Investment Portfolio | Sharkey, Howes & Javer

Jun 22 2020

Does a Roth IRA Conversion Make Sense for you in 2020?

By buhvdesigns | Economy, Investing, Investment Portfolio, SH&J Blog | No Comments

The Roth conversion has been a tool available to financial professionals for a long time to help clients minimize future tax liability. Conversions are helpful in specific instances, but many times are not applicable to every client situation. What about the culmination of events in 2020 has made the Roth conversion more relevant than years past?

What is a Roth Conversion?

Most employees will contribute to a tax-deferred retirement plan while they are working. This comes in many forms: a traditional IRA, a 401(k), a 403(b), etc. These retirement plans provide you with a tax deduction in the year a contribution is made. The funds then grow tax-deferred until it becomes time to make withdrawals. The IRS requires these account types to withdraw a Required Minimum Distribution at age 72 (changed in 2020 from 70 ½). This means you will pay taxes on the original contributions and the investment growth that has accrued over the years.

A Roth conversion is the transferring of retirement funds from a tax-deferred IRA account into a Roth IRA. Roth IRAs differ from the previous listed account types because taxes are paid in the year in that the contribution or conversion takes place. On top of that, the growth on the contributions/conversions is exempt from taxes and there are no mandatory withdrawals during retirement.

What is the purpose of a Roth Conversion?

There are a few reasons why Roth conversions are a popular financial planning tool. One of the most common reasonings for converting tax-deferred funds to a Roth is to create a tax-free bucket for withdrawals during retirement. Having both tax-deferred and tax-free assets during retirement provides more flexibility when it comes to tax planning and client portfolio distributions for spending. Roth conversions can also be appealing if you expect to be in a higher marginal tax bracket in retirement than the year you make the conversion. This is rare, but plausible especially in unique circumstances like this year. By strategizing, you may be able to use this tool to make a series of smaller conversions during years with lower tax implications to minimize taxes paid over the long run.

If you have time on your side, compounding returns on the conversions could benefit you over a long period of investing. On traditional IRA assets, investors pay taxes on investment gains when they withdraw money but with Roth assets, the gains grow tax-free. It is also a tool for investors who would like to leave tax-free assets to their heirs. If that is the case, a Roth conversion may make sense for your situation.

Why is this a relevant topic in 2020?

This year has been filled with trials and tribulations and we still have half a year ahead of us. From a global pandemic to world-wide protests and heightened discussions regarding race discrimination, the world has seen a great deal of challenges and change in 6 short months. What about this year makes the conversation regarding Roth conversions more relevant than years past? First off, many Americans are going to see less income this year in comparison to prior years. This could be due to losing a job or seeing less customers during the government stay-in-place order. This could also be due to The Cares Act allowing those who are required to take Required Minimum Distributions to skip it for the year 2020, creating less taxable income this year. We are also living during a time of historically low-income tax brackets. With the increase in government spending, unemployment benefits and use of federal resources, we will most likely see increased tax rates in our future. If that is the case, it may make sense to pay taxes this year before they are raised.

Our team at Sharkey, Howes & Javer is here to help you explore all your financial options. Contact Sharkey, Howes & Javer today to speak with a CERTIFIED FINANCIAL PLANNER™ to see if a Roth conversion makes sense for you in 2020.

May 11 2020

Retirement Checklist

By buhvdesigns | Income, Investing, Investment Portfolio, SH&J Blog, Tips, Uncategorized | No Comments

Many of us spend our entire working life preparing for retirement. Whether it’s contributing to retirement accounts, paying down mortgages and debt, acquiring pension years, or paying into Social Security.

As retirement approaches, what steps can you take for a smooth transition?

Take Inventory of your Assets

While you are in the working world, it can be difficult to keep track of all your investments, savings vehicles and bills that you have acquired over time. As you prepare for retirement, it is important to take the time and track down all bank accounts, retirement and brokerage accounts, along with all outstanding debts. Once you have taken a full inventory, create a safe place to store all username and passwords. Potentially share this location with a trusted family member or friend in case of a future emergency. Next, consider consolidating as much as possible. Reduce the number of bank accounts, create a plan for your outstanding 401(k) or 403(b) with work, and minimize debt. This will create a simpler and streamlined transition into retirement.

Build a Budget

Do you know how much you are spending on a monthly basis? As you leave the workforce, it is extremely important to have a handle on expenses. Will you spend more on travel during retirement? Will the mortgage be paid off? Creating a monthly budget for retirement will allow you to monitor spending and reduce the risk of spending through your savings.

Identify Income Sources

What is your plan for Social Security? Do you have a pension? Do you have annuities? Do you plan on working part time? By determining income sources that will be available, you and your advisor will be able to create a plan for your retirement savings. Between your monthly budget and income sources, you are then able to determine how much you may need each month from your retirement assets in order to make ends meet.

Practice Retirement

This is the fun part! Retirement is a major life transition. You now have plenty of free time which was once filled with commutes, hours at work and mingling with colleagues. So, as you prepare for retirement, start practicing for it! Set lunch dates with old friends, try out different hobbies, start learning how to enjoy free time again and shaping the retirement that you have worked so hard for.

Know Your Health Insurance Plan

It is important to have a health insurance plan in place before retirement. Can you continue a health care plan through a past employer? Have you signed up for Medicare? Which supplements may be beneficial to your situation? If you are retiring before age 65, how do you plan to cover health care insurance before Medicare kicks in? These are all important questions to answer as you create your retirement plan.

Review Estate Plans

Retirement is a great time to evaluate estate plans and make sure they are in line with your current wishes. Provide copies to a trusted family member and/or your financial advisor so that others have access to them, just in case. Also, check in on your investment account and outstanding life insurance policies to make sure beneficiaries are up to date.

Real Estate Strategy

Do you plan to stay in your home long-term? Would a retirement community be more conducive to the lifestyle you would like to live? Do you need to refinance or acquire a Home Equity Line of Credit (HELOC)? Refinancing and nailing down a HELOC are easier to do while you still have an income, so this is a great time to talk about your options with your financial advisor.

Establish Retirement Investment Allocation

The transition into retirement comes with a great deal of changes. One of these changes is moving from the accumulation phase or saving for retirement to the distribution phase or pulling from your retirement savings. This is a huge shift in mindset. During this time, your risk tolerance may not change, but you may see an increased need for cash or liquidity. That is why it is important to talk with your financial advisor and develop a transition plan for your investments.

Get Excited!

Take a deep breath! You are almost there! Many people work hard their whole life to make it to retirement. Congratulations!

Our team at Sharkey, Howes & Javer is here to help you every step of the way on the road to retirement and beyond. Contact Sharkey, Howes & Javer today to speak with a CERTIFIED FINANCIAL PLANNER™ about your own retirement journey.

Apr 28 2020

ETFs vs Mutual Funds | Why one over the other?

By buhvdesigns | Investing, Investment Portfolio, SH&J Blog, Stock Market | No Comments

History of Funds

Humans have been investing for thousands of years, but the idea of “diversification” and pooling resources to spread risk is relatively new. The first modern day mutual fund in the U.S. was created in the 1920s. It was a way for investors to diversify their investment holdings with little capital. However, it wasn’t until the 1950s and 1960s that the mutual fund industry started to take off.

Prior to 1971, all mutual funds were “active”, meaning the investment manager could choose whatever stocks and bonds he or she saw fit. In 1971, Wells Fargo established the first index fund, which was built to replicate a certain index, not outperform it. It was a revolutionary concept that John Bogle mastered to build the largest mutual fund company of all time, Vanguard.

As indexing gained popularity, the first Exchange Traded Fund (ETF) was created in the late 1980s. The first ETFs were low-cost index funds that gave investors the ability to access cheap market exposure. The ETF industry has seen exponential growth since the Great Financial Crisis in 2008. Currently, there are over 5,000 ETFs that investors can trade, compared to roughly 1,000 ETFs in 2009. One of the most well-known ETFs, the S&P 500 Trust ETF (SPY), was created in 1993 and now has over $260 billion in assets.

Differences between ETFs and Mutual Funds

Why would someone invest in an ETF vs a mutual fund or vice versa? While there are many similarities between the two investment vehicles, there are a few key differences.

One of the key differences is how they trade. ETFs trade intra-day, just like a stock. This means that if you put in an order to buy an ETF, you have possession of the ETF as soon as the trade executes. A mutual fund trade will execute at the end of the day. At the end of the trading day, all the underlying holdings are priced, which then allows the mutual fund to be accurately priced. Therefore, you can only buy or sell a mutual fund at the end of the day, once the price is known.

The vast majority of mutual funds are actively managed, meaning there is a manager making buy and sell decisions. Their goal is to purchase investments that may outperform the index in that asset class. Active management can be beneficial in inefficient markets, like bonds and international stocks, because a manager can identify opportunities and weaknesses. Most ETFs are passive index funds. Because mutual funds are more active, they typically have higher internal expense ratios than ETFs. ETFs are generally more tax efficient as well. If an ETF is an index fund, the turnover of the underlying funds is usually less than an actively managed mutual fund. This can cause ETFs to generate less capital gains distributions compared to a mutual fund.

At Sharkey, Howes, & Javer, we use a combination of mutual funds and ETFs. In certain markets, such as international stocks and bonds, we believe an active mutual fund manager can at times add value above and beyond the benchmark index. In more efficient markets like U.S. large companies, we think investing in ETFs provides a lower cost of entry to the stock market. Learn more about mutual funds and ETFs and how to implement them in your portfolio by getting in touch with us today for a complimentary consultation with a CERTIFIED FINANCIAL PLANNER™.

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Jul 10 2018

180

Retirement Risks

By buhvdesigns | Investing, Investment Portfolio, SH&J Blog | No Comments

Retirement, or Financial Independence, is a relatively new concept here in the U.S. Retirement used to be pretty simple: you step away from the company where you spent your entire career and they rewarded you with a pension check in the mail every month. That was really all there was to it from a financial standpoint. With people now living longer and a shift from employer sponsored pension plans to defined contribution plans (401(k)s, 403(b)s, etc.), people are now responsible for the success of their own retirement more than ever before. Listed below are risks that are unique to retirees, with explanations on ways that these risks can be mitigated.

Longevity Risk

Put simply, longevity risk is the risk of outliving your assets. According to the Social Security Administration, life expectancy for someone born in 1930 was only 58 for men and 62 for women. Now 1 in 4 people who reach age 65 will live past age 90, and 1 in 10 will live past age 95. One of the primary ways to combat this risk is to plan for longevity. When we create financial plans for clients, it is our standard to run the plan until the youngest client reaches age 95 at the minimum. Planning for a longer time horizon forces a retiree to be more conservative when pulling from their investment portfolio throughout retirement.

Inflation Risk

Inflation reduces the purchasing power of a dollar as goods and services increase in price over time. In your working years, inflation may not be as critical of an issue as many workers see cost of living adjustments to their salary. When you’re retired and not earning a salary anymore, it’s important that whatever sources of income you have, keep up with inflation. Social Security has a built-in cost of living adjustment that has historically been around 2% per year. Some government or employer-sponsored pension plans have living adjustments associated with them as well, but they are fairly uncommon and the adjustments are usually less than inflation. One way to help your investment portfolio keep up with inflation is by having a portion of your portfolio invested in stocks. Stocks have historically helped hedge inflation risk.

Long-Term Care Risk

Long-term care risk goes hand-in-hand with longevity risk. As our society continually makes medical advancements, we are able to live longer, but for some this may come at a cost. Many elderly people no longer have the ability to care for themselves, and they have to rely on either family members or professional caretakers to watch over them. According to a study by AARP, 66% of people aged 65 in 2005 will need some type of long-term care during their lifetime. Long-term care insurance policies are the primary way to mitigate this risk, but they are expensive and many people don’t like the “use it or lose it” terms of these policies. Therefore, life and long-term care insurance hybrid policies have recently become more popular. These policies allow you to access the death benefit for long-term care needs while you are still living, yet still provide a death benefit to your beneficiary after you pass away if you do not end up requiring long-term care.

Financial Elder Abuse Risk

A growing risk that retirees face is financial elder abuse. Financial elder abuse occurs when someone tries to take advantage of an elderly person for their own financial gain. What many people don’t know is that elder abuse most often comes from family members! One way to help prevent elder abuse is to simplify your finances as you get older. The less accounts a retiree has, the less accounts they have to monitor. Another way is to work with a trusted financial advisor, who can act as a safeguard if bad actors are trying to swindle money away from those who are no longer able to track their finances as easily as they have in the past.

Sequence of Returns Risk

As we all know, investment returns are unpredictable. We often have very little warning when an event like the 2008 Financial Crisis will occur and send global stock markets tumbling. Negative returns in the first few years of retirement can be detrimental to the success of a retirement plan. It is important to make sure you have a well-diversified portfolio heading into retirement with a mixture of stocks, bonds, and cash. If the stock market were to decline while you’re pulling money from the portfolio, you need conservative investments to draw from so you can allow the stocks to recover.

Loss of Spouse Risk

Losing a spouse can be a turbulent point in anyone’s life. It can be very hard to make sure you have your financial house in order after enduring such a tragic event, especially if the recently deceased spouse handled all of the finances. One of the best ways to ensure the surviving spouse maintains their level of lifestyle is to have a comprehensive financial and estate plan. Hiring a financial advisor in retirement gives the surviving spouse an advocate in such a trying time. The advisor should help create a plan to ensure the surviving spouse has enough assets and income streams to not alter their lifestyle.

If you or anyone you know is nearing retirement, contact Sharkey, Howes & Javer to meet with a CERTIFIED FINANCIAL PLANNER™ and develop a financial plan that helps mitigate these and other retirement risks.

Sep 13 2016

212

What Data is Telling Us About Investors and Investing

By buhvdesigns | Investment Portfolio, Investors, SH&J Blog, Tips | No Comments

We all make assumptions about investors, but what does the data actually say? Today we take a look at recent studies and publications to get more insight into the mind of investors.

Increase in Social Responsibility

Big investment firms and banks are embracing corporate social responsibility, both in their own organization and in their investing. Since the United Nations supported the Principles for Responsible Investment Initiative, there has been a growing network of international investors fighting to practice responsible investing. This new network represents $59 trillion in assets. (source)

Ready for Retirement

Baby Boomers, who make up the largest population group in the United States, are transitioning into retirement. Experts anticipate that 20% of the population will be over age 65 by 2030, up from 12.4% in 2003. With high numbers moving into retirement, we are likely to see Boomers begin the process of turning their investments into income streams. (source)

Increase in Female Investors

75% of women report not working with a financial advisor, although women control over $11.2 trillion of the United States’ wealth. As millennials begin investing, we are likely to see an increase in female investors. More women are starting their own businesses and becoming financially savvy, making them more likely to start investing earlier than previous generations. (source)

Low Financial Literacy

29% of United States households own only retirement accounts and 38% of households have no investment accounts. In a survey to understand the financial literacy of investors, it was found that households with only retirement accounts or with no accounts are significantly less knowledgeable than households with taxable accounts. Even among households with taxable accounts, only 60% are considered to have high financial literacy. (source)

Data about investing and investors is fascinating to us. What is equally fascinating is deciding how the data should or should not influence investment strategies. If you are struggling to develop an investment strategy, reach out today for a complimentary consultation. We would love to talk data and investments with you!

Aug 29 2016

212

The Pros and Cons of Owning Stock Where You Work

By buhvdesigns | Investment Portfolio, SH&J Blog, Stock Market, Tips | No Comments

Many companies offer stock options and stock bonuses to their employees, but is owning stock where you work a good idea? The short answer: it depends. Below are our thoughts on the pros and cons of owning stock where you work.

PROS

One ‘pro’ to owning stock in the company where you work is the added motivation you have for the company to succeed. As an ‘owner’ in the company, your success is tied to their success. This holds true for the employees you manage as well.

More than the incentive to work hard, owning stock in the company you work for can pay off quickly. Often companies offer their stock at discounted prices to employees. Buying stock at a discount can pay off if the company does well. In general, you may want to limit your company stock exposure to 10% of your net worth (or less) to maintain diversification.

CONS

Your paycheck is already tied to your employer and tying more of your investment portfolio to the company where you work could significantly increase your risk. While being motivated to help the company grow can positively benefit your investment, it doesn’t mean the company is destined to be successful. Their downfall can mean a big financial loss for you. Remember General Motors, Enron and Lehman Brothers?

THE BOTTOM LINE

Owning stock in the company you work for can be a beneficial part of your financial plan. Talking to your financial advisor before making a decision to invest where you work is a good idea. Call 303-639-5100 for a complimentary consultation.

Jul 12 2016

198

Will Millennials Ever Retire?

By buhvdesigns | Investment Portfolio, SH&J Blog, Tips | No Comments

“60% of Millennials think it is harder to plan for retirement than to stick with a diet and exercise plan.”

Millennials and Retirement

One word sums up how Millennials tend to view planning for retirement:overwhelming. This is a very clear conclusion from this 2015 survey, which reveals attitudes about retirement in the U.S. You can easily guess why Millennials feel this way: soaring student debt, increased cost of living, stagnant wages for college graduates, and a lack of confidence in Social Security and the stock markets.

Diving into the data, it is not surprising that the millennial generation views traditional retirement as a mythical creature, out of reach and unattainable. “The majority of Millennials believe they will not be able to retire when they want to…with 28% believing they will never be able to fully retire.” So why bother planning for something that may not even be a possibility?

Here’s the reality: the concept of a “traditional retirement” is evolving and will continue to evolve. The advent of technology is increasing the amount of work completed remotely, while the drain of commuting to an office Monday-Friday 8am-5pm continues to decrease as technology advances. By the time Millennials begin turning age 65 in the year 2045, the logistics of working will likely have evolved into more flexible hours, a more flexible location, and “commuting” may be a word of the past. Therefore, the desire to fully retire may not be as strong of a pull as it was for their parents and grandparents.

Planning Steps

With this said, however, there will likely come a time where one no longer has earned income and must rely on an investment portfolio, along with other supplemental income sources. Therefore, making sacrifices to save for retirement will always be a key element, no matter which generation your birth year indicates. To create the opportunity to pull back from full or part time work someday in the future requires accumulating retirement savings over working years.

Meeting with a fee-only financial planner could be the first step in tackling an overwhelming goal, such as planning for retirement. For a complimentary consultation, call Sharkey, Howes & Javer today.

Source: “Will Millennials Ever Be Able to Retire?” research presented by the Insured Retirement Institute and The Center for Generational Kinetics