5 Ways to Get Back on Track with Your Financial Goals

A photo by Charles Forerunner. unsplash.com/photos/gapYVvUg1M8Labor Day traditionally marks the end of summer and the beginning of the school year. For those of us who still go to work every day it also means it’s time to shake off the lazy days of summer, roll up our sleeves and get back to work.

September is also a great time to get back on track with your financial goals. Below are 5 things you should do right now to get back on track and end 2016 with a strong finish.

Understanding “Brexit” and Market Selloffs

photo-1415829994762-1344c5d2dbe9By now you have certainly heard the news that the people of Great Britain have voted to leave the European Union: 52% to 48%.

Last Friday morning U.S. markets responded to the surprising news of the Brexit by opening sharply lower. By the end of the day, the Dow Jones Industrial Average was off more than 600 points or about 3%.

Almost immediately the headlines and news reports started coming in about what investors should do next. I am sure you are wondering as well.

As I have said before, often the best thing to do is nothing – at least at first.

DOL Passes Fiduciary Rule – What You Need to Know

photo-1453945619913-79ec89a82c51On April 6th, 2016 the Department of Labor issued what is known as “the fiduciary rule” which states that financial advisors, brokers and others who help clients manage their 401(k) and IRA assets must always act in their clients’ best interest.

There is not enough space on this blog (or probably in my lifetime) to fully dissect and properly analyze the 1,000+ page ruling that was recently released. I will let the financial media, the industry trade press, Congress, the courts, and the various regulatory bodies that oversee the financial services industry do that.

What I want to do here is share a couple things about the new rule that you need to know.

First, I already am a fiduciary.

Financial Engines recently reported the following statistics: 66% of Americans don’t know the difference between a financial advisor who is a fiduciary and one who is not, and 41% don’t know if their advisor is a fiduciary.

Let me fill you in.

A fiduciary is a financial advisor that is required to put his clients’ interests before his own and without regard to the advisor’s financial compensation. Advisors who are not fiduciaries were previously only required to make investments that were deemed “suitable”.

In case you are one of the 41% who may not know, I am a fiduciary. As a fee-based advisor I am already held to the industry’s highest standard – the fiduciary standard.

If you have accounts with me that are billed a quarterly asset management fee through Charles Schwab or Royal Alliance/Pershing, I am a fiduciary and have been during the entire time you have had your accounts with me.

For me that’s not hard. Frankly, I believe putting clients’ interests first is not only the right thing to do but also the smart thing to do.

Second, my status as a CERTIFIED FINANCIAL PLANNER™ requires me to put your interests first at all times. Even if you are not in a fee-based, retirement account.

As a CFP® certificant I am not only held to the “fiduciary standard of care”, but also to the high ethical standards of the CFP Board. Principals such as integrity, fairness, objectivity, competence, confidentiality, professionalism and diligence are just an everyday part of the job.

The CFP rules of conduct apply to all CFP®s regardless of the products they recommend, how they get paid or whether the account is an IRA or not.

You can read more about this on the CFP Board website or by clicking here.

What this means for you. The new fiduciary rule is a big deal for the industry. But it’s really not a big deal for me or my clients.

You can continue to rest assured that your advisor always has had and will continue to have your best interest at heart.

Nine Things to Do When the Market Tumbles

photo-1416269223193-bc45028133f5When the market drops our natural tendency is to preserve capital and move out of stocks and into cash or some other relatively safe investments. The so-called “flight to safety” is alive and well as we enter the second half of January.

But is that really the best way to manage a volatile market?

Below are nine things to do when the market tumbles.

1. Do nothing. Yes, nothing can actually be something. And sometimes doing nothing is the exact right thing to do when you feel that something must be done.

This Yogi-Berra-like strategy makes sense when your goals are long term and your investments are properly aligned with your goals, time horizon and risk tolerance.

Remember that time in 2011 when the markets dropped over 19%? I didn’t think so. According to a guide titled “Market Insights. Guide To The Markets” published by JP Morgan, as of December 31st there have been 5 major pullbacks in the S&P 500 in the current market cycle. The most severe was in October of 2011 when the market sold off over 19% before going on to reach new highs.

In fact, since 1980 markets have experienced “intrayear” declines of about 14% on average. 75% of the time, the market posted gains for that same year.

Most of the time doing nothing was the right something to do.

2. Buy more. Depending on your risk tolerance and time horizon, the time to add money to your stock portfolio is when markets are down. Sure, they could go down more and tomorrow could present an even better opportunity to buy, but the only thing we know for sure is what we have today.

More than likely your favorite stock or mutual fund is cheaper to buy than it was a month ago. If you buy today and the price simply goes back to where it was a month ago, you stand to make a nice gain.

An easy way to do this is to increase your 401(k) contribution. It’s tempting to reduce your contributions when you see them lose value every day, but the silver lining is that by contributing regularly to your IRA or retirement plan you are able to buy more shares at lower prices. In the long run, you will be better off.

3. Fund your IRA for the year. Similar to the advice above. If it makes sense to buy stocks and other investments when the markets are down, it makes sense to fund your IRA, Roth IRA, SEP-IRA, etc. when markets are low as well. The IRS allows taxpayers with earned income to contribute up to $5,500 per year (plus $1,000 if you are over age 50).

What’s more, you can fund last year’s IRA right up April 15th. If you wanted to make the most of this sour market, you could fund your 2015 AND 2016 IRAs today, while prices are low. If you are married, this means you could contribute up to $22,000 into your IRAs – even more if you are over 50.

4. Build up your cash reserves. Adding more to the market when markets are down can be a sound long-term strategy for people who can tolerate the volatility of stocks. But if your cash reserves are low, consider increasing them to a more comfortable level before adding more to the stock market.

For people who are still working, that may mean having money market funds, bank savings, or other cash on hand to pay for short-term expenses or to provide a cushion if your income were to decline.

Long-term investments like stocks and stock mutual funds work best if you can leave them untouched for long periods of time. Dipping in to your stock portfolio to pay for college tuition, your kid’s wedding or the mortgage payment while markets are down can sink your portfolio value as fast as any bear market.

5. Pay down debt. Rationally you understand that you should buy more while markets are down, but emotionally you just can’t do it. I get it. In this case, maybe you should focus on other priorities like paying down your credit card, student loan or even your mortgage.

Any extra amount you can pay down towards your debt helps. In fact, depending on your interest rate, paying down debt is like getting a guaranteed 4%, 6%, 10% or more on your money. Hard to beat that.

6. Convert IRAs to Roth IRAs. Roth IRA conversions are taxable events. Obviously the less you convert, the less tax you pay. An IRA worth $10,000 last month may be worth $9,000 this month. Converting today reduces your tax bill by 10% due to the lower value of your account.

7. Dump your dogs. Markets are down across the board. Selling for the sake of selling probably isn’t a good idea. However, if you have investments that were questionable to begin with, now may be a good time to dump them and replace them with something else.

The idea is to be positioned for the next market rally. If you don’t believe your investments will recover strongly when the market bounces back, consider other investments. Sometimes a down market can be just the push you need to make that change.

8. Consider an annuity with a guaranteed income benefit. Annuities aren’t for everyone, but if an annuity with a guaranteed income benefit makes sense for you, then now may be a good time to consider one.

Here is why: The income benefit often ratchets up based upon a fixed, guaranteed amount or an increase in the market value of your account, whichever is greater. If you add to an annuity with such a benefit when markets are down, you stand a greater chance of seeing that income benefit increase by more than the guaranteed amount when markets rebound.

Annuities are complicated investments that aren’t suitable for everyone and every annuity product is different. Do your homework and read the fine print carefully.

9. Complete your college financial aid forms NOW. The FAFSA form asks for the value of your assets as of the day you fill out that form. Today your assets may be worth a lot less than they were at the end of the year.

By filling out your college financial aid forms now, you will decrease your Expected Family Contribution (EFC) and possibly increase the likelihood of having financial need. The greater your need, the more likely you are to get some financial help when paying for college.

Market volatility happens. What you do when it happens makes a difference. I plan to implement the first three ideas.

What’s your plan?

Is Your Pension Safe?

photo-1448975750337-b0290d621d6dThe Pension Benefit Guarantee Corporation (PBGC) guarantees the pension benefits you were promised if your original pension fails to do so.

Today, the PBGC helps protect the retirement benefits of over 40 million Americans in over 2,400 different pension plans.

Across the country the PBGC paid benefits to over 825,000 retirees in 2015. Here in MN, the PBGC paid over $54 million in benefits to more than 9,000 retired workers.

Worried about your pension? Perhaps you should be. The promise of a pension is that you will receive a monthly pension check for life, but that’s really not an absolute guarantee.

If your pension fails and the PBGC takes over your plan, you may receive a lower pension benefit than what was originally promised by your employer. In some cases your pension may be reduced by as much as 50% or more.

The Minneapolis Star Tribune recently reported that nearly 15,000 Minnesotans who are or were part of the Central States Pension Fund could face significant cuts to their pension benefits. The average pension cut is estimated to be 34%, but some pensioners could receive cuts of up to 60%.

PBGC Losses. In the fiscal year 2015 the Pension Benefit Guarantee Corporation reported a $76.4 billion loss. This was an increase over the previous year’s loss of $62 billion.

While single-employer plans seem to be on a stronger footing, over the next ten years the PBGC estimates as many as 50% of all multiemployer plans like the Central States Pension could fail.

Pension benefit guarantees can vary. Pension benefit guarantees are set by law and cover only vested benefits. Single-employer plan benefits are guaranteed up to $60,136 for a 65-year old retiree.

In multi-employer plans, the PBGC guarantees only up to $12,870 for a retiree with 30 years of service. Multiemployer pensions affect about 10 million Americans in 1400 different plans.

Not an ironclad guarantee. Normally, when I advise clients on whether to take their monthly pension or a lump sum payout at retirement, the conversation goes something like this:

“A monthly pension offers the benefit of a guaranteed income for life. A lump sum payout doesn’t offer a lifetime income guarantee, but it gives you greater control over and access to your retirement assets, and the ability to pass on any money left over to your heirs when you die.”

The decision for many retirees is often a choice between the promise of guaranteed lifetime income and control over your retirement assets.

What’s the best strategy? Unfortunately, the assumption that your monthly pension is guaranteed for life may no longer be inaccurate. However, the decision to take a monthly pension or a lump sum payout at retirement depends on many factors such as how long you expect to live, whether you will need access to your funds, your comfort level with managing your retirement assets, etc.

For retirees who need the promise of a guaranteed monthly check and are confident in their pension’s ability to meet its obligations, a monthly pension may still make sense.

For others, access to principal and control over their retirement funds is the higher priority.

For more information. The PBGC website is a good first stop if you are looking for more information regarding the solvency of your pension. The website also offers some good advice regarding the lump sum vs. monthly pension decision.

If you are weighing your options, I recommend you click here for more information.

Then consult with your tax professional and/or financial advisor to determine the right choice for you.