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By Arlen T Olberding, CFP® on May 1, 2015
Okay, you don’t need to read an article to know that college costs a lot more than when you went to school. Despite the breathtaking numbers, lots of kids still go to school and there are strategies to help accumulate the required funds.
To get started, let’s ballpark the amount of money we’re talking about. Suppose you need to accumulate $80,000 for a four-year education. There are lots of variables here. Tuition is rising or your child may choose to go to a more expensive school. On the other hand, your child may qualify for a scholarship, financial aid or may be able to help save for school or even work while attending.
Saving $80,000 is just like saving for any large purchase in many ways. The longer you can save and the more you can save in the early years, the easier it is to achieve your objective. Suppose you start saving $200 per month as soon as your child is born. Assume they start school at age 18 and graduate at age 22 and that you continue saving until they graduate (22 years). Investment returns will vary, but let’s assume you earn 3.5% over the life of the savings program. This will produce the desired $80,000.
Now that’s a realistic plan for many families. The challenge comes in when your child decides to go to a more-expensive, out-of-state school. Also, most of us don’t start saving the day our child is born. These factors definitely make it harder, but not impossible. For example, suppose you don’t start saving until your child is ten-years old? In this case you need to save $450 per month for the remaining 12 years (graduation at age 22 minus the current age of 10) to end up with the desired $80,000.
You’ve probably heard that there are a variety of savings programs for college. These include 529 plans, Coverdell Education Savings Accounts, qualifying U.S. Savings bonds, Roth IRAs, Traditional IRAs, UGMA/UTMAs and mutual funds. Many Coloradoans choose the 529 plan since your contributions are deductible from your state income taxes. (There are no federal or state taxes on the growth of your 529 plan if the funds are used as intended.) Colorado offers several versions of their CollegeInvest 529 plans, so that decision must be made too (we like the low-cost Direct Portfolio option using Vanguard funds).
There are a number of consequential other factors too such as penalties for not using these funds for college. Additionally, there are some special considerations for grandparents. Fortunately you don’t have to figure this out on your own. Guidepost Financial Planning is able to help you with this and all other aspects of your financial planning. Please visit our website or give us a call at 970.419.8212 so that we can discuss your financial goals in a no-charge, no-obligation initial meeting.
This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products. Please consult your tax or investment advisor for specific advice.
Posted in College, Saving | Tagged College, Colorado State University, CSU, saving
By Arlen T Olberding, CFP® on February 1, 2015
As a refresher, IRA rollovers are simply the transfer of funds from a retirement account such as a 401(k) into an IRA, or an IRA-to-IRA transfer. There are three ways to accomplish this rollover or transfer:
- Direct rollover – The administrator of your account may issue your distribution in the form of a check made payable to your new account. No taxes will be withheld from your transfer amount.
- Trustee-to-trustee transfer – This is an institution-to-institution transfer. No taxes will be withheld from your transfer amount.
- 60-day rollover – If a distribution from an IRA or a retirement plan is paid directly to you (or a check made out to you), you can deposit all or a portion of it in an IRA or a retirement plan within 60 days. Taxes will be withheld, so you’ll have to use other funds to roll over the full amount of the distribution.
It’s the 60-day rollovers that are changing in 2015. Simply put, the IRS will enforce a one-rollover-per-year rule. This means that you can make only one rollover from one IRA to a new IRA in any 12-month period, regardless of the number of IRAs that you own.
The most important exception to this new rule relates to any rollovers made in 2014. Such rollovers will not prevent a 2015 distribution from being rolled over provided the 2015 distribution is from a different IRA than was involved in the 2014 rollover. Also, the following situations are exempt from this new rule:
- Trustee-to-trustee transfers between IRAs are not limited
- Rollovers from traditional to Roth IRAs (“conversions”) are not limited.
It’s still safest to do a direct rollover or a trustee-to-trustee transfer unless you need a “60-day loan” from your IRA. When 60-day rollovers are done, you’ll need to be cautious about early distribution penalties if you’re under age 59 ½ and required minimum distributions if you’re over 70 ½.
The good news is that you don’t have to sort this out on your own. Guidepost Financial Planning is able to help you with this aspect of your financial planning. Please visit our website or give us a call at 970.419.8212 so that we can discuss your financial goals in a no-charge, no-obligation initial meeting.
This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products. Please consult your tax or investment advisor for specific advice.
Posted in Retirement Planning, Taxes | Tagged fee-only, Fort Collins Financial Planner, IRA, retirement planning, RMD, Taxes
By Arlen T Olberding, CFP® on November 3, 2014
CSU employees do not pay Social Security taxes. Because of this, employees are not eligible for Social Security benefits (see the exceptions discussed below). Because your earnings from CSU are not covered under Social Security, employees are mandated to participate in one of the following retirement programs:
• Colorado Public Employees Retirement Association (PERA)
• The Defined Contribution Plan (DCP)
• Colorado Student Employee Retirement Plan (SERP)
One of these plans will serve as your “Social Security replacement” when you retire.
An important special case is those employees who have had many years of service outside of CSU. They may have accumulated enough credits to qualify for Social Security benefits. In this situation, a law called the Windfall Elimination Provision (WEP) reduces the amount of Social Security that you can receive. AARP explains the intent of WEP as follows, “people who got both a pension from non-Social Security work and benefits from Social Security-covered work were enjoying an unfair ‘windfall’ due to technicalities of how benefit amounts are calculated.”
Another factor comes into play if your spouse is eligible for Social Security benefits based on your work history, In this case, your university pension may affect your spouse’s benefits. A law called the Government Pension Offset (GPO) covers this situation.
To complicate things a bit more, CSU employees can avoid the WEP-based Social Security benefit reduction if they withdraw their contributions and interest before they are eligible to receive such a pension. The Social Security Administration clarifies the importance of the withdrawal date as follows, “if you withdraw your contributions and interest after you are eligible to receive such a pension, SSA treats the withdrawal as a lump-sum pension and your Social Security benefit is subject to the WEP. It makes no difference whether you are working in Social Security-covered or non-SS-covered work before you are eligible for your Social Security benefit. The rule turns on whether you are eligible for the pension from the non-SS-covered work.”
As usual, there are a number of details that vary from person to person. The good news is that you don’t have to sort all of this out on your own. Guidepost Financial Planning has experience advising CSU employees on their retirement plans and other financial matters and we’re located right here in Fort Collins. Please visit our website or give us a call at 970.419.8212 so that we can discuss your financial goals in a no-charge, no-obligation initial meeting.
This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products. Please consult your tax or investment advisor for specific advice.
Posted in Retirement Planning | Tagged Colorado State University, CSU, Fort Collins Financial Planner, retirement planning
By Arlen T Olberding, CFP® on October 7, 2014
Variable annuities are insurance products. These contracts are marketed by insurance companies as investments. However, due to fees, surrender charges, tax issues and limited investment choices, annuities should be avoided if possible.
Generally, two versions are offered: immediate and deferred. With immediate annuities, you give the insurance company a lump sum of money and they promise you an income stream for your lifetime or for the life of both you and your spouse. With deferred annuities, your money is invested in a mutual fund-style account until you either withdraw it or annuitize it.
You’ll find that most financial advisors who are paid a commission (brokers and fee-based financial advisors) strongly recommend variable annuities. Unfortunately, the reason for this often has more to do with the high commissions that they are paid rather than what is best for you. Fee-only financial advisors typically do not recommend variable annuities.
Why do fee-only financial advisors stay away from these types of investments? In short, there are almost always better investments available. Some of the negative aspects of annuities include high fees (2-4%); disadvantageous tax consequences on withdrawal; long surrender periods (typically 7-20 years where you pay a penalty for withdrawing funds) and the lack of a step-up in basis for your non-spousal beneficiary.
Are there any times when annuities make sense? As I noted, generally there are better investment options. However, immediate annuities may make sense for a small number of people who feel the need for a guaranteed income stream (beyond Social Security and/or employer pensions) or who are pretty certain that they’ll live longer than an average person.
You can always purchase a variable annuity if you determine that it’s right for you, but you’re pretty locked in once you do. Therefore, it makes a lot of sense to review your situation with an independent, fee-only financial advisor before you make a move. Guidepost Financial Planning can help you sort through your options. Please visit our website or give us a call at 970.419.8212 so that we can discuss your financial goals in a no-charge, no-obligation initial meeting.
This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products. Please consult your tax or investment advisor for specific advice.
Posted in Fundamentals, Investing, Retirement Planning | Tagged fee-only, Fort Collins Financial Planner, fundamentals, retirement planning
By Arlen T Olberding, CFP® on September 12, 2014
In this article, I want to share some information on the benefits of waiting to begin Social Security. Industry research has confirmed that most retirees benefit from delaying Social Security payments. There are, of course, reasons why people don’t do this even though it might benefit them to do so. Some simply need the money now rather than later. Some have health issues which cause them to think they might not live to a very old age. And some have a bird-in-the-hand philosophy.
You can start receiving reduced benefits as early as age 62. However, the size of your monthly payments increases the longer you wait up until age 70. If you can wait until age 70, your monthly benefits will increase by 76% (compared to claiming at age 62). Couples have even more options by coordinating their start dates. I described a scenario that’s useful for many couples in a previous article entitled Reasons to Delay Social Security Payments.
If you’re able to wait, here are some of the reasons that delaying payments often makes a lot of sense. First, there are the higher monthly payments that I mentioned. Another very important reason to wait is that doing so will increase the chances that you’ll have enough income should you live to a ripe old age. Running out of money is a top concern of retirees and delayed Social Security can really help out here. Another reason to wait is that research has shown that Social Security returns are superior to annuities, bonds and equities in many ways. Finally, delayed Social Security benefits can help protect you against increased inflation and down markets. The very things that your other investments are not immune from.
Outside of these when-to-start considerations, Social Security payments can change if a divorce occurs or when a spouse dies. Guidepost Financial Planning can help you sort through your options. Please visit our website or give us a call at 970.419.8212 so that we can discuss your financial goals in a no-charge, no-obligation initial meeting.
This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products. Please consult your tax or investment advisor for specific advice.
Posted in Retirement Planning | Tagged retirement benefits, retirement planning, social security
By Arlen T Olberding, CFP® on August 8, 2014
Hopefully you are reading this article prior to the death or incapacitation of your spouse. If your spouse has recently passed away, please accept our sincere condolences.
Numerous organizations have offered helpful suggestions for coping with the loss of a loved one. One that is repeatedly mentioned is well summarized by CancerCare when they say, “Wait to make major life-changing decisions. While you are grieving, it is hard to bring clear judgment to major life decisions. If you can, wait to make these kinds of decisions until your feelings of grief are less intense.” While this period of cloudy thinking varies, it is not uncommon for it to last at least a year.
But, how do you avoid major decisions when you need to deal with Social Security, life insurance policies, IRAs, estate matters, tax preparation, bill payments, cash flow management and other pressing financial decisions? Worse yet, what if your spouse mainly handled these matters?
This is one of the advantages of starting a relationship with a financial planner before these inevitable life events occur. Starting now gives you time to develop confidence in your advisor. It also permits him to become familiar with your financial situation and to suggest estate planning and other steps that the two of you can take to be prepared.
Guidepost Financial Planning would be honored to help you with this difficult and important part of your life. Please visit our website or give us a call at 970.419.8212 so that we can discuss your financial goals in a no-charge, no-obligation initial meeting.
This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products. Please consult your tax or investment advisor for specific advice.
Posted in Estate Planning, Fundamentals | Tagged estate planning, Fort Collins Financial Planner, fundamentals
By Arlen T Olberding, CFP® on July 7, 2014
In 2005, a set of Federal bankruptcy law amendments added protection of retirement accounts from creditors. However, a few weeks ago, the U.S. Supreme Court unanimously ruled that inherited individual retirement accounts are not protected.
What this means is that your own IRAs and other retirement accounts are protected from creditors while you are alive. If a spouse is your beneficiary, they can move these assets into their own IRA and close the inherited accounts. These assets are then protected from creditors.
A non-spousal beneficiary cannot move the assets to their own IRA account. Therefore, the IRAs and other retirement accounts that they inherit are not protected from creditors. Further, this lack of protection from creditors is not limited to bankruptcy proceedings. Any creditors potentially have access to inherited IRAs and other retirement assets since they have no legal protections. For example, these assets are at risk in the case of a major accident, negligence or other legal claim on assets.
We might immediately think that this is bad and that we need to take some action to protect our children and other non-spousal beneficiaries. While this is possible, such actions complicate things and cost money. So, it might be best to first ask ourselves, how much does this really matter? For example, how likely is it that significant IRA assets will remain after both you and your spouse have died. Also, how likely is it that your children or other non-spousal beneficiaries will find themselves in bankruptcy?
If you think your estate needs protection in this area or have other estate planning questions, Guidepost Financial Planning can help you analyze your situation. Please visit our website or give us a call at 970.419.8212 so that we can discuss your financial goals in a no-charge, no-obligation initial meeting.
This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products. Please consult your tax or investment advisor for specific advice.
Posted in News | Tagged Fort Collins Financial Planner, IRA
By Arlen T Olberding, CFP® on April 7, 2014
Should American financial advisors always be looking out for the best interests of their clients? Should our government intervene to ensure they do so? Australia thinks so, and has passed new laws to make it happen.
To illustrate, let’s imagine that your credit card company offered to exchange your old card for a new one, and advised you that it was a good deal. After a while, you notice that dollars were often being added to your charges. You pull out your magnifying glass and read the very fine print for the new card. What you discover is that you’ve been charged extra, a lot extra. You would have been better off keeping your old card, but the company wasn’t forthright about it.
Australia concluded that some of its financial advisors were behaving similarly with people’s retirement savings. So that they passed the Future Of Financial Advice Act (FOFA). Under FOFA, financial advice must put clients’ best interests (not the advisor’s enrichment) first. FOFA makes it very difficult for someone delivering advice to also receive sales commissions. Advisors must provide easy-to-understand explanations of exactly how they’ve made money off their customers every year. And every two years, customers must sign, or opt – in, to acknowledge that any ongoing commissions or fees their advisors are receiving should continue with the customer’s blessing.
What’s the difference between an advisor and a salesman? If I sell you something when I know you could get something better and less expensive, am I really your advisor? When it comes to investments, it appears that Australia and FOFA are trying hard to defend the consumer from deception. Britain and South Africa have done the same. Here in the U.S., the financial services industry has some work to do to restore trust and confidence with the consumer. Maybe we can learn from our friends down under.
Similar to Australia’s aim, Guidepost Financial Planning has a fiduciary responsibility to act in your best interest, not our own. We sell no investments, annuities or insurance. Please give us a call at 970-419-8212 so that we can discuss your financial goals in a no-charge, no-obligation initial meeting.
This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products. Please consult your tax or investment advisor for specific advice.
Posted in News
By Arlen T Olberding, CFP® on March 17, 2014
Smart, well-intentioned investors may harm their financial futures when they delay money matters. Tomorrow seems like a great day for difficult things. If it’s not fun, if we lack the proper skills or if the task takes us back to previous painful mistakes, tomorrow usually seems best.
When outsourcing professional services, procrastination can be especially costly. For many of us, it is painful to pay someone for a service that we believe we can do ourselves. It just seems like a matter of finding the time to brush up on the subject and then get it done.
For example, a retired investor once determined that he was an excellent candidate for a Roth IRA conversion. If he converted after his high-tax-bracket years, but before age 70 ½, he could save many thousands of dollars in income taxes. He just needed to figure out the nuts and bolts of the process and then do it. The tax code was confusing. The articles he read were vague. He hated the idea of paying to have a professional take the job off his hands. Springtime and the joys of life beckoned and he put it off. The years passed. It just didn’t happen. To this day, the word Roth conjures up regrets for him.
Roth conversions are just one example of the downside of procrastination. Portfolio re-balancing, harvesting capital losses, shopping for better mutual funds, maximizing employer matches, choosing pre-tax healthcare plans, life insurance reviews, college savings programs and dealing with low-rate-of-return savings accounts are also examples. Most powerful, however, is the time value of money. When money goes to work for you now, versus later, there can be a dramatic increase in total return. A finely-tuned financial fitness program can make a significant difference in your financial health. Every day that the tune-up gets put off translates into lost dollar opportunities that can never be recaptured.
Are you deferring important financial actions? That’s exactly where Guidepost Financial Planning can help. Please visit our website or give us a call at 970.419.8212 so that we can discuss your financial goals in a no-charge, no-obligation initial meeting.
This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products. Please consult your tax or investment advisor for specific advice.
Posted in Cash Flow | Tagged expenses, fee-only, Fort Collins Financial Planner, retirement income, retirement planning
By Arlen T Olberding, CFP® on March 6, 2014
Retirement income involves thinking about the amount of money that you need for expenses and determining the source of these funds. The key difference between where you get your cash in retirement years versus working years is that you’ll no longer receive a paycheck in retirement, and you’ll need to replace that income from investments and other sources.
If you haven’t yet estimated your monthly retirement expenses, please see our blog on retirement expenses. For this cash flow discussion, let’s assume you need $8,000 per month, or $96,000 per year, to cover your fixed and discretionary expenses.
Where will you get these funds? For many of us, there are two obvious places to get at least a portion of this money. One is from our investments, and the other is from Social Security. Assume for this exercise that Social Security will pay you and your spouse $3,500 per month. So, $8,000 minus $3,500 leaves $4,500.
In this simple example, the $4,500 will come from your investments. Many advisors feel that it is safe to withdraw 3.5% per year from your investments, assuming typical inflation and your life-expectancy. The calculation for this couple is then ($4,500 x 12 months)/3.5%, or approximately $1.5 million in investments.
For many people, this level of savings is breathtaking. But let’s break it down just a bit and see if it seems more realistic. Many of us have a defined benefit or pension plan from our employer. We also might have IRA and 401(k) or similar retirement savings plans. Suppose these pension and retirement savings plans add up to $800,000. That means we also need personal investments (mutual funds, etc.) worth about $700,000.
If these levels of savings are not realistic for your situation, you still have options. You might consider working a little longer. This gives you more time to add to your savings and also decreases the number of years that your investments need to support you. Similarly, some people continue working part-time to help with cash flow. There are other options too, such as rental properties and so forth. It also may be wise to have your financial advisor double-check your expense estimates –- particularly the tax estimates. Improved expense estimates could hopefully reassure you that your retirement savings are adequate to fund your expenses.
Beyond this high-level analysis, there are other important considerations, such as tax efficiency and required minimum distribution rules. If all of this sounds a bit overwhelming, don’t worry, Guidepost Financial Planning and other advisors can help you analyze your cash flow requirements. Please visit our website or give us a call at 970.419.8212 so that we can discuss your financial goals in a no-charge, no-obligation initial meeting.
This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products. Please consult your tax or investment advisor for specific advice.
Posted in Cash Flow, Fundamentals, Retirement Planning | Tagged fee-only, retirement income, retirement planning, RMD
