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19 Jan

The Hazards of Buying Individual Stocks

Everywhere you turn, financial media pundits seem to revel in the excitement and drama about the ups and downs of individual stocks in the market. In fact, you will likely find a wealth of commentary on the “top stock picks for 2016” floating around the web and on financial news shows as the New Year lurches to a start.

While all the fast talk and day-to-day highs and lows may be more exciting for TV, most of us are not day traders with lots to lose and really shouldn’t be dabbling in risky individual stocks to grow a comfortable nest egg for retirement or fund a child’s college education. Even those with the savviest understanding of balance sheets, income statements, cash flow, and financial forecasting models can still find themselves dealing with an erroneous prognosis of a company’s stock future or an unexpected turn of events within a company or industry that can quickly dig a deep hole in one’s portfolio. This is known as specific stock risk, and it lingers behind every individual stock.

Specific stock risk is really an aggregate of multiple risks that come with purchasing an individual company stock, including:

  • Economic risk
  • Industry-specific risk
  • Government policy risk
  • Material cost risk
  • Technological risk
  • Competitive risk
  • Legal risk
  • Executive Leadership risk
  • Management risk
  • Corruption risk

Even companies with proven business models, hot products that fly off the shelves, and wise leadership are not safe from risk.

Take Apple, for example. As the latest financial market shows, even the world’s most valuable company is not a surefire bet.  Apple shares ended the year 22% down from its 52-week high and 4% down from the beginning of 2015. Many commentators speculate the reasons for Apple’s fall from the top. Some blame an abundance of activity by short-term options investors or a grossly overvalued stock price to begin with, while others blame a broken business model or disproportionate hype in the media. Whatever the exact cause of the tech giant’s tumble makes no difference. The fact is, even the hottest stocks can fall off their pedestals and wreak havoc in your financial portfolio.

If you were counting on the rise of individual stocks to bolster your retirement portfolio quickly last year, you are undoubtedly disappointed by year’s end. Speculation and risk is not a great strategy on which to build your future. Make a new resolution this year to not get caught up in the hype, trust your investment strategy, and stay focused on your long-term financial goals.

While they may not be as sexy, practical, long-term strategies that combine  well diversified, passive, low-cost investments are proven to withstand even the toughest of market conditions. So while giants like Apple fall from grace, you can rest assured that you are secure in your financial future.

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09 Nov

If Donald Trump invested his inheritance in index funds, he might be wealthier

FMB Wealth Management does not endorse or recommend any candidates for presidential or any other office. This article is for editorial purposes only and does not serve as political commentary on any candidate’s qualifications for president.

Celebrity real estate mogul, media sensation and now-presidential candidate Donald Trump is probably best known for his enormous wealth and distinctly abrasive personality. In 1974, Trump inherited $40 million from his late father, self-made multimillionaire and developer Fred Trump, along with his father’s real estate empire. In 1982, Forbes estimated Trump’s net worth to be $200 million. Today – although his actual net worth remains a mystery – Trump’s wealth is estimated to be somewhere between $2.9 billion (according to Bloomberg ) and $4.1 billion (according to Forbes ). Other financial institutions – including two separate banks that assessed Trumps assets and liabilities for business loans and the Federal Election Commission’s financial disclosure report – suggest much smaller holdings.

Despite all of the buzz about Trump’s business acumen and wealth – particularly recently during his run for office — it is more than likely that he would have been a much wealthier man had he simply put that inherited sum into a mutual fund of S&P 500 stocks instead, then basically gone on a 40-year vacation. If Trump put the $40 million he inherited from his father in 1974 into index fund-equivalents (the first index mutual fund didn’t exist until 1976), instead of building skyscrapers and taking a chance on casinos, his wealth would have amounted to $3 billion – and without all the drama. If he put his total estimated $200 million wealth in 1982 into a hypothetical S&P 500 index fund, then simply rested on his laurels for 33 years, Trump’s fortune would have amassed to $8 billion today. Now let’s look at what would have happened if Trump had built upon the index-based strategy by simply further diversifying into index funds that track US small companies as well and also blend in International and Emerging Markets indexes; thus creating a more traditional globally diversified portfolio. By taking that one simple next step, his $40 million in 1974 would have amounted to over $10 billion by the end of 2014. Again, if he put his 1982 total of $200 million into a globally diversified portfolio, his fortune would have amassed over $14 billion today. While these figures are hypothetical and are not based on an actual portfolio of specific funds, this is still a compelling lesson in the power of global diversification.

Interestingly enough, there was another well-known businessman who was also worth $40 million in 1974, who did put his wealth into the market. That self-made businessman was Warren Buffett, who is now worth $67 billion. While Buffett’s financial gains are certainly tough to replicate, if Trump had followed in Buffett’s footsteps, his wealth too could potentially be worth a much larger sum than it is today. Even if he had simply put his wealth in “set it and forget it” index funds, his holdings could still be three and a half times as much as his highest reported wealth is today. What Trump may have gained in celebrity status, lifestyle, control, or the illusion of business acumen, he gave up for in actual earnings. Despite Trump’s self-proclaimed assurances that he is, in fact, a skilled businessman, his reported fortune today actually lags quite far behind the market gains over the years, revealing the attractions – but not necessarily the fruits – of active investing. So if Trump could have actually been much wealthier than he is today, why take on all the drama and stress that comes with active management? Why did he not simply relax and watch his wealth mount up on its own through decades of stock market gains?

It all comes down to the psychological attraction of active wealth management. Humans have a tendency to feel like they can control their destiny, and nothing seems more satisfying than skillfully building up a thriving empire or proactively choosing the right stock or asset class. For some, life is about more than maximizing returns. Perhaps it is the illusion of control, the need to have an identity, purpose or power, or maybe they believe they can beat the market on their own. Whatever the case may be, the attraction of active management is often not logical, but psychological.

Few people get to see their name in lights for sitting at home depositing dividends, but for those simply hoping to build their wealth without all the drama, a well-rounded global investment strategy may be the most attractive way to go.

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24 Oct

5 Reasons to Keep Calm When the Stock Market Takes a Dive

In August, investors saw some of the U.S. stock market’s worst days in years. Even investors and media pundits who are known for their longview approach to investing began to make irrational choices with their investments.

Stocks rise and stocks fall. It is a longstanding truth of investment. History shows that even when stocks fall significantly, they will rise again, often stronger than before. Looking toward the future, however, can be difficult when you are watching the value of your holdings plummet. Here are five reasons to keep calm and keep investing even when the market takes a nosedive:

Stocks Will Rise Again

History shows that when the market drops, it tends to come back stronger sometime in the following years. A study by NYU’s Stern School of Business showed that following nearly every down period in the S&P 500 is a period with better than average returns. Take for example, the 30% rise in the S&P in 1991 that followed a 3% decline in 1990, or the 37% rise in 1975 that followed a 24% drop in 1974. While some recoveries take longer than others, such as the case in 2008 and 2009, records show that disciplined investments will steadily grow to have higher values than before.

Lower Prices Can Work to Your Advantage

As with any investment, there is a time when you need to sell and a time when you should buy. But selling when markets are down might mean losing out on future gains or simply losing money by selling for less than you bought for. However, for longterm investors a downward market gives you the chance to buy stocks at bargain prices with enormous upside potential.

Declines are Healthy for the Longterm

A major downturn in the market may reflect problems with national or international economies, but financial disasters like those of 2008 are very unpredictable and may happen only about once in a generation while dips of less than 10% generally indicate healthy market valuations, which is important to prevent a larger, more painful crash down the road. Often a market decline simply indicates investor fears that certain stocks were overvalued as expectations exceeded earnings.

Plan Ahead

The key to good investing is planning for the longterm. Even the best economists cannot predict what the market will look like day to day, but sound strategy will help prepare you for the ups and downs. Young investors have several years before retirement to recover financial losses and to gain higher returns on investments and can be a little riskier in their portfolios. Those nearing retirement, however, should err on the side of caution by employing a more conservative investment strategy, which includes the use of short term bonds.

Tax Planning Opportunities

When stock markets experience a large decline, it may give you tax planning opportunity. This includes loss harvesting or being able to sell unwanted assets that previously had high unrealized gains.

When panic sets in, keep the big picture in mind. From offsetting capital gains to offering the perfect opportunity to buy, there are a number of benefits to a market decline should you choose to see the bright side. So long as your portfolio is sound and tailored to your individual circumstances, you will weather the storm and come out of it stronger than before.

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12 Oct

Fed Says It Won’t Raise Interest Rates for Now

Fed Says It Won’t Raise Interest Rates for Now

The Federal Reserve announced in mid-September that it will postpone increasing interest rates for now, opting to keep rates near zero awhile longer. The Fed’s chairwoman Janet L. Yellen said, however, that interest rates are still expected to rise before the end of 2015.

The Fed’s near-zero interest rates began in 2008 during a nationwide recession. The Great Recession came after the housing bubble burst in mid-2007, which caused a sharp increase in U.S. unemployment and prompted government response in the form of stimulus plans.

Yellen stated in a news conference that “The recovery from the Great Recession has advanced sufficiently far and domestic spending has been sufficiently robust that an argument can be made for a rise in interest rates at this time.”

However, she cited uncertainties in the global market, such as China’s weakened economy, as sound reason for the central bank to delay raising interest rates until new data secures claims of continued economic growth.


The Long Wait May Yet End Soon

The Federal Reserve has decided against raising interest rates several times in recent years. In 2012, the Fed announced interest rates would remain near zero until the unemployment rate fell below 6.5%, a standard which was met in April 2014. Officials later indicated rates would rise in June of this year.

Despite the continued longevity of the federal rate of 0-0.25%, signs indicate rates might yet rise before the end of the year. Jeffrey Lacker, president of the Federal Reserve’s Atlanta regional bank, voted for an increase at the September meeting in dissent of the majority vote. In economic projections released separately by the Fed, 13 out of 17 officials on the Federal Open Market

Committee expressed intentions to raise the benchmark rate before the 2015 session concludes.

Predictions state that unemployment will continue to fall as the economy grows, eventually raising inflation.

The Fed’s policymaking committee plans to meet in October and December. The committee could vote to raise rates at either meeting. Though Yellen’s next scheduled press conference does not come until December, she said that if the Fed agrees to raise short-term rates at the October meeting, she would brief the press.

Slow, but Steady Gains Expected in Coming Years

The 17 officials on the Federal Open Market Committee show a cautious optimism amidst economic growth at home and troubles abroad. Policymakers downgraded forecasts for GDP growth in 2016 and 2017, but their median projection estimates the American economy will grow by 2.1% this year, a faster rate than previously predicted. Unemployment is also projected to stabilize at 4.8 percent by next year.

Some Federal Reserve officials argue that higher inflation will follow a tighter labor market and that wages will rise. Officials forecast that the unemployment rate will drop below 5% by the end of 2015, which would mark a new 7 year low. Yellen warned, however, that the real rate of inflation will not match what the unemployment rate suggests due to the number of people not included in unemployment estimates, such as underemployed part-timers, temporary workers, and those who have ceased job-seeking. As market conditions improve, these people are likely to reenter the job market seeking full time work.

What Rising Rates Mean for You

Increased rates by the Federal Reserve eventually convert to increased rates for mortgages, car loans, personal loans, and credit cards. When the Fed does raise rates, central banks in other developed countries are likely to follow America’s lead by raising their interest rates, too.

Given the slow pace of economic growth since the recession, the Fed plans to raise rates slowly and steadily as compared to past practice. Officials plan for the benchmark rate to rise to 2.6 percent over the next two years. When the rates actually begin to rise is yet to be determined.

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28 Sep

Are Target Date Funds Right for Your Retirement Portfolio?

Target date funds were first designed in the early 1990s specifically with the simple retirement planners’ needs in mind. Target date funds are basic collective investment funds that become increasingly conservative as an investor’s target date – most often his or her retirement date –approaches. When an investor’s target date is long into the future and his or her risk tolerance is higher, asset allocations are weighted more heavily in higher risk, higher expected return investments like equities. As one’s target date draws near and capital preservation becomes paramount, the fund becomes increasingly conservative in nature with investments favoring asset protection vehicles, such as government bonds.

Today, more than $1.1 trillion in assets are invested in target date funds, and financial research firm Brightscope expects that number to rise to a whopping $2 trillion by 2020. Since the 2006 Pension Protection Act, target date funds have become the default option in many defined contribution plans, 401(k)s and 403(b) plans. Target date funds have also become a more popular choice among individual investors in their own IRAs as well.

The greatest appeal of this “set it and forget it” investment tool is that it is a managed investment strategy that can be set and left for long periods of time without putting much thought or effort into it. While this “one-size-fits-all” strategy is not the optimal tool for most, it is likely better than nothing.

“What I’ve learned from behavioral economists is that people are more likely to spend more time figuring out what carry out meal they want on a Tuesday evening than they are on the allocation of their portfolio,” said Tim Maurer of Bam Alliance. “If you don’t intend to do anything, and you’re honest enough with yourself to admit that, absolutely use a target date fund.”

The Pros and Cons of Target Date Funds

The best thing about target date funds is that they are better than the alternative, which is to do nothing. Before 2006, employees who chose not to elect specific investment options in their 401(k) plans would have their funds automatically directed toward no-growth money market accounts. By making target date funds the automatic option in retirement accounts, employees can rest assured that they are headed in the right direction at the very least. While they are not optimized for each individual’s needs, target date funds take the guesswork and confusion out of investing for those seeking a simple savings strategy or are just starting out. Employees simply set a date and the fund takes care of the rest.

Some of the benefits of target date funds include the stress-free automatic diversification and asset allocation that is achieved through the fund by default. For young, first-time investors, target date funds can be a great way to get them in the habit of saving for retirement and learn about these basic and important lessons early on.

This age-based strategy follows a widely accepted approach that – while not customized to your individual needs, risk tolerance and savings goals – generally won’t lead you too far astray on your retirement savings path.

Target date funds may also be effective in certain savings vehicles, like 529 plans, where it is unlikely that an investor will take the time to reallocate the account each quarter. Where target date funds are proven to be least effective, however, is for those in their 40s and 50s who are nearing retirement. At this stage in life, when one’s savings needs are more dynamic and complex, target date funds might not offer the level of customization they need.

Target date funds can be restrictive as they include only funds from their own fund families. Additionally, target date funds treat age as the only factor in one’s risk tolerance. While, in theory, one’s risk tolerance generally diminishes as the person nears retirement, an optimal savings strategy should take into account the entirety of one’s goals and needs, which is vastly different for every person.

While target date funds can be a great starter tool for those just beginning, investing according to your individual savings needs and risk tolerance – not just your age – is the optimal way to effectively meet your savings milestones. If you are invested in target date funds, it might be time to reassess your portfolio and identify the right custom tailored solution to meet your distinct savings needs.

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13 Aug

The backdoor to a Roth IRA is still open ‚for now

The Roth IRA was revolutionary when it became available nearly two decades ago. That’s because retirement accounts traditionally have been a method of deferring taxable income, with eventual withdrawals in retirement subject to income tax. Roth IRAs offer tax-free retirement income, and that has appealed to millions of investors.


Many high-income savers, however, don’t have direct access to Roth IRAs because of income limits on contributions. There is a way in, through the backdoor, for those who are locked out, but the backdoor may soon be closing. The Obama administration and other policymakers have put the backdoor Roth IRA strategy on the chopping block.

So if you’ve been eyeing the backdoor but haven’t stepped across the threshold, now is the time, while the strategy is still available.

So why exactly is the backdoor Roth IRA so valuable, and why do some people want it to disappear?

When Roth IRAs first came into existence, high-income individuals were shut out of the benefits a Roth IRA had to offer. Even now, single filers with adjusted gross income above $131,000 and joint filers with adjusted gross income above $193,000 aren’t allowed to make Roth IRA contributions. Conversions from traditional IRAs to Roth IRAs weren’t allowed for those with incomes above $100,000. This combination of factors created a barrier to high-income savers wanting Roth access.

In 2010, lawmakers slightly relaxed the earnings limits and repealed the income limit on Roth conversions. That opened the door to Roth IRAs for high-income individuals for the first time, but it came with a caveat.

Typically, when you convert a traditional IRA to a Roth, you have to pay income tax on the converted amount. Given how high the tax rates are for upper-income taxpayers, not many people were willing to pay up for a conversion.

Enter the backdoor Roth IRA, which gets around this problem by taking advantage of something called the nondeductible regular IRA. Most high-income individuals also can’t deduct their traditional IRA contributions because of income limits, but nondeductible traditional IRAs are available to anyone with earned income.

So, investors invented a two-step dance for the backdoor Roth that involves making a nondeductible IRA contribution and then converting that newly created IRA to a Roth.

If your nondeductible IRA is the only traditional IRA you own, then the Roth conversion doesn’t create any tax liability. That’s because the IRS recognizes the fact that you didn’t get a tax deduction for your initial nondeductible IRA contribution, and so it essentially gives you credit for that contribution when considering the tax impact of the rollover.

Violà, a Roth IRA, via the backdoor.

But what if the nondeductible IRA isn’t a person’s only traditional IRA, which is the case for many retirement savers? If you have made past IRA contributions and got tax deductions from them, then the IRS requires you to treat the conversion of your nondeductible IRA as if it came pro rata (in proportion) from all your IRA assets. That means you’re stuck paying taxes on part of the converted amount.

However, there are a few ways to rearrange your finances to still use the backdoor Roth IRA strategy. Many employer 401(k) plans allow workers to roll their IRA assets into their 401(k) accounts, and money that’s in a 401(k) avoids the pro-rata tax problem because of its being an employer plan rather than an individual IRA. Similarly, those who are self-employed can use self-employed 401(k) arrangements and provide for the same asset movement to set up their tax-free backdoor Roth.

Lately, lawmakers haven’t been impressed with the cleverness of the backdoor Roth strategy. Policymakers have increasingly seen the strategy as a form of unfair tax avoidance. The Obama administration’s proposed budget for fiscal year 2016 included changes that would put a halt to the backdoor Roth IRA by preventing Roth conversions involving funds from nondeductible IRAs or voluntary after-tax contributions to 401(k) plans. The proposal is not likely to become law this time around, but in the future, lawmakers might target the backdoor Roth again.

Until then, the backdoor to a Roth IRA remains wide open. High-income individuals should eye it closely to see if they can take advantage of it. The backdoor Roth is the best — and often only — way for people subject to income limits to get the benefits of this retirement vehicle. Talk to your financial advisor to see if stepping through the backdoor is right for you.

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30 Jun

How should freelance workers save for retirement?

More and more Americans are saying that the freelance life is the life for them. A whopping 53 million Americans consider themselves to be full-time freelancers – an all-time high. With the flexibility and freedom of freelance life also comes challenges, such as determining how to save for retirement without the traditional backing of a full-time employer.

About 34 percent of the U.S. workforce is now freelance, according to a nationwide survey last summer by the Freelancers Union and Elance-oDesk online job marketplace. With the onus on freelancers to handle their own retirement planning, how are freelancers doing?

Not well.

Tom Egan, a graphic designer in his 50s living in Jersey City told CNBC that he will likely have to “work until I drop dead.”

Egan mostly invests in mutual funds but also has some individual stocks. He funds his accounts in the early spring, but only if he has any money left after paying his taxes.

"I’ve missed quite a few years since 2000," Egan said.

Egan’s missed-years problem highlights one big issue for freelance workers — they don’t get the dedicated employee match that many corporations offer on 401(k) plans, which doubles the amount of money workers can sock away for retirement. And for the freelancers who divert some of their savings to an emergency fund, they are left with even less to put into a retirement account on an annual basis.

"The biggest challenge freelancers face when it comes to retirement is the feast-or-famine nature of their income," Dan Lavoie, director of strategy at the Freelancers Union, told CNBC. "One month you might be flush from a big project. But the next, you’re looking for a new gig and prospecting. It’s hard to know how much to put away or when you can afford to put it away. It’s important to remember that every little bit helps."

According to a CNBC article, there are three main types of retirement plans for the freelancer to consider:

Simplified Employee Pension (SEP)

These are traditional IRAs that typically only require a one-page form at most banks and brokerages, and they can be opened and funded right up until your tax-filing deadline. You can contribute 25 percent of your net self-employment income, up to $53,000 annually. These plans do not allow for Roth IRAs, wherein contributions are initially taxed but eventual withdrawals are tax-free.

Solo 401(k)

Also known as Individual 401(k)s, these allow $18,000 in annual contributions, plus 25 percent of net earnings from self-employment, up to $53,000 annually. People who are 50 years or older and looking to catch up on their retirement savings can put in an extra $6,000 annually. These plans can be funded on a pretax basis or post-tax as Roth contributions, and they allow for pre-retirement access through loans and hardship distributions. They must be set up by Dec. 31 of the preceding tax year.

Savings Incentive Match Plan for Employees (SIMPLE IRA)

SIMPLE plans are typically for small-business owners, but they also work for individuals, especially those who are considering eventually expanding their business with outside hires. As with the SEP and non-Roth 401(k), this plan offers upfront tax breaks and tax-deferred saving. Neither you nor your employees pay taxes until you withdraw money. Small business owners and their employees can contribute up to $12,500 annually (plus an extra $3,000 for those 50 or older) plus either a 2 percent fixed contribution or a 3 percent matching contribution.

It is not uncommon for workers to accumulate several retirement plans over the years, such as a corporate-sponsored 401(k) from a former employer. If these plans have good investment options and low fees, there is no need to roll them over into a combined account. One catch is that 401(k) account balances below $5,000 are not guaranteed placement in a given plan — a plan sponsor could ultimately cut the participant a check for the balance if the participant does not roll the money over into another 401(k) or IRA account.

The advantage to staying in a 401(k) rather than rolling over to an IRA, if allowed, is that 401(k) plan account fees and underlying fund-management fees are typically lower than individual IRA fees — though 401(k) plans at very small companies may not be any more cost-attractive than an IRA. The downfall to staying in a company 401(k) is that IRAs are more flexible when it comes to distribution policies, including emergency withdrawals.

One big issue that many freelancers face is how to balance paying off debt while saving for retirement. Bob Glovsky, vice chair of the Boston-based registered investment advisory firm The Colony Group, told CNBC that he recommends putting 20 percent of freelance income toward either retirement savings or paying down outstanding debt. He also recommends individual 401(k) plans as generally the best bet for independent contractors due to their flexibility and high savings limits.

The freedom of freelance life does come at a price, but saving for retirement and paying down debt is possible with the right strategy and saving diligence and consistency.

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19 Jun

New poll finds that many adults are flying blind into retirement

According to a new survey by the Indexed Annuity Leadership Council, more than half of all U.S. adults have never spoken with a financial advisor to ensure they are saving enough to retire comfortably.

The survey polled 3,017 adults, including 605 retirees and 1,664 employed individuals, and found that 54 percent of those polled say they have never spoken to a financial adviser in their lives. Of the employed adults surveyed, 45 percent said they planned to retire before age 67, 18 percent said they plan to retire at 67, and 21 percent plan to work until 70.

"This tells me is that we might have a retirement crisis on our hands from the standpoint of people not preparing," Jim Poolman, executive director of the Indexed Annuity Leadership Council, told USA Today. "One of things this project does is highlight the need for people to do long-term financial planning, especially retirement planning."

The poll found that 56 percent of employed adults say they will have to keep working for financial reasons upon reaching retirement age. Around 45 percent want to keep working to stay active, 34 percent want to keep working simply because they enjoy working, and 32 percent want to keep working for the benefits and financial security.

The latest poll comes on the heels of other recent surveys that paint a grim picture about the state of retirement in America.

One phone survey by the nonprofit Employee Benefit Research Institute and Greenwald and Associates, which was published in USA Today in April, found that nearly one-third of Americans have virtually no retirement savings. Of the more than 2,000 respondents surveyed, 28 percent said they have less than $1,000 in savings and investments that could be used for retirement, not counting their primary residence or defined benefits plans such as traditional pensions. Another

57 percent of respondents said they have less than $25,000 in savings.

Another recent survey by the Deloitte Center for Financial Services found that only 45 percent of respondents felt “very secure’ in having sufficient savings and income to maintain a comfortable lifestyle during retirement.

The results of these recent surveys highlight the need for people to not wait until retirement is near to make sure their savings are on the right track. Speaking with a financial advisor, even just once a year for an annual checkup, should help retirees and future retirees feel more secure in their savings.

Some of the valuable services financial advisors are able to provide include making tweaks to 401(k) plans that can add up to tens of thousands of dollars, recognizing when a promising mutual fund goes sour before it is too late, or critically analyzing whether or not your retirement portfolio is balanced and diversified enough to meet your specific needs in retirement.

Other reasons to consult a financial advisor before retirement are that taxes, estate planning, rules for gifting to relatives, timing of withdrawals from retirement accounts and other issues can change year-to-year and be immensely complex. Financial advisors stay on the cusp of these rule changes to ensure their clients’ needs are met in every aspect of their financial lives.

One popular trend today is the use of easy-to-use DIY financial tools that are now available online. While these systems can empower individuals to take control of their finances, financial advisors still have a number of cutting-edge financial projection systems available to them to forecast an individual’s needs in retirement as well as the viability of their financial portfolio. They can also create a feasible roadmap to a comfortable retirement, establish a realistic budget, and test the amount an individual can safely withdraw to meet their needs in retirement.

At FMB Wealth Management, we believe in treating your financial health like you would treat your own health. It is important to get regular check-ups, routine maintenance, and the occasional procedure to fix small ailments before it festers into a serious problem.  

Smart moves well in advance of retirement will lead to the most comfortable golden years possible. By planning ahead with the right advisor by your side, anyone – no matter their annual income or financial situation – can build up a nest egg that ensures they can live out the most enjoyable, comfortable and stress-free retirement possible.

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22 May

Timeless Tips on Tax-Wise Investing Part II: You and Your Tax-Wise Team

In Part I of our series on Tax-Wise Investing, “You and Your
Investments,” we explored how to engage in year-round tax-wise investing by
adopting your own best practices as well as by favoring fund managers who are
likewise keeping a tax-efficient eye on their offerings. There are two other
important areas to tend to as part of your due diligence: your investment
portfolio’s tax-efficient management and your advisers’ tax-efficient teamwork. 

Proper Portfolio
Management: The Art of Asset Location

Beyond tax-wise management of the individual funds in which
you’re invested, some categories of investments are inherently more
tax-efficient than others. For example, stock funds are usually more
tax-efficient than bond funds (with many caveats that we won’t go into here). A
plain vanilla U.S. stock fund tends to be more tax-efficient than funds seeking
to capture the expected premium returns from smaller, less liquid markets. And
so on. This means that another vital way to manage your taxable income is to
practice wise asset location.

The concept is simple enough, but implementation can be
tricky. First, there is only so much room in your tax-sheltered accounts. Challenging
trade-offs must be made to ensure you’re making best use of your available tax-sheltered
“space.” Effective asset location also involves considering other tax-planning
needs, such as the ability to harvest capital losses against capital gains,
donate appreciated shares to charity, implement a step-up in basis, and take
foreign tax credits. While these opportunities have more or less importance
depending on your goals and circumstances, they become unavailable for stocks
held in tax-sheltered accounts.

In short, arriving at – and maintaining – the best asset
location formula for you and your unique circumstances is something of an art
as well as a science. That’s one reason why it’s important to have a
well-coordinated adviser team, to ensure that you’re making best use of all of the
wealth-building opportunities available to you, including but not limited to
asset location.

Organized Alliances:
Do Your Advisers Get Along?

It’s important to manage your investments tax efficiently.
But what about when it comes time to transfer your wealth – bequeathing it to
heirs and making meaningful donations? And what about your tax filings
themselves? Is your accountant aware of what your investment manager is up to,
and are both of them informed of pertinent details related to your estate

In short, are key members of your financial team – your
estate planning attorney, investment adviser, tax professional, insurance
providers and others – acting in isolation or in coordinated concert with one
another? Even if each is seeking to best manage tax-related events within his
or her specialized area of expertise, if there is little or no coordination
among their activities, unnecessary (taxable) gaps or overlaps may occur when
key communications break down.

Putting It Together: The
Tax-Wise Wealth Manager

Tax-efficient investing can add considerable power to your
net wealth – the kind you and your family get to keep after taxes and expenses have taken their toll. But making the most
of the many opportunities can be daunting if you’re going it alone. As we’ve
covered in this series, tax-wise investing includes:

Establishing an effective Investment Policy

Making best use of available tax-sheltered or
tax-free investment accounts

Investing tax efficiently yourself

Selecting fund managers who invest tax
efficiently on your behalf

Appropriately locating your more and less
tax-efficient holdings among your taxable and tax-favored accounts

Ensuring that all of the members of your financial
team are acting in tax-efficient concert with one another across the spectrum
of your financial activities

All this and more is why the final piece in the puzzle is to
engage a wealth manager like FMB Wealth Management to organize the many moving
parts and players involved, keep an eye on it all over time, and help you and
your specialized team members make adjustments when appropriate. The savings
achieved can more than offset your investment in ongoing oversight of your
tax-wise wealth. That’s a good idea, any time of the year.

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13 May

How to Protect Yourself from Outliving Your Money in Retirement

In 2015, the average life expectancy for Americans is 79
years old, more than 10 years older than the average life expectancy was in
1950.  Also, in just 15 years, an
expected 70 million baby boomers in the U.S. – individuals born between 1946
and 1964 – will be over the age of 65, meaning that there will be the largest
population of older adults America has ever seen, and they are expected to live
longer than ever before.

This increased life expectancy coupled with America’s large
baby boomer population growing older and nearing retirement, many more
Americans may soon become faced with the risk of outliving their retirement

The exact amount you need in order to retire is dependent on
a number of factors including your income sources during retirement, your cost
of living in retirement, when you plan to retire, and more. According to
financial experts, after calculations, a rule of thumb is that the average
individual will need about 75 to 80 percent of their preretirement income to
maintain the same standard of living in retirement.

A good retirement plan includes saving early, creating a
savings strategy that is based on a calculation of your retirement lifestyle, contributing
a sufficient sum for retirement, and downsizing or establishing a spending plan
during retirement. However, sometimes, even the most diligent savers and
thrifty spenders can find themselves in a position where their expenses
outweigh their means.

While many people would like to leave a legacy for their
children and do not want to access their principal, others may have to lower
their monthly expenses by moving in with their adult children for a period of
time. While there is no clear-cut or cover-all solution to solve this dilemma,
each individual must consider a number of factors in order to protect
themselves against outliving their money in retirement.

To put some of these options into perspective, let’s say,
for example, an 80-year-old woman who receives $1,500 per month in Social
Security income has drawn down her retirement savings to $100,000. Let’s also
assume that her present income and investment strategy – primarily in bonds —
is earning her around 3% per year on that principal sum for an additional
$3,000 in income per year. Her mere $1,750 per month in income is insufficient
to afford her cost of living each month. 

She could invest in stocks, but there is the risk of
volatility and income loss. She could live on the principal sum, but then she
cannot leave anything for her children. She could lower her expenses by moving
in with her adult children, but she doesn’t want to create a burden on them and
their families.

Obviously, every situation is different. For older Americans
in good health with children of means who are not relying on their parents’
income, an immediate life annuity may be the best option. On the other hand, if
the individual can afford some risk, investment in mutual funds and ETFs might
pay off the most.

With America’s baby boomer population getting older and life
expectancy on the rise, the risk of outliving one’s income may soon become a
problem that affects many in the near future. With effective planning and the
right tools in place, this risk may be averted – even for those who fear they
are starting too late.  Speak with your
financial advisor about your option in retirement to ensure your nest egg and
quality of life enjoys the longevity it deserves. 

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