brains go to work trying to figure out what it will take to succeed. Do you need more time in the day? Try setting your alarm clock one minute earlier each day for a month. Bingo! An extra half-hour of time and little effort to get there. Want more time to start a hobby, spend with your family, etc.? Turn off the TV and social media. Better yet, get rid of your cable package (it’s easier to turn off the TV when you’re not paying for it) and delete your social media account. Again, it comes down to priorities.
  1. Just do it. Nothing happens without action. The best laid plans and goals are worthless unless we take action and make progress. Think of it this way: The Mona Lisa, Sistine Chapel, Mount Rushmore and many other glorious accomplishments all started as ideas with goals. However, they wouldn’t be present today without action. Commit yourself to working on and toward your goals on a daily basis. Every little bit gets you closer and closer to their realization.
  1. Learn, revise, reset. Inevitably, goals will be achieved, missed and changed. It’s important that if you fail to meet a goal that you haven’t failed overall. It may mean you need to take a different approach. Failure is a good thing. It’s how we learn. Perhaps some revisions need to be made, new details added and different action taken. When a goal is achieved, celebrate and then get back to setting more goals. This builds momentum and it’s infectious. It becomes hard to stop your progress and much easier to say no to things that will inhibit your achievement.

2016 isn’t over by a long stretch. Sit down today, now, and write out a few specific goals that you’d like to achieve within the next six months. Then get moving.

Withdrawals from an IRA – death, disability, and 59 1/2

key to ageThree of the most common ways that you can withdraw funds from your IRA without penalty are: 1) reaching age 59½; 2) death; and 3) disability. Below is a brief review of each of these conditions for penalty-free withdrawal:

  1. Reaching Age 59½ When you reach age 59½, you can withdraw any amount from your IRA without penalty, for any reason. The only thing you have to remember is that you must pay ordinary income tax on the amount that you withdraw. This means that, once you have reached the date that is 6 months past your 59th birthday, you are free to make withdrawals from your IRA without penalty. You are not required to take distributions at this age (that happens at age 70½).
  2. Death Upon your death at any age, the beneficiaries of your account or your estate if you have not named a beneficiary, can take distributions from your IRA in any amount for any reason without penalty. In fact, your IRA beneficiaries in most cases must begin withdrawing from the IRA, taking required minimum distributions annually, or taking the entire account balance out within 5 years after the death of the original owner. See the article RMD from an Inherited IRA for more details.These distributions are taxable as ordinary income to the beneficiary, but no penalty is applied.
  3. Disability If you are deemed “totally and permanently disabled” you are also eligible to withdraw IRA assets for any purpose without penalty. Total and permanent disability means that you have been examined by a physician and the disability is such that you cannot work, and the condition is expected to last for at least one year or result in your death.

Check Your Vitals


Whenever you go into the doctor’s office for a check-up what’s the first thing he or she usually does? The doctor checks your vital signs. Generally, this is heartbeat, blood pressure, breathing, reflexes, etc. Sometimes either the doctor or the nurse practitioner will have a questionnaire asking various questions such as number of drinks per day, whether or not you smoke, and any allergies – to name a few.

Most individuals give this information without thinking twice. Most of the time, the answers we give don’t change. So why does the doctor keep asking the same questions every time we have an appointment? The answer is because if one of these answers does change (such as an irregular heartbeat or high blood pressure) this changes the potential diagnoses and outcome.

This is why it’s important in your financial planning to always check your vitals. In other words, even though you think you’re financially “healthy” let the financial professional look at your auto, home, life, health and disability insurance to check coverage and liability limits. Most of the time an individual is going to be ok. However, there are times where someone thinks they’re healthy, yet their coverage is inadequate. For example, maybe the individual has comp and collision deductibles on vehicles that are old. The coverage was necessary 10 or 15 years ago, but not today. This would be the equivalent of being on antibiotics for an illness, but still taking them when the illness is cured – and continuing to pay for the prescription!

Additionally, levels of debt and savings should be checked frequently. Are debt ratios improving or getting worse? Has the savings rate changed or does it need to be changed? Someone saving $50 per pay when they were first hired may need to up that amount as they receive increases in annual salary. If they’re not asked, they can wind up with considerably less in retirement, yet their earnings allowed them to save more.

Individuals may find this hard to keep track of so it’s important that their financial professionals be vigilant in always asking. For the financial professionals, it can be difficult when they become focused on one area of planning – such as gathering assets or selling products. The point is that just like the body’s vitals, financial vitals should be checked every time individuals meet with their financial professionals. Most of the time things don’t change dramatically. But if they do, financial professionals and their clients can be better prepared to move forward with an accurate diagnosis of the situation and the appropriate prescription to remedy the issue.

RMD from an Inherited IRA

inheritanceIf you have inherited an IRA you are required to begin taking distributions from the account according to a set schedule. If you are the sole beneficiary of the IRA, how you handle your distributions is up to you. If there are two or more beneficiaries of the IRA, the process becomes more complicated – see the article at the link for more on multiple beneficiary arrangements.

There are actually two different schedules that you can use, lifetime distributions and a distribution over 5 years.

5-year distribution

The 5-year distribution method is the default period for distribution of an inherited IRA. As the name of the method suggests, in this method the inherited IRA must be completely withdrawn within 5 years of the death of the original owner. There is no specific amount that must be withdrawn in any particular year, as long as the entire account is withdrawn within 5 years.

I mentioned that the 5-year method is the default – this is because if no distributions are taken within the first year following the death of the original owner, it is assumed that the 5-year method is being used. However, if you are using the lifetime distribution method, you would take a specific distribution (or more) during the first year following the year of the death of the original owner.

Lifetime distribution

If using the lifetime distribution method, you are intending to extend the time period of distribution for some length of time in excess of the default 5-year distribution. To accomplish this, there is a specific amount which must be withdrawn each year – and as long as at least that amount is withdrawn annually, the required minimum distribution has been satisfied.

The amount of the withdrawal required each year is determined by the age of the beneficiary upon the death of the original owner. The IRS has a table, known as Table I, that indicates a life expectancy figure for the beneficiary.

So if the beneficiary is, for example, 28 upon inheriting an IRA her life expectancy figure is 55.3. If the inherited IRA is worth $240,000, dividing the value of the IRA by 55.3 results in $4,339.96 – this is the first year’s required distribution. As long as at least that amount is withdrawn during the first year following the year of the death of the original IRA owner, the RMD has been satisfied.

The following year, the original life expectancy figure is decreased by 1 to 54.3. So now, if the IRA is worth $236,000 as of the end of the prior year, dividing that amount by 54.3 results in a RMD of $4,346.22.

The inheritant can take a larger distribution at any time – the only requirement is that at least the prescribed amount is withdrawn every year.

Age 70½ RMD Rules

give-us-this-day-by-mr-krisAs an owner of an IRA or other qualified retirement plan (such as a 401k), when you reach age 70½ you are required to begin taking distributions from the account(s).  There are several important factors about these distributions that could trip you up if you’re not careful.  Listed below are some of the more important rules – but keep in mind that these RMD rules are only for the original owner of the account, not for a beneficiary of an inherited account. There is a different set of rules for inherited IRA RMDs.

Required Minimum Distribution Rules

Calculation of RMD

  1. Determine your account balance from the end of the calendar year prior to the year for which the distribution is being calculated.  Any additions or withdrawals after December 31 of the previous year are not included in this balance, even if an addition is for the previous calendar year.  Also, any “in flight” rollovers or recharacterizations that effectively would impact the end of year balance are included (or excluded) in the balance as applicable.
  2. You must learn your distribution period, which can be found in Table III, using your age at the end of the current year (not the previous year).
  3. Divide the balance determined in #1 by the distribution period found in #2.  This is your RMD for the current year.
  4. For each subsequent year, go back through #1 for a new balance at the end of the prior year, then go to the table from #2 to get a new distribution period, and do the math.

More Than Minimum – for any year in which you withdraw more than the RMD amount you are NOT allowed a credit against future year RMD.  The result is that your balance at the end of the current year would be less, so future RMD would be less as well, but not by the amount of your extra withdrawal.

No Rollovers or Conversions of RMD Amounts – Although you’re allowed to rollover or convert IRA funds after age 70½, you can not rollover or convert the amount attributable to your RMD for the year. This amount (the RMD) must be taken completely out of tax-deferred accounts.

Multiple Accounts – For the purposes of calculating RMD, the IRS considers all traditional IRAs owned by one individual as one aggregate IRA.  This means that you can determine your RMD by adding together the balances of all your trad IRA accounts at the end of the prior year, and then taking your RMD from any one account (or as many accounts as you wish) as long as it totals at least the RMD for that year.  Other qualified retirement plans such as a 401(k) must be treated separately – that is, RMD must be calculated only on that account and distribution received from only that account.

Multiple Payments – For the tax year, you are allowed to take from as little as one to as many payments as you wish from your IRAs, as long as they add up to at least the RMD for the year.

Photo by Mr. Kris

The Value of a Stay-at-Home Parent

2770132690_0b9558b429_m1In earlier posts we’ve discussed the importance of a spousal IRA for a spouse that stays at home taking care of the children in order to still save for retirement even though the “non-working” spouse has technically no “earned” income.

Spousal IRAs aside, I wanted to shed some light on the value of a stay-at-home parent has, even though they might not be getting paid a salary for their work raising the children. The goal is to point out why stay-at-home parents still have a need for risk management and retirement planning as they (in my opinion) work one of the hardest jobs – raising children.

According to the 2016 Mother’s Day Infographic, the value of a stay-at-home mom (parent) is approximately $143,102 annually, accounting for 40 regular hour work and 52 hours of overtime. This “salary” takes into account occupations such as driver, teacher, chef, nurse, and janitor. The site also lets the user input their own information regarding specific circumstances (honey, if you’re reading this it said you were priceless!).

Here’s why this number is so important. There have been plenty of times that I have worked with a married couple and one of the spouses was a stay-at-home parent. Generally, that individual is the wife. What is interesting is that while she is general making close to, if not more than her husband, she is severely lacking in some of the basics of financial planning – insurance and retirement savings.

Unintentionally, I’ve seen the husband with quite a bit of life insurance and various retirement accounts such as a 401k and IRA, while the wife has very little, if any life insurance and has little to nothing saved for retirement.

The question that needs to be considered is how would the family function if the stay-at-home spouse died? How would the working spouse continue working, while also caring for the children if the stay-at-home spouse could not? Even though one spouse is working, are not both spouses going to enjoy retirement? And (sorry, men) since husbands generally die before their wives, will what he’s saved be enough to support her in retirement after his death?

Ok, ok. So maybe your head is spinning. My apologies.

Although this is a lot to think about, surprisingly the remedy isn’t that difficult. After determining the amount of (monetary) value that the stay-at-home spouse provides, consider having that spouse apply for an amount of life insurance related to that amount. A ballpark place to start is ten times that annually amount. From there, determine specific needs or see a competent professional to quantify it using a human life value approach. The working spouse should consider getting spousal life insurance through their group policy at work. Although not very high amounts it’s generally easy to get and the premiums are inexpensive.

For retirement savings, take advantage of the spousal IRA option. This allows a stay-at-home spouse to contribute to an IRA as long as the working spouse has enough earned income to make the contribution. For 2016, this means that for a couple under the age of 50, the working spouse would need to have earned income of at least $11,000 for both spouses to make the maximum contribution of $5,500 each.

Although the earned income is non-existent, it’s still important to make sure plans are in place for the stay-at-home spouse. As you can see the results of not planning could leave a significant gap in a family’s plan.

%d bloggers like this: