Will you save more for retirement after the kids are grown?

on June 30, 2016 Comments Off on Will you save more for retirement after the kids are grown?
We are always prone to postpone the activity that has the least impact today.  For most of us, that is saving for retirement.  As we move through life, we are focused on our families and making sure that today is fulfilling without spending enough time to think about saving for a tomorrow that is years away.

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Jeffrey MillerWill you save more for retirement after the kids are grown?

Registered Investment Advisor vs Broker/Dealer

on June 17, 2016 Comments Off on Registered Investment Advisor vs Broker/Dealer

In the complex world of financial services it is often believed that every advisor is the same.  If you believe this, then you should learn more about the difference having a Registered Investment Advisor can make.  There are many types of advisors that exist in financial services.  The truth is that they are not all the same and when it comes to choosing an advisor, a little research will help you understand who may better serve you.

So, there are at least three different types of advisors with some overlap as each can have multiple licenses and therefore have multiple roles.  The three types are:

1   Investment Advisor Representative of a Registered Investment Advisor
2   Registered Representative (Broker) of a Brokerage Firm
3   Insurance Agent

I am going to focus the discussion on the difference between an Investment Advisor Representative and a Broker.  The key differences that define the relationship are important as you search for and choose an advisor to help guide you.

Fiduciary vs Suitability

There is a significant difference between the level of responsibility that is applied by law to the two different roles. For an Investment Advisor Representative, there is a requirement based on the Investment Advisers Act of 1940 to act as a fiduciary and put the clients interests before their own.  This simply means that the client is the most important consideration for any recommendation provided and all conflicts of interest must be disclosed to the client.

As a Broker or Registered Representative for a broker-dealer, there is only a standard of suitability.  What does suitability mean?  The standard of suitability only dictates that the investment sold to the client is appropriate given the client’s current financial situation.  So, the broker is able to sell/offer the investment that may pay them the highest commission because their interests can be placed above the client’s best interest.

Advice not Sales

For Investment Advisor Representatives, the goal of any work done for a client is to provide advice and guidance with a foundation in planning. The advice is based on the needs of the client.  The driving goal is to provide strong guidance that helps the client achieve their goals.  Once a recommendation is formulated, an Investment Advisor Representative working solely for a Registered Investment Advisor helps with the implementation but is not compensated by any investments that may be used in the process.  In many instances, there may be a need for insurance to be purchased.  At Courage Miller Partners, we work with our clients and an insurance professional to then implement the insurance need.  As a fee-only Registered Investment Advisor, we would not benefit in any way from the purchase of the insurance product.  As fiduciary Investment Advisor Representatives, we share full details regarding how we earn our fees and fully disclose any conflicts of interest.  There are no hidden compensation agreements or commissions that would jeopardize our responsibility to our client.

Can’t tell by the title

In today’s financial services environment, you cannot rely simply on a title to help guide you in your decision process. There are titles used from Wealth Manager, Financial Advisor, Investment Advisor and Financial Planner that are used in the industy, but these titles do not disclose any aspect of their compensation arrangement or responsibility to you as a client.

How can you tell the difference?

If you truly want to know, simply ask the financial professional if they are ever compensated by commissions for the sale of financial products and investments. The answer to that question will immediately let you know if they are truly an Investment Advisor Representative or not.  If they answer that they may receive commissions, then you know that when you are presented with a recommendation there is potentially some incentive provided to them for selling the product.  Now you must ask if it is truly the best product or the highest commission for the professional.

The Grey Area in between

With all situations there always remains a grey area that must be carefully navigated. A very traditional practice is for many financial professionals to be duely registered as both an Investment Advisor Representative and a Registered Representative (Broker).  When a financial professional is licensed as both, they may provide financial planning and guidance for a fee or free, but at the time of implementation of the advice they implement the plans as a Registered Representative and receive the commission compensation from the products used to implement the plan.

Fee based vs Fee only

In many instances, professionals will refer to their compensation structure and the subtleties make a difference. A fee based advisor is an advisor that may charge traditional asset based fee for portfolio guidance, but receives commission compensation from product recommendations and sales.  A fee only advisor is only compensated from a traditional asset based fee for portfolio management, hourly fees or flat fees.  You will always know the full extent of the compensation for a fee only advisor.  You will not have to ask yourself if the recommendation is in your best interest because the advisor has no incentive to recommend the product unless it is beneficial to your goals.  As a result, we highly recommend seeking out a fee only advisor as you look for guidance and planning.

We recommend using the SEC Investment Advisor Search and FINRA Broker Check to review the information of potential advisors and their Registered Investment Advisor and/or Broker/Dealer.  While the information does not indicate competency, it will provide information regarding complaints the advisor has received. You are also provided the company that has them registered as an employee. 

Hopefully, as you search for a financial advisor, you can use this as a guide as you interview potential advisors to help you through your financial decisions.

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Jeffrey MillerRegistered Investment Advisor vs Broker/Dealer

401k – Old vs New – Where Should I Move it? (Part 2)

on June 9, 2016 Comments Off on 401k – Old vs New – Where Should I Move it? (Part 2)

In a recent article 401k – Old vs New – Where Should I Move It?, we discussed some of the 401k options that investors could take per guidelines of the Financial Industry Regulatory Authority (FINRA).   In this series on 401ks, we’ll cover the third of the four mentioned in our May blog.   This third option is simple-  liquidating and moving the cash value out of your tax-deferred retirement account and receiving your check in a taxable non-retirement account.   Data in 2013 from Fidelity revealed that people aged 20-49 years old, an average of 32-43% would cash out of their 401k when they terminated and changed jobs (see chart below).  We’ll also cover in a moment where this strategy is not so simple, metaphorically speaking.   


401(k) cash outs

(Source: Fidelity data based on the analysis of 900,000 terminating participants in workplace 401k plans; based on 12/31/13 data. Because of rounding, figures might not total 100%.)


Liquidating All or Some of Your 401k

If you choose to fully liquidate out of your 401k to take full cash value of your account, you will first have to contact your former 401k plan provider to get the proper paperwork started.   Requesting sells of positions will go to cash in your retirement plan once you request the distribution check.   One of the big negatives to liquidating your 401k is the loss of long-term compounding growth and tax deferral.  The benefit of reinvested capital gains, dividends, and interest with any tax consequence go away.  Investing into another investment account with no real tax benefit after liquidation is typically not a sensible strategy.  When people liquidate out of their 401k plan it’s typically for short-term emergency cash needs due to loss of a job.  This is why we would advise against this knowing it’s the least optimal and of last resort. 

Tax implications

When you liquidate out of a 401k to move to a taxable account, it will be subject to taxes due to IRS rules of early distribution from a retirement account.  Remember the part where we mentioned it wouldn’t be so simple?  This is the part.  Be aware your former employer is required to withhold 20% of that withdrawal for federal income tax.  An extra 10% penalty for early withdrawal will be applied if you are distributing before the retirement age of 59 1/2 years old.  Keep in mind state income tax also needs to be accounted for on this distribution and will vary from state to state.   This could be painful for those who are in need or in a short-term transition.  You want to be mindful of current IRS income tax brackets and that it does not bump you up into the next bracket, so we recommend conferring with a tax professional.  As an example, you may want to consider not liquidating that whole $15k or $20k in the former employer’s 401k if you don’t have to do it.  Maybe you rollover a percentage of it into a retirement account like an IRA or the 401k depending on the new employer and what your short-term needs are?  If for whatever reason you try to reinvest that money back into the market using a brokerage account, guess what?  Your investments are now subject to capital gains tax and ordinary income tax on interest each year.  Hence the importance of letting it stay in a tax-deferred account instead of the worst case scenario of moving into a taxable account.  

Below is a chart comparing the future value and investment return difference between tax deferred and taxable investments.  It also highlights the effects of compound growth using an online calculator for illustrative purposes.  We calculated having $20,000 in a 401k/IRA versus no tax-deferral in a brokerage account with a 7% annual expected rate of return.   We took it further and calculated the IRS penalties and income taxes totaling 35%, if this liquidation comes from a 401k into a brokerage with an effort to grow it.  


Amount Invested Number of Years Invested Marginal Tax Rate Investment Return Taxable Future Value Annualized Yield
    $20,000  (In retirement account – 401k/IRA)     30 yrs       20% 0% until income is drawn in retirement  $148,117      6.9%
    $20,000  (In a brokerage account)     30 yrs       20% 100% exposure to capital gains and interest income  $102,553      5.6%
    $13,000 (In a brokerage account. Assumes 401k valued at $20,000 with 20% fed. and a 5% state income tax, and 10% early withdrawal penalty)     30 yrs       20% 100% exposure to capital gains and interest income  $66,659      5.6%


We hope this blog brings perspective in having a plan for retirement in the future.  Seeing the ramifications of failing to launch a retirement account while you’re in the early career stage of life is vital in order to create a nest egg for the long-term.  Additionally, it highlights the importance of building an emergency reserve to protect you from cashing out your retirement accounts.   Let this serve as a call to action seeing the ability to store away hundreds of tax-deferred dollars to hopefully multiply to hundreds of thousands of dollars over the course of a lifetime.  Over the next few weeks, we’ll continue on this path to discuss the fourth and last option:  rolling over your 401k to an individual retirement account.   Please continue to follow us on WealthWorthItBlog.com and take advantage of our complimentary portfolio analysis, if you have more questions and would like to talk. 




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Jeffrey Miller401k – Old vs New – Where Should I Move it? (Part 2)

Money – Can it make you happier…apparently in retirement it can

on June 1, 2016 Comments Off on Money – Can it make you happier…apparently in retirement it can

We all know that money can’t buy happiness, but a recent study from the Employee Benefit Research Institute (EBRI) indicates that retirees with a higher net worth in retirement are more satisfied with retirement.  I think that most of us would expect this to be the case.  The reality is all retirees since 1998 have had a decreasing level of satisfaction during retirement.  The largest decline occurred from 2002 to 2004, which was a time period marked by a recession after the technology bubble burst and September 11th.  For me the more important item is that the level of satisfaction never recovered even after the end of the recession.  We have continued to see a negative trend in the level of satisfaction across all levels of wealth.

So, with this information and the expectation that having more savings in retirement would make it more satisfying, we must be saving more than ever before for retirement as a country.  Well that is not the case.  Each year an organization called America Saves conducts a survey to gain some perspective about the savings landscape in the country.  The America Saves Survey results are less than impressive.

Survey results

Survey results from 2016 National Survey Assessing Household saving by America Saves.

As a general rule, most planning assumes a need to save at least 10% of your income to achieve an amount of savings at retirement that will replace your income needed as a result of no longer working.  In the survey this year, 66% of respondents are fortunately not spending their entire paycheck.  The downside is that only 28% are saving at least 10%.  EBRI conducted a study with data through 2014 which estimates the retirement funding shortfall in the US is over $4 trillion dollars.  As pensions continue to be replaced by defined contribution plans, i.e. 401k, 403b, and SIMPLE IRA IRA, the burden is being shifted to each individual.  With only 28% of workers saving at a pace that will give them a solid foundation for retirement, we have a growing problem that will manifest over the coming years.

The other unfortunate statistic from this year’s survey is that only half of the respondents have a plan for saving with defined goals.  Every indicator shows that those with a plan are much more successful.  If you don’t yet have a plan, you should consider beginning the process to create one.





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Jeffrey MillerMoney – Can it make you happier…apparently in retirement it can

401k – Old vs. New – Where Should I Move It?

on May 23, 2016 Comments Off on 401k – Old vs. New – Where Should I Move It?

401k – Old vs. New – Where Should I Move It?

         “Should I stay or should I go?”  As a fiduciary, it’s important for our clients to be well-informed on their 401k options and understand the pros and cons of staying with or rolling over your retirement plan.  Today, a vital fiduciary question we ask is: is it in the best interests of the client to do a 401k rollover when they leave a company?  With the fiduciary standard it is important for investors to be educated to equip them in making the best decision.  

In this blog we’ll cover 2 of the 4 options for investors and consider the consequences of those options.  You want to make sure you understand all the penalties and benefits when making the decision.  So, what do you do if you’re leaving your employer for whatever reason it may be?


Per the Financial Industry Regulatory Authority  guidelines (FINRA) there are four options:   1) Keep your former employer’s 401k, 2) Liquidate your 401k and take the cash value of your account,  3) Rollover your old 401k to your new employer, if accepted, 4) Rollover your 401k to an individual retirement account (IRA).   For the sake of keeping today’s article brief we’ll discuss options 1 and 3.


Keeping Your Former Employer’s 401k

There are pros and cons to keeping your former employer’s 401k.   You may already be comfortable and familiar with your overall portfolio allocation and the fund manager’s strategy.  If there’s a diverse and healthy fund selection to choose from and the investment platform is updated and reviewed for due diligence, that means the fiduciary is reviewing investments for the company well.  You may have a healthy relationship with the advisers of the 401k, so an established relationship is a strength if they’re giving you prudent advice. There may be some negatives though to consider.  In some cases, employers may charge higher fees if you’re not an active employee so check with your HR director on the rules keeping it there.  If your investments stay with your former plan, you’ll have less organization in not having a fuller picture of your investment if your accounts and investments are spread out.


A Word on 401k Loans

Though we’d highly discourage taking loans from your 401k in general, you might not be able to have loan flexibility from the old 401k if it was a last resort.  Looking at your plan summary document will help serve as a guide on this issue.  Most 401ks rule that if you take a loan from your retirement account, you will not be able to move it until full loan repayment.  If employment is terminated, you will need to repay the loan based on the time specified in the plan, usually 90 days or less.  However, this loan will be seen as a taxable distribution if not repaid, so be prudent about your job security with your current employer.  For the plans that are accessible, taxation and penalties on a temporary basis don’t apply as you are borrowing and not distributing.

Holding Former Company Stock

For those holding company stock, you will need to think about the long-term viability in that company.  Questions to consider that aren’t necessarily negatives may be:  what if your former employer merges with someone else, changes 401k platforms, or has the possibility of bankruptcy?  Leaving behind a 401k account out of negligence or procrastination can be costly.  So you have to weigh risk at every level and how much exposure you have to the company and the investments in it.

Internal Fees and Minimum Balances

We believe getting full transparency on cost is tantamount prior to moving it anywhere.  Though there is a cost to everything make sure its financially worth it and wise in paying for what you get.   The internal fees of the plan might be lower than the industry average, especially if it’s a reputable company like Vanguard, Fidelity, or Charles Schwab who are known for keeping cost low.  Insurance companies have higher costs due to their insurance nature, yet many participants aren’t aware of this because fee disclosures are often overlooked.  This can cost your portfolio’s ability to compound over the years eroding your growth potential.  If you leave a company, they may require you to have a minimum balance or either take a lump sum rollover.  Some don’t let you move it in one lump sum.  In my personal experience as a participant in a 403b plan (401k like plan), the Principal Group plan didn’t allow lump sum distributions.  Instead, a slow rollover of retirement assets over a few years had to be moved to another retirement vehicle.  After figuring out the plan summary,  you will know if you can or cannot move those tax-deferred assets to the new plan.   This leads us to the discussion of option 3.


Rollover Your 401k to Your New Employer, If Accepted

There are some pros to rolling over the old 401k to the new.  Portability to move all or some assets from your previous employer to your new 401k gives you the ability to track assets at one place instead of two or three.  The new plan may have more investment options and flexibility, but it’s not guaranteed.  That wild card with rolling over also depends on your new employer and the selection of investment choices they provide.  As an example, the federal government  Thrift Savings Plan (TSP) will give you a smaller list of index funds to choose from.  Other companies and institutions may give you a few dozen funds as well as glide path or life cycle allocated funds.  Another hurdle with the new employer might be ineligibility before one year.  Meaning, they cannot accept the rollover yet.  Other companies let you become eligible and rollover immediately into the plan.   It’s important to note that you if you have a liking for a particular investment at your former employer, you will not have the ability to rollover that mutual fund or funds or annuities as a “distribution in kind” into the new retirement plan.  You may want to consider keeping it at your former employer in that scenario if it’s possible.  

In summary, there are many paths, positives, and pitfalls to consider having your retirement assets at either employer.   No matter if they’re the new or old retirement plan sponsor.  Make sure you are thorough in researching your 401k, and consider the scenarios and consequences that you may run into in the future.   Our next blog on this topic will continue the train of thought on options 2 and 4:  Fully liquidating or rolling over your retirement plan to an IRA.   Continue to follow us on the www. wealthworthitblog.com, and feel free to comment or ask us questions here or at www.couragemiller.com.  We hope this blog was well worth your time!  



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Jeffrey Miller401k – Old vs. New – Where Should I Move It?