,

The Million Dollar Question: Pension Lump-Sum or an Annuity?

 

If you are fortunate enough to have a defined benefits pension plan at work, you may have a very important upcoming decision to make.  The task of deciding between a lifetime monthly payment or a 7 figure one-time payment can be daunting,  To compound the complexities, there are various different annuity options factoring in spousal payments and fixed term guaranteed payments.

Before stressing over the details, the first step is to understand the advantages and disadvantages of each option.   The table below objectively compares the two:

Annuity payments Lump-sum payments
Your monthly income is fixed, you have no investment decisions, and your tax planning is straightforward You’ll face tax issues in deciding how to take the lump sum, and you’ll have to make investment and estate planning decisions
You generally can’t transfer your money to another investment or postpone or accelerate payments if your health or financial situation changes You control how your money is invested and how fast you spend it.  You can roll the money over to a tax-deferred retirement account and have access to the money if needed for an emergency or an investment opportunity.
Most annuities pay a fixed monthly amount.  At an inflation rate of 3.5% a year, a fixed income annuity would lose half of its purchasing power in 20 years Your investments may earn higher returns than an annuity would offer and help you better keep pace with inflation
Your benefits don’t depend on your investment results, so declining interest rates or falling stock prices won’t reduce your income If your investment perform poorly, you could end up with less money than if you’d taken a fixed monthly payment
You can’t outlive your money (although after inflation it may not meet all your needs) You may outlive your money if you live long enough or you don’t make good investment or spending decisions
You must pay income taxes on your monthly distribution If you roll over your lump sum to another tax-deferred plan (IRA), you’ll generally be taxed only as you withdraw the money.  But, if you don’t roll over the lump sum, it’s taxable as income in the year you receive it.
Once you (and your beneficiary, if you choose a survivor option) die, all benefits cease and there is nothing for your heirs The unspent portion of your lump sum can be left to your heirs when you die

After understanding the basic concepts, the best way to look at the “Million Dollar Question” is to view the pension in terms of your overall portfolio.

  • Have you saved in a 401(k)?
  • Does your spouse work as well?
  • Does he/she have a pension?
  • How good is your current health?
  • How much control of your money do you want?
  • Is the pension adjusted for inflation?
  • Are you eligible for Social Security?

Each of these questions will allow you to lean towards the best retirement choice for you.  In summary, the age old wisdom of, “If you don’t know, ask!” perfectly applies to retirement questions.  A financial planner can help sort through the noise and help you find the optimal solution.

 

/0 Comments/by
,

Part 4: What Opportunities Have I Missed?

The last part of our “Why to Use a Financial Advisor” series involves missed opportunities.  Knowing there are unknowns out there in financial planning is the first step in identifying areas that can be improved.  A few examples of common missed items that we optimize for clients are:

529 Savings Plan in NYS – New York allows a state tax deduction for 529 contributions on up to $10,000 of yearly additions.  At a rate of 6.85%, that is an extra $685 annually just to save for college in the right bucket.  This can even be contributed in the years where college tuition is being paid.

Savings Buckets – There are many investment vehicles to save money for retirement, college or even a rainy day.  Using the optimal buckets (401(k), IRA, Roth IRA, 529, 403(b), Simple IRA, etc.) can help reduce your tax responsibility

Optimal Diversification – Diversification is becoming easier with target date funds, but many clients have suboptimal portfolios causing them to take an increased level of risk for a given return.

Tax Efficiency – If you are fortunate enough to have savings in both taxable and tax-deferred accounts, the portfolio should be optimized to include both account type characteristics.  In short, bonds and REITs should be in tax-deferred accounts and stocks should be in taxable accounts (using the same asset allocation for a level of risk tolerance).

Simplification – As the years go on, the various number of financial accounts continue to accumulate and complicate the picture.   A financial advisor can help sort through the accounts, combine some, eliminate others and come up with a simplified optimal solution customized to you.

Large Transactions – House purchases, car purchases, and new student loans are just three examples of large purchases that could make or break your financial strategy.  A financial planner can assist you in these transactions, sometimes saving thousands of dollars over the course of a loan.

Legal Documents –Wills, Estates, Trusts, Power of Attorneys, and Health Care Proxies are just as important as savings and investing.  A financial advisor can make sure you have the proper documents in place and recommend excellent professionals who can take care of the paperwork.

Social Security –With Social Security being the primary source of retirement income for most Americans, optimizing lifetime benefits is essential for most retirees.   By delaying and utilizing techniques like “file and suspend with spousal benefit,” a married couple could increase the overall lifetime value of Social Security by up to $500,000.

Return to “Why Do I Need a Financial Advisor?”

/0 Comments/by
,

Part 3: Can’t I Do This Myself?

Believe it or not, the simple answer is, “You can, but most likely you won’t.”

Emotions – How do you feel about a 10% market downturn?  If you have $10,000 in savings, the $1,000 loss stings, but it is not the end of the world in terms of retirement.   How about if you have $1,000,000?  Now that 10% loss has a value of $100,000!  A large loss close to retirement could jar anyone’s emotions.  This is a primary area where a financial advisor can provide a world of difference.  With experience in financial markets, an advisor can take the emotions out of the financial asset decisions and plot a logical course for their clients.

Emotions are also stoked by a relentless advertisement and journalism barrage created to grab headlines instead of focusing on what is important.  The entire financial service industry thrives on your emotions as a way for them to profit.  In contrast, a fiduciary (one who always holds the clients’ best interests first) financial advisor can separate the signal through the noise and take the emotions out of financial decision making.

Desire – Saving and investing are traditionally not in the forefront of our minds and often get ignored.  A good example of this is that the average person spends more time planning their vacation than planning for retirement!  Is this you? By delaying uncomfortable but essential financial conversations, you will only hurt yourself.

Knowledge – Career knowledge is another reason that it is advantageous to hire a financial advisor.  Similar to a doctor or lawyer, advisors have spent many years learning and perfecting their craft.

Time – Finally, the most important value that a financial planner can offer a client is time.  Time saved from stressing about money; time saved from trying to learn complex financial topics; time that can be used for your family, friends, or hobbies.  This concept is no different than hiring a lawn mowing company in the summer to take care of your yard.  You can do it, but it takes time and you most likely won’t be as diligent nor enjoy it.

Return to “Why Do I Need a Financial Advisor?”

/0 Comments/by
,

Tony Farella in USA Today!

The USA Today published an article by our one and only Tony Farella. (Link)

The full text version is shown below.

 

Is it worth paying for 401(k) advice?

Christine Dugas, Money Watch columnist5:13p.m. EST March 9, 2013

Money Watch, a personal finance column that runs every Saturday, features a financial planner from the National Association of Personal Financial Advisors answering reader questions about saving, protecting and growing your money. To submit a question, e-mail USA TODAY personal finance reporter Christine Dugas at: cdugas@usatoday.com.

Q: My employer offers a service in which an investment company manages my 401(k) savings. The cost is an annual rate of 0.25%. They have a chart that says people normally do 3% better on their investments with their help. I would prefer to see independent results. But being ignorant of the markets, would I be better off getting help? I’m at least 15 years from retirement.

A: Many employers are adding professional investment management services to their retirement plans. I’ve seen the cost of these services range from 0.25% to 1.0%, so it appears that it’s a pretty good deal for you.

Studies do suggest that investors who use advisers do get better returns than individuals going at it alone, but there is no reason that should be true if an investor does some basic research. It’s not magic. Advisers usually have confidence and discipline that are key factors in successful investing.

Most people do not have the time or interest in managing their own portfolios. Individual investors can be their own worst enemy by making emotional decisions about their investments. Those decisions include bad timing (getting out of the market during a crisis), chasing hot sectors of the economy or jumping into the latest investment fad being touted by the news media.

A good investment adviser can remove the emotion and focus on the important factors in creating an appropriate retirement portfolio.

Ask yourself these questions:

1. Do I know how much I need to save each pay period?

2. What is the total amount I need to save before my retirement?

3. What return do I need to reach my goal?

4. Do I have a diversified, balanced low-cost portfolio?

5. Am I taking the right amount of risk to reach my goal?

6. Do I have the discipline and confidence to stay the course when things get rocky?

If you don’t know all six of the answers, then an independent adviser could be quite valuable. Armed with the correct information, the adviser can construct a well-diversified portfolio that’s specifically designed to give you the best chance of maintaining your lifestyle in retirement.

Anthony Farella, NAPFA-Registered Financial Advisor

Rockbridge Investment Management, Syracuse, N.Y.

/0 Comments/by
,

Part 2: I’m in a Life Transition – Now What?

Years go by with casual spending and saving until one day a major life event materializes.  It could be a happy moment such as a marriage, retirement or an additional child.  A life event could also be a sorrow-filled experience of a death, a divorce or a loss of a job. Regardless of the event, financial planners can add the most value for clients in key life phases.

Objectivity – A financial planner will provide an outside view of the situation and deliver an objective opinion.  A simple, fresh perspective can enlighten a path in a confusing time of life.

Scenario Analysis – A financial advisor can analyze the what-if scenarios that run through a client’s mind and streamline the decision making process.  How much can I retire on?  What happens to my children if I die?  How will this marriage affect my savings?  Answering these, and many more similar questions, can give a client peace of mind in a confusing time.

Planning for the Unknown – Another key concern in a life transition is understanding future unknowns.  Each transition causes a unique set of new circumstances to analyze and plan for.  Although the federal estate tax limit is greater than $5 million dollars for an individual, did you know the New York State limit is $1 million? How do you plan on avoiding the New York State estate tax while minimizing the loss of control when gifting money?  Digging deeper into the unknowns can protect a family’s wealth and minimize planning mistakes.

Simplifying the Complex – Life transitions come with complexities.  For example, a client on the cusp of retirement came to us with nine different retirement/investment accounts and a dozen various funds in each.  With account consolidation and unified reporting, we were able to properly diversify the portfolio and illustrate all of the assets on a single sheet of paper.  An advisor can help streamline the financial portion of a life transition so that you can focus on the aspects that matter to you!

Return to “Why Do I Need a Financial Advisor?”

/0 Comments/by
,

Part 1: A Coach Can Take You Farther!

No matter how good a swimmer Michael Phelps was, he would have never reached his level of success without a patient and willing coach like Bob Bowman.  The coach-athlete interaction, which includes accountability, camaraderie and hard work, pays off in all aspect of sports.  No one would question that Syracuse University’s basketball success was in large part due to Jim Boeheim!

The benefits of coaching can be easily translated into financial planning.

Goal Setting – Goal setting is an art and a financial planner can help focus the goals to create a tailored individual plan.  All too often, people set their financial savings goals far below their retirement needs.  By identifying an achievable savings goal, an advisor can illuminate the correct path for every client.

Accountability – Stephen Covey’s famous quote “Accountability breeds response-ability” rings true in financial planning.   By interacting with a financial advisor, the thought of saving is always at the forefront of your mind; creating a favorable saving response.  The adherence to a saving habit increases greatly by just reviewing the past, talking about the present, and planning for the future.

Focus on Items that Matter – It is human nature to tinker and try to improve oneself.  It happens in golf when elite athletes disassemble their swings in pursuit of perfection.  It also happens when saving for retirement.  By utilizing the optimal mix of available investment vehicles, (401k, IRA, Roth IRA, brokerage accounts, CDs, etc.) a financial planner will add significant value to the final retirement picture.

Coaching applies to a much broader spectrum of life than just athletics, so consider adding a financial coach to your life!

Return to “Why Do I Need a Financial Advisor?”

/0 Comments/by
,

Why Do I Need a Financial Advisor?

This is a very common question, and rightly so.   In this series of blog posts, we will highlight four distinct areas where financial advisors add true value to clients.  After reading, hopefully you will be able to evaluate and recommend the benefits of a financial advisor with a new light.

Part 1: A Coach Can Take You Farther!

Part 2: I’m in a Life Transition – Now What?

Part 3: Can’t I Do This Myself?

Part 4: What Opportunities Have I Missed?

/0 Comments/by