Elaine Martyn from Fidelity Charitable explains how donor-advised funds can help others and reduce your 2017 taxes. Retirement jitters, a retirement crisis, and 7 ways to teach your kids the value of saving for retirement to help them avoid both the jitters and the crisis. Plus, is there any way to undo rolling a 401(k) into a 403(b) annuity? And can Joe explain why a 60/40 mix of stocks and bonds aren’t necessarily the best way to go – without snapping?
- (1:09) Signs of a Retirement Crisis from the GAO
- (9:00) Elaine Martyn: What are Donor-Advised Funds?
- (16:11) Elaine Martyn: How to Avoid Charity Fraud
- (25:54) 7 Ways to Teach Your Kids the Value of Saving for Retirement
- (33:33) Estate Planning Strategies for Surviving Military Spouses
- (38:46) Pre-retirement jitters
- (47:04) Listener Emails
It’s a really simple and effective platform to both give, grow and grant. And by that, I mean you can give charitable assets, any asset, into your charitable giving account, and then your account then grows its income through a variety of pooled funds that we offer. Or you can work with a financial planner to grow that income, and then we help you actually execute the grants to over 200,000 nonprofits here in the U.S. and abroad. – Elaine Martyn, FidelityCharitable.org
As the end of the year approaches and you’re looking for every possible tax deduction, we revisit our conversation with Elaine Martyn from Fidelity Charitable on how donor-advised funds can help you help others while reducing your 2017 tax burden. Pre-retirees have retirement jitters and the Government Accountability Office says we’ve got a retirement crisis on our hands, and Big Al’s got 7 ways to teach your kids the value of saving for retirement to help them avoid both the jitters and the crisis. Plus, is there any way to undo rolling a 401(k) into a 403(b) annuity? And can Joe explain why a 60/40 mix of stocks and bonds aren’t necessarily the best way to go – without snapping? Let’s find out! Here are Joe Anderson, CFP and Big Al Clopine, CPA.
JA: You were talking about this retirement crisis or something like that? The GAO came out?
AC: Yes, the Government Accountability Office came out recently with a report, they warned of a retirement crisis. Sometimes we and others talk about “the looming crisis,” and you and I have sort of tried to get away from that because that sounds self-serving.
JA: It’s just so doom and gloom.
AC: If there’s such a crisis, come to us, because we know how to fix it.
JA: Yes, I am the Almighty Savior. (laughs)
AC: So this is not from Joe and I. This is from our U.S. government. I’m just going to read what they say. So they’re saying that they wanted to take a hard look at the ability of individuals to save for retirement on their own and the amount of employer-sponsored pension plans. So we all kind of know that there are fewer and fewer defined benefit plans, standard pension plans like in the old days, maybe, our parents or grandparents had. But there are a lot of companies that do have 401(k) plans and things like that. However, about two-thirds of the folks working have a retirement plan. And one third don’t, which goes back to what we talk about all the time – how is that fair? So I got a 401(k). I’m over 50, I can save $24,000. Next year, $24,500 into my 401(k). Joe, let’s say you work for a company that doesn’t have a 401(k), you’re under 50, you can do an IRA for $5,500. I can do $24,500, you can do $5,500. How is that fair?
JA: It’s not. It’s BS.
AC: Yes it is.
JA: We created a new class, I teach a retirement planning course, I have been for the last ten years. And so I’m teaching more of a wealth creation class, for younger individuals, 35 to 55, versus the standard 55 to 70. This is what you need to do, set yourself up, create the retirement income, Social Security strategies, pensions and so on. So I got into it a little bit, there, Big Al. People my age, they’re not understanding what they need to do. They hear certain things, such as, “I have this retirement plan through my employer, but the fees are too high, so I don’t think I should be saving into it.” And I was like, “OK, well, what is your gauge on too high? And you have a 401(k) plan. Save money into it, because you have a company match, and it’s a pretax contribution or an after-tax into a Roth. I don’t care what the fees are.”
AC: That’s a justification as to why I shouldn’t save.
JA: Yeah exactly, it’s just like, “well, I want to spend it all. I gotta talk to Luxe so I can still save and then spend.” It’s just excuses – no, throw money at it. I understand that fees are a drag on your overall return. I get it. I’ve been doing this a long time. However, if you take a look at someone that has a 401(k) plan, that has saved into, minimal, with a match, versus someone that doesn’t have a 401(k) plan, the person with the 401(k) plan will win every single time. Al and I’ve seen thousands of you that come into our office that we can help, but I would say 90% of your liquid assets are in a retirement account. Most people don’t have the discipline to save outside of a retirement account. They just don’t. So I save into my 401(k) plan, I max it out, maybe I do a Roth IRA, and that’s it. Everything else is spent. Which is fine. But if you don’t have that 401(k) plan, because it’s not out of sight out of mind out of your paycheck, then it’s very difficult to save. So I digress. Go ahead.
AC: Yes that’s absolutely right. So they also, in this report, identified that Social Security trustees project that, beginning in 2035, the trust fund will be unable to pay full retirement benefits, which is true. And so something has to happen between now and then, and they probably can, they probably can fix that. But to do so will cause more people to pay more taxes, or maybe the retirement age will be delayed, or probably a combination of things. Some people are concerned, Joe, that they’ll have means testing on Social Security, and maybe they will, maybe they won’t. It’s hard to say.
JA: Well, there’s means testing now on Medicare. The more income that you make, then the higher Medicare premium that you have.
AC: Yeah. In a sense, they have it on Social Security, because the more income you make, the higher percentage of Social Security is taxable. So that’s an issue, and then, of course, we’re living a lot longer. So again, they focused on, there are a lot less traditional defined benefit pension plans. About a third of all private sector workers don’t have employer-sponsored retirement plans. Social Security has got some issues. And we’re living a lot longer.
JA: Yeah, but here’s the other side of this. People are resilient, for the most part. And we’re live in a lot longer, so that means we’re going to have more time of a healthier life, that we can continue to be in an occupation that is going to provide us with an income. If you take a look in 20, 30 years, 70 is going to be the new 50. And so yeah, people are going to continue to work. Yeah, we’re living a lot longer. And then they’re still using the same old, “if you retire at age 60, and you live to 105, you’re going to go broke.” Well no, I’m probably going to work until I’m 75, and then I’m going to get another career from 75 to 80. And do something online, or whatever the new Googles or Internet is going to be.
AC: Yeah, there’s all this discussion about the gig economy, and working part-time, and a lot of folks in my generation, the baby boomers, we want to remain productive, even in retirement. And for some of us, maybe that’s volunteering, others will need the income, and it’s going to be working in some kind of job, or some kind of freelance thing, or whatever. And you are absolutely right. And of course when you’re doing that, what happens is, then instead of tapping your retirement accounts, you can let them grow further. So then not only do they grow more, you’re not pulling my money out, and you’re adding to them, you’re working into your retirement by doing something productive, which will probably give you a lot more passion, and reason to get up in the morning, and you’ll be happier.
JA: Right. I think the whole definition of retirement needs to change, in a sense. Because we’re still using old rules for a new age. And so, it’s just looking at what are you trying to accomplish, what are your lifetime goals? How old are you, how much money that you have, and then making sure that you have a strategy and a plan. That’s the key, understanding what you need to do. Write it down. And then making sure that just keep yourself in check. If you can’t keep yourself in check, then you hire someone to do it or have your spouse do it, or have a neighbor do it. There’s a lot of different quick fixes that you can do. And I don’t think that there’s a looming retirement crisis, but what the hell do I know.
AC: That’s what the GAO says. Although they do say, Joe, real quickly, one of their suggestions is to promote universal access to retirement savings plans. I like that. That’s number one.
JA: Yeah but didn’t have contribution limits is going to be about $2,700.
JA: Yeah, $2,400, that’s it.
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9:00 – Elaine Martyn: What are Donor-Advised Funds?
JA: Alan, it’s that time of the show.
AC: It is, we’ve got a guest.
JA: We do. We have Elaine Martyn. She’s a Vice President, Relationship Management of the Private Donor Group at Fidelity Charitable. Want to welcome Elaine to the show. Elaine, are you there?
EM: I am. Thanks so much for having me.
JA: Yes. Well, thank you so much for joining us. We’re excited to talk charitable giving, planning, donor-advised funds, and disasters.
EM: Well, I think donor-advised funds are becoming a hot topic down in southern California and across the nation, and so I’m really looking forward to sharing what we’re doing with you.
JA: Well let’s talk first. Tell our audience a little bit more about Fidelity Charitable. What’s your role there, what do you do, and what are some of the functions that you work with?
EM: Yeah absolutely. So we are the oldest national donor-advised fund in America, and that means that we are working with donors across the U.S. to help them do more tax efficient, high-impact grant-making. And what a donor-advised fund is, it’s a really simple and effective platform to both give, grow and grant. And by that, I mean you can give charitable assets, any asset, into your charitable giving account, and then your account then grows its income through a variety of pooled funds that we offer. Or you can work with a financial planner to grow that income, and then we help you actually execute the grants to over 200,000 nonprofits here in the U.S. and abroad. And so, I actually work with donor families around the country, who are really interested in doing highly effective grant-making. And last year alone, we gave out about $3.5 billion in grants to non-profit charitable organizations in the US.
JA: So in real simple terms, because we use donor-advised funds with our clients quite a bit as a tax strategy if they’re already giving to certain charities. And a donor-advised fund is that instead of giving directly to the charity – let’s say if I’m giving $10,000 a year to a certain organization. What a donor-advised fund could do is maybe accelerate that tax deduction, if you will, and maybe they say, “Well, I’ll put $100,000 in the donor-advised fund, because I know I’m going to be giving $10,000 a year, but maybe I need a big tax deduction this year. So I put $100,000 in the donor-advised fund, I get that tax deduction in the year that I contribute to the fund, and then from there, I can distribute those dollars as I see fit, to whatever charitable organization that I have some passion about.” Is that a fair explanation?
EM: That’s exactly right. It’s about leverage. You get to give a single gift and get a tax deduction at that time, and then give at the pace you want, to the organizations that you most care about, and you don’t have to give it all in one lump sum to one organization. You can really think thoughtfully and work with your non-profit partners to figure out how you want to do your grant-making for the year and beyond.
AC: It’s a little like a private foundation, except you don’t have to set up a non-profit entity to do that. It’s much simpler, you’re just setting up an account, right?
EM: That’s exactly right. I love describing it as a private foundation for everyone. I actually manage a team of relationship managers who can serve as almost like your program officer of your foundation, who will work with you to identify what your giving goals are, what your strategy might be, and then help you figure out how to actually work with a non-profit directly, to make it as simple for you as possible.
JA: If I know of an organization that I want to give to, is there like an approved list that you have to vet, or could I give it to any organization that I see fit?
EM: If it’s a 501(c)(3) organization, an IRS qualified organization, you absolutely can give it through us. We do review all the recommendations to make sure that they are doing response work if you designate it for hurricane relief, we’ll make sure that it is actually going to the program that you’re recommending. And so that’s absolutely fine, and we see many donors doing that. in the first few days after the crisis, we saw a lot of giving to the Greater Houston Community Foundation, for example, and that we hadn’t yet recommended, because we were waiting for confirmation on the fund that they were setting up. But that was an organization that many of our donors knew about, and wanted to get to right away, and we absolutely supported that.
AC: Hey thinking about disasters, Elaine, domestically versus internationally. It seems like a lot of people have a lot of causes internationally. But certainly, there are things going on the United States. Is that changing, in terms of where people are giving, or what are the current trends?
EM: Yeah, international giving has been on the rise for the last few years, and we’ve actually seen, probably a 4 or 5% increase in grants going out to international causes over the last year or two. And all our donors really do a great job in responding to international crises, like the Nepal earthquake, or the floods in India. I think what we’re seeing right now, with Hurricane Irma, is that we see a huge response around Harvey and what’s happening in Texas because that was the long-term crisis that we knew about for the last couple of weeks. But we’ve had a ton of requests coming in from the Caribbean islands, donors interested in giving to those more international causes, and we are working with organizations like UNICEF to support grant-making internationally. So I think the increasing trend around international giving – and the world is becoming smaller. So we saw the Mexican earthquake happen. We saw the monsoons in Asia, and our own hurricanes happening all simultaneously, and we saw giving to all three of those things consistently by our donors.
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16:11 – Elaine Martyn: How to Avoid Charity Fraud
JA: Welcome back to the show, show’s called Your Money, Your Wealth. Joe Anderson here, Certified Financial Planner, Big Al Clopine, he’s a CPA. We’re talking to Elaine Martyn. She’s over at Fidelity Charitable. The website again is www.FidelityCharitable.org.
AC: Let me ask you, you mentioned grant-making. What does that mean, or how does that relate to a donor-advised fund?
EM: When you make a recommendation of a gift to a non-profit we call that a grant. I consider that grant-making, so you don’t have to be a big foundation to make a contribution out of your giving account. This is really just a recommendation of a gift from your donor-advised fund, out to the nonprofit that you want.
AC: And so for folks that have donor-advised funds, are most of those suggested grants coming from the account holder, or are you guys, in many cases, recommending the charities yourself?
EM: We provide guidance on our website, but the donors are really doing their own due diligence as well and making their recommendations beyond that. So in the first week of the response to Hurricane Harvey, we saw grants going out to many local organizations that Texas donors knew about. And then we saw large grant-making to our guidance as well. So I think it’s both.
JA: What is your website?
EM: It’s FidelityCharitable.org. That’s where you can look for guidance around both giving to hurricane response, but we also have strategic guidance on how to think about your giving. We have a great program called Boost Your Giving IQ, which gives guidance on how to think about creating a mission statement. What are your values, and what early experiences might help inform how you think about how you want to give in response to your donor-advised fund to improve the world?
JA: I think that’s great because I think there’s a lot of people that are charitably inclined, but they really don’t know where to start. They might have a passion for something that they don’t know even where to go to give to. And they might start their own Google search, and then, next thing you know, they might find what they think is a legit organization, but you probably know this way more than Al or I, there’s a lot of fraudulent individuals that take advantage of people, especially in a time of crisis. How do people protect themselves?
EM: Yeah, we recommend partnering with organizations like GuideStar and Charity Navigator, which are both organizations that review non-profits and give them ratings around how they assess the effectiveness of those non-profits, and whether or not they are truly IRS qualified charities. So we would recommend partnering with them. There’s also the Better Business Bureau, which of course can tell you whether or not an organization is legitimate. And I never underestimate the power of community and talking to others about what their experiences have been about a non-profit that you’ve heard about or spoken to, and looking through the website of a nonprofit, and making sure that they really are doing what they’re saying they’re doing.
AC: Is it advantageous to have a donor-advised fund when it comes to giving in a disaster situation, or is it just as good just to give directly?
EM: I think in a disaster situation, there is a strong emotional response, which can spur giving. And we empower our donors to take action, and the donor-advised fund means you have a ready reserve available to react and to give immediately when the crisis hits. And oftentimes you have that gut instinct, you see something and you want to respond. The donor-advised fund means you don’t have to think about it, you just have to go on to our website, or call your relationship manager, and say, “I want to recommend a grant,” and make it happen. And I think it’s a really wonderful way because we do vet the charities, we make sure they’re accepting funds for the relief efforts, and we deliver those grants electronically daily. A lot of organizations, if you’re trying to do it yourself, you might be giving, and it might be you want to send a check – in Houston for example, the roads were closed. So a lot of these organizations couldn’t receive checks because the Post Offices were closed. We want to be able to enable them to hit the ground running so that the non-profits doing the great work can respond right away.
JA: A couple of thoughts that I have is that if I’m going to be giving to a certain organization that I may not be familiar with, how do I know how that capital is being utilized? What are they actually doing with the money?
EM: We recommend working with those charities directly, asking one, how are you planning on responding to the relief efforts? What are their prophecies around accounting and asking them what fiduciary oversight do you have for larger than normal contributions? And I think working closely with those non-profits is one way. Another way is actually working through us, as I said, through organizations like GuideStar, to see what their ratios of spending are around, and how experienced they are in these kinds of situations. And that goes not just for disaster, but for any kind of response that you might be looking to do. If you want to give around health issues, or if you want to give around the arts, you can do the same thing.
JA: We’re talking to Elaine Martyn. She’s Vice President Relationship Management for the Private Donor Group at Fidelity Charitable. A couple last questions here for you, Elaine. I don’t have a ton of money but I want to help. Is there like a minimum if I’d like to give to several different charities, maybe $200 here, $500 here, $100 here, or is this really geared towards someone that is giving thousands to certain organizations?
EM: I think that’s the power, the beauty of Fidelity Charitable. To open a donor-advised fund, you can start that account with $5,000. So you can make a $5000 gift, and then distribute that in increments of $50, $100, to the organizations you care about most. And of course, you can give larger gifts, but I think it’s a really wonderful entry point for starting to give and testing out what you might care about, and seeing what the impact can be.
JA: So all I have to do is open up an account Fidelity Charitable, and put in my $5,000, $10,000, and then I want to give a couple hundred bucks to these certain charities. Is that a website that I go to, or do I call and talk to a representative to send that money, or how do I distribute the cash to those certain organizations where I want it to go?
EM: Yes so to open an account, it’s three simple steps, it takes about 8 minutes. I did it last week for a new donor of ours. And you could do it online through FidelityCharitable.org. But equally, you can do it through your financial advisor, your CPA or lawyer can work with you, or you can call us, we have an 800 number, we’d be happy to share, and you can do it over the phone. And when you want to make the grant, the same thing, you can just go on to our website, and there’s a simple drop-down process, and you can make multiple donations, recommendations at the same time. Or you can call us, and we will process those over the phone for you.
JA: That’s great stuff, Elaine, I really appreciate your time. Big plans for the weekend?
EM: Well, I’m actually going out to San Francisco to support a funders’ collaborative at Stanford University, which will be looking at how we continue to support our donors in high-impact philanthropy, in collaboration with other funders who are looking at the same issues. So we’re looking forward to that.
JA: Really. Well, I’m going to sit on my couch and drink beer and watch the Florida Gator Bowl. (laughs) Man, you all are just all over the place, Elaine!
AC: She’s way more useful than us! (laughs)
JA: Totally! I’m just trying to lighten the thing up here!
EM: (laughs) Well, I am a massive Patriots fan, so I don’t know how that plays out in Southern Cal, but I’m looking forward to watching the team play as well.
JA: Yes, as you’re feeding the homeless.
AC: Coming up with new ideas to help everyday folks.
JA: Yes, exactly. That’s Elaine Martyn, folks, probably one of the nicest, most wonderful person in the world. We’ve gotta take a break. Show’s called Your Money, Your Wealth. We’ll be back in a second.
To learn how you can make tax-efficient charitable donations that go further, faster through a donor-advised fund, call Your Money, Your Wealth at 888-994-6257. That’s 888-994-6257, or email email@example.com. Get the tools for intelligent giving: support any charity, grow your gifts tax-free, support all your favorite charities with a single donation and get one tax receipt. Learn more about donor-advised funds. Call Your Money, Your Wealth at 888-994-6257, or email firstname.lastname@example.org
LIST: Time now for Big Al’s List: Every week, Big Al Clopine scours the media to find the best tips, do’s and don’ts, mistakes, myths, and advice to improve your overall financial picture – in handy bullet-point format. This week, 7 Ways to teach your kids the value of saving for retirement
AC: For this segment, I would really like to focus on an article I just saw in MarketWatch, called How to Teach Your Kids the Value of Saving for Retirement. And I thought it was pretty good because I think a lot of us have kids or grandkids, and sometimes it’s sort of confusing what we ought to be telling them or some of the concepts, and so I’m going to highlight some of the things in this article.
The first one it said, the magic of compounding: a dollar now equals $14 later. And the concept here is that the example is, you invest $1,000 in the S&P 500. If you did that 30 years ago, and just let it sit there for 30 years, then you would have almost $14,000. Let’s say almost $14,000, is what they came up with. So that’s interesting, but to me, that’s not earth-shattering. But what is earth shattering, I did my own calculation, which is this: what if you still save $1,000, but let’s do it monthly. Let’s do $83.33 per month, 12 months, that’s $1,000, and let’s just not put it in once, let’s do it every year, every month, for 30 years. In that 30 year period, you’ve got $153,000. Now that’s starting to get interesting. And if you could do this for 40 years, you would have $390,000, just by saving $83.33 per month – that’s $1,000 per year. And you know what, if you break that down to a day, it’s less than $3 a day. And I’m pretty sure that if you thought about it, there’s a lot of ways to save two or three bucks a day and make this happen. You think, “What if you could save 10 bucks a day?” That’s almost four times. Now you’ve got over $1 million if you do it for 35-40 years. So I think a lot of young people don’t really understand the compounding of money, and how much that can make a difference.
Second thing is to save the right way. The right way is looking at those investment vehicles that are going to allow you to put money in, particularly retirement accounts, that you don’t touch. Because a lot of times when you save money in your regular savings account, you’ll find ways to spend it. But if your son, or grandson, daughter, has a 401(k), 403(b), they can put money into that. If they don’t, they could set up their own IRA plan or Roth IRA. Maybe if they’re self-employed they could have a SEP-IRA plan. Maybe you want to put money into 529 plan for their college. So there are lots of ways to save, and I would say this: a lot of young people when they’re first starting out in their career, their salaries are not as high as they’re going to be later. Their tax bracket’s not that high. A regular IRA or a regular 401(k) contribution is probably not going to be nearly as effective as a Roth IRA contribution, or a Roth 401(k) if they have them because the tax deduction doesn’t make that much difference when you’re in a low tax bracket. But that compounding of income, interest, and growth for 30-40 years, whatever it may be, all of that being tax-free, that’s a huge advantage. And actually, to be honest, a lot of millennials are aware of that, and they’re the ones that are saving the most into these Roth plans and I think that’s a great way to go.
Next point is the article talks about a better budget: setting up a budget, sticking to it. But that’s sometimes difficult for, I would say most people. Most people don’t really have the interest or discipline to do that. So the workaround on that is to just simply pay yourself first, to have the money go directly to the 401(k), to your Roth IRA, directly to your savings account, maybe all three. Whatever it may be, whatever the case is for your kid or grandkid, and then it’s out of sight out of mind. Then whatever’s left you can spend. You have to do, maybe a little planning, to figure out how much to save. And I think without any planning at all, I would say a really good goal is 15% of your income. So what that means, let’s say you make $100,000, which would be a great salary, but just because it’s easy math, that would be $15,000. Or if you make $50,000, 15% would be $7,500 per year. Something like that.
Now something for you guys, being the parents and grandparents, is you can make annual gifts of $14,000 per year for your kids or grandkids. And a lot of people are confused about that – do they get a tax deduction, or how does this work? And the answer is no, there is no tax deduction. But there’s also no income for your kids or grandkids, so that’s how gifts work. If you give more than $14,000, well then you personally have to fill out a gift tax return and you may not be able to have as much estate tax exemption when you pass away. But then you want to think about, “well, I don’t just want to give them the $14,000, maybe I can have them put it into a Roth IRA.” And of course, Roth IRAs would be only $5,500. And maybe that’s what you want to give. Now they would have to be working. They would have to have earned income. But wouldn’t that be a great way for you to ensure that their retirement is going to be better, is instead of giving them $5,000 or whatever the amount may be, and then them spending it, why not open up an IRA? They actually have to open it up in their name, but you can fund it, as long as they have earned income. Or as I said, a 529 plan, that might be enough as well.
Another point in this article is savings, and how much is enough? And this is where a lot of people – it’s hard, there’s not a lot of guidelines on how much you should save. Until Fidelity, among others, recently kind of came up with kind of a guide, which is, by the time you’re age 30, you ought to have saved about 1 times your salary. By 40, about three times your salary. So I’m going to use $100,000 again because it’s easy math. Three times $100,000 is $300,000. You’re making $100,000 at age 40, you ought to have about $300,000 saved, and that savings can be in 401(k)s, it could be IRAs, Roth IRAs, regular savings accounts. By age 50, the number is six times. By age 60, it’s eight times. And by age 67, which is the Social Security full retirement age and a couple of years, that’s 10 times.
The final two ways to teach your kids the value of saving for retirement are to use yourself as an example to your kids or grandkids, and to seek professional help – for example, if you’re in the San Diego area, you and the family could join us for a one-hour lunch n’ learn with a Certified Financial Planner on Thursday, November 30th. We’ll look back, review the year’s major headlines, and discuss what may be ahead. Learn what the data is telling us about the economy’s health, what financial experts predict for the end of 2017 and the beginning of 2018, and which details you should pay attention to. Visit purefinancial.com/marketupdate to register for this free event – lunch is included! Visit purefinancial.com/marketupdate
33:33 – Estate Planning Strategies for Surviving Military Spouses
AC: Something that probably doesn’t apply to a lot of people, fortunately, but if it does apply to you, this is a big deal, Joe. If your spouse is in the military and passes away, you’ll typically get like a $400,000 life insurance payment. And if it’s in combat, oftentimes you get another $100,000, so it’s $500,000 for the surviving spouse. And the surviving spouse is allowed to put that entire $500,000 into a Roth IRA, which is cool. No tax has to be paid on it, and then it goes into a Roth IRA, and all future growth and income is a 100% tax-free.
JA: Jason Thomas is a new advisor of ours, he’s a Certified Financial Planner. He’s up in L.A. And basically, his role is financial education. We teach a lot of adult education courses throughout Southern California. We teach a ton in San Diego. We teach a few in Orange County. And then I think he’ll be teaching at UCLA, CSUN, and there’s a couple of other state schools and universities that he’ll be teaching at. It’s all adult education. It’s for people that are probably anywhere from 50 to 75 that are looking to do something a little bit better with their money. And he recently came out – he used to teach Certified Financial Planners how to be a Certified Financial Planner. And he’s done some online stuff, and he also had this weird contract with the federal government, where he worked with widows and widowers, survivors and military and trying to help, let’s say if there was a child that just received $500,000, father perished. And he said the biggest challenge – because there are great benefits, you can roll all of that into a Roth IRA. Let’s say the individual that received that is 20 years old. All that could compound tax-free for your whole retirement. The whole retirement is tax-free – it’s significant. But he was like, “the toughest part was, no, don’t buy the Maserati. Yes, I understand that you want a Ferrari,” but that is key, just to have that. Because you’ve heard the same short sleeves to short sleeves in what, two generations? And then if someone inherits a large inheritance, I forget what study, don’t quote me on this, I’m guessing, but it was like 18 months where a lot of those big inheritances are gone.
AC: Yeah, it tends to be, Joe, all kinds of studies bear this out. When you get money that you didn’t really earn yourself, it just feels different. Same thing happens with lottery winners.
JA: Or Vegas So you bet $100, you win $5,000. What are you going to do? You’re going to like, “oh, I just got $4900 free! I’m going to try to parlay this! It’s house money! Let’s do this!”
AC: “Let’s see if I can get $100,000!” (laughs) Well anyway, this rule – this is from the Heroes Earnings Assistance and Relief Tax Act, which came under George W. Bush. It’s a great benefit, and even in the military, you don’t even have to be in combat. Like here’s an example – there’s an article written in Investment News Daily, about a financial planner that kind of focuses on this. And she was helping a widow of somebody that had been in the military 17 years, still in the military, but died of cancer, unfortunately. But there was a $400,000 death payment that can be rolled into a Roth IRA, 100%. And this advisor was talking about – she actually works with the custodians, in this case, she was trying to do this in Vanguard, and even Vanguard, whoever she talked to, didn’t even know, never heard of this rule. Now sure enough, when this became public, that Vanguard didn’t know the rule then they wrote something: “Vanguard appreciates legislation such as the HEART Act that benefits and provides financial flexibility and support to families of our country’s servicemen and women” blah blah blah blah blah blah. So basically a little CYA there.
JA: “Let me educate you first: no, you can’t do this.” “Yes I can, because here’s the tax law.” “Oh okay! White paper! Coming out next week! Hey, we want to share this with you.”
AC: Unfortunately if it happens to you, or somebody that you know, this is a great benefit to make that life insurance payment 100% tax-free, future growth and income.
JA: Right. Well, life insurance is always going to be tax-free to you. But the problem then is that – well there’s not really a problem, but – you get that debt death benefit tax free, and then you invest it, and any other growth you’re going to pay capital gains on. But with this, all the growth, the dividends, interest and everything else, that’s going to be tax-free as well.
AC: You bet.
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38:46 – Pre-Retirement Jitters
AC: So Joe, do you suppose some pre-retirees have financial jitters?
JA: Oh boy. Great segue. Yes. I’m sure they’re very jittery.
AC: Here’s what to do, according to CNBC.
JA: OK. I saw that article too and I deleted it. (laughs)
AC: (laughs) I should of. Getting close to retirement feeling nervous about your finances? You’re not alone. For people facing this major life change, angst over transitioning to non-working years can morph into fears about their savings running out, even if they had planned well in advance to prevent it. So what are you supposed to do? I guess, first of all, this financial planner says, your normal. I guess maybe if you feel like you’re abnormal, no, this is a normal thing. But this one CFP says, “take risk off the table.” What do you think of that, is that a good idea? What does that mean even, taking risk off the table? (laughs)
JA: I don’t know. Yeah. There are risks in every investment. Let me just educate this CFP real quick. If I keep my money in cash, I’m taking on risk. It’s called inflation risk. If I have my money all in bonds, I got term risk. I got credit risk. If I have all my money in stocks, well then that’s market risk. If I have my money in an individual stock, well that’s business risk. If I am trying to take distributions from my overall account and I don’t have a strategy, that is called sequence of return risk.
AC: Wow, you’re bumming me out, you’re making me more jittery!
JA: Right? If I have all my money in, I don’t know…. pork bellies that are called commodity risk. (laughs) I made that one up. But no, just like, take risk off the table? I don’t know let’s take some chips off the table. Why are they talking about like gambling terms? You have to find out what is the appropriate portfolio for you, what target to return do you need to generate, and the amount of money that you have in stocks and bonds has nothing to do with how much risk you can stomach, in my opinion. Because a lot of you probably don’t want to stomach any of the risks. As soon as you see a dollar drop in value, a lot of us freak out. So you want to make sure that you have a strategy that you have enough fixed income in place to cover your income needs for five to seven years.
AC: Right. So obviously she’s getting into your asset allocation, stocks versus bonds, and you hear a lot of financial planners or people on CNBC, they talk about risk – getting it off the table. That just means probably having a lesser allocation in stocks. And she does, actually I give her credit for this next statement. She says, “a person’s allocation should be customized to their specific cash flow needs in retirement.” That makes sense. In other words, you figure out what your cash flow needs are first.
JA: And what cash flow needs are is this: how much money do you need a monthly basis from your portfolio? Do you need 10 grand a month? Five grand a month? Three grand a month? Figure that out.
AC: Yeah. And to take that a step further, what do you want to spend and how much do you have in Social Security and pensions, subtract those two, see what’s left over. 10 grand, 20 grand, 30 grand, that’s what you need from your portfolio. Then you look and see what you got. If you got 30 grand, there’s no investment in the world is going to work on that one. Because then you gotta get 100% return each year, and that’s not possible. So then maybe you got to change your budget. Here’s what she says though. Her next best recommendation, if you don’t want to do that, 60/40. (laughs) 60% in stocks 40% in bonds and cash. What do you think of that? (laughs)
JA: It’s better than… I dunno. If you don’t want to take the time to do some planning for the rest of your life, to make sure that you don’t run out of money, that you don’t die broke, that you don’t call your kids for a loan. If you don’t want to just do a little bit of planning… eh, 60/40.
AC: (laughs) So you spent two weeks planning your vacation. And you don’t want to spend a day trying to figure this out?
JA: Nope! 60/40. Just get on a bus. (laughs) Here’s your next vacation. If you don’t want to go to Wikipedia or whatever…
AC: Your next vacation, walk down the street, the church that has bingo, you’re gonna sit down and play that all day.
JA: This is how stupid that statement is. It’s like, “OK, here’s what you do. Just get on a bus, and then get off whenever you feel it’s appropriate.” What? Don’t you want a little bit of planning? Just a little bit, please. “Eh, 60/40, what the hell.”
AC: Anyway, that’s all I wanted to mention out of this article. Actually, I thought it might be good for a laugh, and maybe it was.
JA: That’s it? OK. So if you have jitters in retirement – that’s the headline?
AC: Yeah, take chips off the table.
JA: If you don’t want to do that, eh, 60/40. (laughs) How do you get that published?!
AC: See, we could be published.
JA: JEEZ! This is just…. a 60/40 split is a very calm and balanced portfolio, and it suits many people fine. But how do you know you should be in 60% stocks or 40% bonds? Or 40% stocks 60% bonds? How much income are you trying to derive from the portfolio? What are your goals? What is your tax bracket? Where is the money coming from?
AC: So I like the way Paul Merriman just said it. So he’s 73. He’s got a 50/50 allocation, between stocks and bonds. And so in the Great Recession, stocks went down about 50%. And so if he’s half in the market, then he would expect his portfolio to go down half of that – 25%. Maybe less because he’s got bonds to cushion the blow, and as he’s said, 20 to 25%. He said we’ve signed up for that, for this higher rate of return. We’ve signed up for the downside, knowing that it will recover. If you can’t sign up for that downside, then maybe that’s not the right allocation for you.
JA: Right. If you don’t understand how much your portfolio potentially could lose, then you need to do some more homework. I’m telling you, the markets are going to turn. I don’t know when, Al doesn’t know when, but they are. We all know this. So are you going to be able to stick with your overall strategy? Do you have the right strategy? You’ve got to spend a little bit more time. Yeah, that strategy might have worked over the last nine years, because we’ve been in the biggest bull market ever. The markets are 270-some odd percent from the low of 2009. We’re in 2017, approaching 2018. “No, my portfolio is doing well” because you have short memories. We forgot all about 2008. Or maybe you didn’t even have a lot of money in 2008, so you didn’t care to begin with. But now that you’ve accumulated money over roughly the last 10 years, plus the market has given you a nice boost, can you afford to lose X Y and Z, now that you’re getting in your 50s or 60s? You have to relook at this.
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It’s time to dip into the email bag, with financial questions courtesy of Advisor Insights from Investopedia, and you, the Your Money Your Wealth listeners. Joe and Big Al are always willing to answer your money questions! Email email@example.com – or you can send your questions directly to firstname.lastname@example.org, or email@example.com
47:04 – Listener Emails
JA: I got this e-mail from like this professor at some college in San Francisco.
AC: You did? Very nice.
JA: She e-mailed me and she was seeing if I was interested in the MBA program.
AC: Oh, because you need some help? (laughs)
JA: Yeah exactly. (laughs) Dammit! I didn’t put the two and two together! Thank you, Clopine! She’s like, “hey, I was just down in San Diego, and I watched your show. And by the way you might want to be interested in our MBA program because you are one stupid son of a gun. (laughs) But that Alan. Wow, is that guy sharp.”
AC: I didn’t get the e-mail.
JA: Yeah exactly. (laughs) Dammit. Then I got another call. “I was listening to the podcast with John Anderson and Big Al.”
AC: I saw that, John. I knew you were gonna love that. (laughs)
48:04 – JA: It’s like what the hell? (sigh) Here’s the email question. The last email question of the day. “A few months back, I decided to roll my 401(k) from a previous employer to a 403(b) account with my present employer. I didn’t quite understand that I was investing in an annuity. Annuity contracts and so many rules worry me. Can I roll it back into a 401(k)? Should I keep it? I have another nine years before I am eligible to begin withdrawing the money.” What say you, Clopine?
AC: Nine years. Well, first of all, I’ll let you explain how the 403(b)s work.
JA: So yeah, he or she, I don’t know what the name is, this is probably a teacher. And 403(b) accounts…
AC: Are they always annuities?
JA: No, no no. They got sold an annuity contract within the 403(b)
AC: By the guy that came out.
JA: If you’re a hospital or if you’re a nonprofit, that’s where section 403(b) comes in, it’s just for non-profits. 401(k)s or for profit, then you got 457s which are deferred comp plans. You have Keogh plans that could be either for profit or self-employed. You have defined benefit plans, you have SEPs, you have SIMPLEs, you have TSP, thrift savings plans, and so on. 403(b), a very popular product that goes into 403(b)s is an annuity contract. Let’s say if I’m working for a school district because they used to be called TSAs, tax-sheltered annuities. I’m not a history major on the 403(b) code. But that was a very popular investment choice for educators. So here’s probably what happened. So he or she is now an educator at a school district, and they have choices of their 403(b) providers. So it’s different than your 401(k) plan. The 401(k) plan, the employer sets up the plan, and they pick Fidelity, or Vanguard, or T Rowe Price, or whoever to be the custodian of that overall plan. And then you, as a participant, you have that plan that you can participate in. You can’t necessarily say, ” well I don’t like T Rowe Price, I want to go to Vanguard.” You’re limited to their choices. And there’s ERISA rules and fiduciary responsibilities and things like that within the employer to make sure that they offer whatever. But the 403(b) is not necessarily the same. 403(b)s, as a schoolteacher let’s say in the San Diego City school system for instance, you might have a choice of 50 different companies that you can pick from. You can say, “well I want to go to MetLife, or Axa, or American Funds” or whatever. You could pick the actual custodian. And a lot of times there are individuals that will go to the schools, and they’ll represent themselves as like, I’m your 403(b) provider. And if I’m used to a 401(k) provider, you might say, “oh, you’re the 403(b) person, great. I need to sign up for my retirement account.” “Great. Well, you have this old 401(k), would you like to roll the 401(k) into your new plan?” “Sure. I would love that, consolidate.” So what happened is that the 401(k) that was sitting at whatever custodian, that was probably in low-cost mutual funds, now went into this annuity contract through the 403(b). Probably wasn’t disclosed that it was an annuity contract when it went in, until after the fact when they got the contract, after the money’s already been invested, and there’s probably a surrender charge, and so on and so forth.
AC: So I’m guessing the nine years is probably nine years surrender?
JA: I’m guessing nine years is when – they think it’s 59 and a half.
AC: Well that could be either way. Right? It could be the surrender period.
JA: I’m guessing it could be that. Who knows. But a nine-year surrender, it’s usually 7, 10. I’ve never heard of a 9.
AC: No, but they’re a year in, let’s say.
JA: Maybe, yeah. It could be that. I took it as that’s when they turn 59 and a half.
AC: That’s what I first took it as. But now I think it could be the surrender period that’s left.
JA: Sure. Here’s the deal. Now with 403(b) accounts, to do an in-service withdrawal, to put it back into a 401(k), well the 401(k) is dead. You can’t do that. You left your employer.
AC: You can put it into an IRA if you’re eligible.
JA: If you’re eligible, but I doubt that this person is eligible to do an in-service withdrawal from a 403(b) into an IRA.
AC: I doubt it too because now 59 and a half, now with 401(k)s, if you terminate from service at 55, that’s one thing.
JA: She could leave or he could quit the job.
AC: Yeah, go work in another school district.
JA: But what they could do. It depends on the surrender schedule. What a surrender schedule is, is it’s a back-end penalty. It just pays the insurance agent’s commission. They could go to another 403(b) provider, let’s say Fidelity, for instance, Fidelity’s on the platform at San Diego city schools. I have no idea where this person works. So they could take the 403(b) from whatever insurance company and move it into the Fidelity plan, then you pick low-cost mutual funds or whatever. Even if they’re a little bit higher costs mutual funds, they’re still going to probably be a lot cheaper than the annuity she’s in or he’s in. So I guess the point of that is just before you move your money, understand what you’re getting into. All right that’s it for us folks for Big Al Clopine, I’m Joe Anderson. Show’s called Your Money, Your Wealth. We’ll see you next week.
So, to recap today’s show: The Government Accountability Office says we’re heading for a retirement crisis, but you can avoid it if you have a strategy. If you have pre-retirement jitters, taking chips off the table or just going with a 60/40 mix of stocks and bonds aren’t necessarily the best answers – you need a strategy. If you’re going from a 401(k) to a 403(b), make sure you know what you’re getting into and make sure you have a strategy. If you’re a surviving military spouse, there are special rules that apply to you, so make sure you have a strategy. Sensing a theme here?
Special thanks to our guest, Elaine Martyn. Visit FidelityCharitable.org to learn how a donor-advised fund can help you help others while making the most of your tax strategy.
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