Asset Protection??

Normally, retirement plans are generally considered safe from creditors. A recent ruling by the Bankruptcy Panel for the 8^th U.S. Circuit Court of Appeals has called that safety into question. An individual was awarded ½ of his ex-wife’s 401(k) plan and her entire individual retirement account in their divorce settlement. He later filed for Chapter 7 bankruptcy and claimed those assets were exempt from creditors because they were in retirement plans. The Bankruptcy Panel disagreed on the basis that the retirement plans were not originally his; thus, they were subject to creditor claims.

Defined contribution 401(k) plans are sheltered from creditors in bankruptcy filings for individuals who own the plan. IRAs are also usually exempt from bankruptcy as well (subject to a cap under federal law that is approximately $1.2 million). However, once the assets are separated from the original owner, you should expect that the asset protection will go away. In the Supreme Court ruling of Clark v. Rameker, the Court held that inherited IRAs are not considered retirement funds for bankruptcy protection.

Although the 8^th Circuit ruling applies only in that district, other courts may follow suit. For protection, IRA assets received in a divorce settlement should not be intermingled with the individual’s own IRA. Co-mingling funds could possibly jeopardize the creditor protection of the entire IRA.

Please note that this discussion does not constitute legal or tax advice; it is informational only. Your individual circumstances should be discussed with your legal and/or tax counsel.  Paragon Financial Advisors is a fee only registered investment advisory company located in College Station, TX.  We offer financial planning and investment management services to our clients.

Alternative Investments

It has been a good run. Ten years after the 2008 “meltdown,” the bull market in securities is beginning to show its age. And, after a very placid 2017, volatility in the market is showing it’s alive and well. That volatility has been driven by interest rate expectations, trade/tariff discussions, and the mid-term elections. The elections are (mostly) behind us, but volatility may still be around for a while. Investors have made some money with this long bull market; now the goal is to protect those gains.

 Alternative investments can play a major role in hedging risk in the stock market; however, there are many different hedging strategies available. Many investors are not familiar with these strategies or how to access them. In general, there are two broad categories of alternatives: 1) those investments offering diversification from the stock market, and 2) those investments that reduce risk of loss of portfolio value while still maintaining some return potential.

Access to hedging strategies used to be a major problem; lack of liquidity (the ability to easily buy and sell) being a prime example. Many of these strategies are now available in a mutual fund format. Shares can be purchased or sold daily with valuations set at the end of the day. Some strategies are available as exchange traded funds (ETFs) which provide intra-day liquidity.

Correlation

Correlation is an analysis of the relationship of two data variables, or how the variables move in relation to each other. Normally this relationship is combined into a single number—the correlation coefficient. A correlation coefficient can have a value of +1 to -1. A value of 0 indicates that the variables have no relationship, i.e. they are independent. Positive values (>0) imply that when one variable goes up, the other variable goes up also. Negative values (<0) imply that wen one variable goes up, the other variable goes down. The magnitude of the number (the closer the coefficient is to a value of +/- 1) explains the degree to which moves in one variable are like moves in the other variable.

Diversification Alternatives

Since most investment portfolios contain stocks, alternative strategies which have a lower correlation to them can provide diversification benefits. Listed below are three strategies which have lower correlations to the S&P 500 over the last 10 years.

• Managed Futures- A fund manager utilizing this strategy usually invests in different asset classes (both long and short positions) depending on the manager’s analysis of which asset classes are going to increase or decrease. Successful ability to capture both rising and falling markets have a substantially different return profile from the stock market—a correlation coefficient of about -0.10.
• Market Neutral- A market neutral manager usually has a portfolio long (owned) on stocks the manager expects to rise and short (sold) on stocks the manager expects to under-perform the market. When the portfolio has similar long and short holdings, the return of the portfolio has returns less related to the stock market- a correlation coefficient of about +0.34
• Multi-currency- A multi-currency manager usually invests in different currencies depending on the manager’s perceived relative strength. Since returns are usually different between stocks and fixed income investments, this strategy has had a correlation coefficient of +0.48.

Risk Reduction Alternatives

Ideally, investors would like a diversification strategy that doesn’t significantly sacrifice returns. Such strategies would not only have less losses in down equity markets, but would also have more positive returns in up equity markets. Over longer time periods, these alternatives would outperform those alternatives that provide only downside risk mitigation. Examples include the following:

• Long/Short Equity- A long/short manager usually has a long (owns) position in stocks in which the manager expects to outperform the market and short (sells) stocks which are expected to under-perform the market. The manager may use the sale proceeds from the short positions to increase his/her holdings in the long positions.
• Non-traditional Bonds-Such a manager usually has the ability to invest in bonds of varying maturities, differing credit quality, differing economic sectors, or varying geographic areas as the manager perceives have value. A successful manager has the ability to move according to interest rate changes and other variables affecting the returns markets.

The Bottom Line

Make no mistake—investing involves risk! So does putting money under the mattress in times of inflation. However, if one can mitigate risk (even in a minor way), it surely is worth the effort. Please contact us at Paragon Financial Advisors to see if such alternative investments might benefit your investment portfolio.  Paragon Financial Advisors is a fee only registered investment advisory company located in College Station, TX.  We offer financial planning and investment management services to our clients.

Old Age and Retirement

The World Economic Forum produced a white paper entitled “We’ll Live to 100-How Can We Afford It?” (Lead Author, Rachel Wheeler, Project Lead, May 2017) The basic premise of this white paper was the status of world-wide retirement plans and potential problems and reforms necessary to address those problems. The disclaimer in the white paper is that “…views in this White Paper … do not necessarily represent the views of the World Economic Forum or its Members…” In addition, these papers “… describe research in progress by the author(s) and are published to elicit comments and further debate.” The report is “… part of the Forum’s Retirement Investment Systems Reform project that has brought together pension experts to assess opportunities for reforms that can be adopted to improve the likelihood of our retirement systems adequately and sustainably supporting future generations.” The paper, in its entirety, can be accessed at  http://www3.weforum.org/docs/WEF_White_Paper_We_Will_Live_to_100.pdf  Our discussion in this posting is done without comment or endorsement of the contents of the white paper. However, in light of the positions taken by some candidates in the 2016 US Presidential election, it behooves us to look at some propositions being espoused in the academic community and conditions that exist in the international community.

Old Age

Life expectancy is increasing. For individuals born in 1947, the median life expectancy is 85 years; for those born in 2007, it is age 103. The increased life expectancy leads to a longer working career. If retirement age remains unchanged and current birth rates continue, the global dependency ratio (the ratio of the workforce to retirees) will decrease from 8:1 today to 4:1 by 2050. The position taken in the Forum’s white paper “…focuses on the sustainability and affordability of our current retirement systems.” Retirement “…system needs to be affordable for today’s workers and sustainable for future generations…"

Challenges to Retirement Systems

 

The primary causes of retirement systems problems, according to white paper authors, are increasing life expectancy and a declining birth rate. The authors identify five additional factors affecting global retirement systems:

1. Lack of access to pensions- Many workers (especially the self-employed) don’t have access to pension plans or savings products. Over 50% of global workers work in the informal or unorganized sectors of the economy. Forty-eight percent (48%) of retirement age people don’t receive a pension.
2. Low investment returns- Long term investment returns over the last 10 years have been significantly lower than historical averages. Equities have returned 3-5% below averages; bonds, 1-3% below. These lower returns have exacerbated pension plan shortfalls and reduced individual retirement savings balances.
3. Personal responsibility for pension plan management- Defined benefit plans have been decreasing in number while the number of defined contribution plans has been increasing. Defined contribution plans now account for over 50% of global retirement assets. The investment risk has thus been shifted from the employer to the employee.
4. Low levels of financial literacy- While investment risk has been shifted to the individual, the ability of those individuals to make sound investment decisions appears to be lacking. Most people are not able to correctly answer questions on basic financial concepts.
5. Inadequate savings- Individual savings in all countries are well below the 10-15% level necessary to fund a reasonable retirement income.

The Retirement Savings Gap

 

Historically, retirement income has come from three sources: 1) governmental sources (Social Security, etc.), 2) employer pension plans, and 3) individual savings. According to the authors of the white paper, the world-wide retirement savings gap in 2015 is estimated to be approximately $70 trillion with the largest shortfall being in the US. Of that gap, 75% is in the government and public pension obligation, 1% in unfunded corporate pension plans, and 24% in lack of personal savings. This gap is predicated on a 70% income replacement in retirement.

 

The Findings

 

The authors of the white paper espoused three key areas to address overall financial security:

• Provide a “safety net” pension for all persons
• Improve access to effective, efficient retirement plans
• Increase personal savings initiatives

The authors of the paper state:

 

“Poverty protection for the elderly should be the minimum requirement for any government pension system. It should be the responsibility of the government to provide a pension income for all citizens that acts at a “safety net” and prevents those who miss out on other forms of pension provision from dropping below the poverty line.”

 

“In countries where there are challenges to establish employer-based or individual pension schemes, introducing universal pension benefits may be the only way to significantly reduce poverty among the elderly.”

 

“Technology can make saving automatic by deducting contributions directly from employees’ pay before it reaches their personal accounts.” “Governments can make it compulsory for all employers to automatically enroll new employees into a retirement savings account and to contribute on their behalf.” (italics added)

 

Principles for Change

 

Authors of the white paper identified four principles that they felt should be addressed in retirement plan provisions.

 

Principle 1: The work force is changing. Occupations that are most sought after today didn’t exist 10 years ago. In addition, about 65% of today’s primary school children will work in jobs that don’t yet exist. The number of workers over age 65 is increasing; it has more than doubled since 1995. The number of employers for whom a person works over his/her career is increasing. That requires “re-tooling” work skills and portability of job benefits.

 

Principle 2: There is a gender imbalance. Retirement balances for women are 30-40% below those for men. Longer periods out of the workforce and lower salaries in general contribute to the lower retirement account balances. In addition, the longer life expectancy of women means those reduced assets need to cover a longer period of time. Unisex life expectancy tables and valuing work performed outside the workplace for retirement benefits could help alleviate this disparity.

 

Principle 3: Shared risks could reduce individual burdens. Collective defined contribution systems (as employed in some countries, such as Canada) could help with the burden on individuals for their retirement savings, account management, life expectancy, etc. Pooled money and risks could be based on “target” benefits. An example of such a plan, as presented by the authors, is shown below.

Defined Benefit Plan	Collective Defined Contribution Plan	Defined Contribution Plan
Pooled assets across all accounts	Pooled assets or notional accounts	Individual accounts
Predominantly employer contributions	Combination employer and individual contributions	Combination employer and individual contributions
Trustees determine investment policy and investments	Trustees determine investment policy and investments	Individual makes investment decisions
Trustees takes investment risk	Investment risk pooled	Individual takes investment risk
Trustees takes longevity risk	Longevity risk pooled	No longevity protection
Guaranteed pension	Target pension, not guaranteed	No target or guaranteed pension

Principle 4: All financial needs should be considered. People who save early for retirement will have much larger retirement savings than those who start later. However, retirement savings may not be a priority for younger employees. Therefore, the authors contend, the full financial picture (assets and debts) should be considered for financial need.

The Bottom Line

When one reads the World Economic Forum white paper and analyzes its recommendations, it is obvious that items presented are significantly different than what we have in the US today. However, as we examine our current public benefit systems (Social Security), it is also obvious that some changes must be made. Prudent financial planning means looking at alternatives and trying to plan for what “might happen.” Visit us at Paragon Financial Advisors to review your individual circumstances. Paragon Financial Advisors is a fee only registered investment advisory company located in College Station, TX.  We offer financial planning and investment management services to our clients.

 

           

Living on the Financial Edge

 Living on the Financial Edge

At Paragon Financial Advisors, we recommend our clients have a 3-6 month cash “ready reserve” to meet unexpected expenditures. For most Americans, accumulating that amount appears to be much easier said than done. In the May, 2016 The Atlantic magazine, Neal Gabler wrote an article entitled “The Secret Shame of Middle Class Americans.” Some of the items he mentioned (and the sources he quoted) are shown below.

Unexpected Expenses

A Federal Reserve Board survey designed “to monitor the financial and economic status of American consumers” found that 47% would not be able to cover a $400 unexpected expense unless they borrowed, sold something, or could not cover it at all. David Johnson (University of Michigan) surmised that Americans usually smooth consumption over their lifetime: borrowing in bad years and saving in good years. People are now spending any unexpected income (bonuses, tax refunds, etc.) instead of saving it.

A 2014 Bankrate survey found that only 38% of Americans had enough in savings to cover a $1000 emergency room visit or a $500 car repair. Nearly one-half of college graduates could not cover the expense through savings. In 2015, A Pew Charitable Trust study found that 55% of households didn’t have enough liquid savings to cover one month’s living expenses.

Another study by Annamaria Lusardi, Peter Tufano, and Daniel Schneider asked whether a household could raise $2000 within 30 days for an unexpected event. More than 25% could not; another 19% would have to pawn something or use a payday loan to raise the money. Nearly a quarter of households with an income of $100-$150,000 per year could not raise the $2000 in one month.

Liquidity or Net Worth

Is this situation only a liquidity problem or is net worth (the net sum of all assets including retirement accounts and home equity) also at risk? Edward Wolff, an economist at New York University, reported that net worth has declined significantly in the last generation. Net worth declined 85.3% from 1983 to 2013 for the bottom income quintile, decreased 63.5% for the second lowest quintile, and decreased 25.8% for the middle quintile. He looked at the number of months a household could fund its current consumption by liquidating assets if the household lost all current income. In 2013, the bottom two quintiles had no net worth; hence, they couldn’t spend anything. The middle quintile (with an average income of approximately $50,000 per year) could continue spending for 6 days. A family in the second highest quintile could maintain current spending for a little over 5 months.

Research funded by the Russell Sage Foundation found that the inflation adjusted net worth of the median point of the wealth distribution was $87,992 in 2003. In 2013, it had declined to $54,500—a decline of 38%.

Debt

Value Penguin did an analysis of Federal Reserve and Transmission data pertaining to credit card debt. In 2015, credit card debt per household was $5700. Thirty eight percent of households carried some debt; the average debt of those households was greater than $15,000. Apparently the rise of easy credit availability has supplanted the need for personal savings. The personal savings rate peaked around 13% in 1971, fell to 2.6% in 2005, and has risen only to 5.1% now. These debt levels reflect only personal debt; no serious attention is being paid to our $19 trillion government debt.

What’s Going On?

Financial products are becoming more sophisticated, both in quantity and complexity. Such additional products should provide a better way to manage personal financial “hiccups.” Lusardi and her associates (in a 2011 study) found that the more complex a country’s financial and credit market became, the worse the problem of financial insecurity becomes for its citizens. That study measured the knowledge of basic financial principles (compound interest, risk diversification, the effects of inflation, etc.) among Americans ages 25 to 65. Sixty five percent were basically financially illiterate.

Why are we at a financial advisory firm writing about this situation? The United States finds itself in the midst of a most unusual political situation. Some candidates for President of the United States are espousing theories or programs outside the normal capitalistic structure. Are conditions such as the ones described above partially to blame?

A crucial part of managing investment portfolios is attempting to monitor the economic, political, and social conditions that might affect the investing environment in the future. What will that environment look like and how will it affect the selection of assets going forward? We at Paragon Financial Advisors don’t have a crystal ball for the future, but we do try to help our clients invest for the long term. Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas.  We offer financial planning and investment management services to our clients. 

The Retirement Plan-Success of Failure

When one reads about retirement planning, the writer usually focuses on planning for retirement. An equally important part of that plan needs to focus on what to do after retirement. A spending plan normally covers the adequacy of income over expenses during retirement and whether or not that income is sufficient over a long period of time. A well-developed spending plan is much more than that. Increasing life spans (and the corresponding lengthening of retirement years) has some interesting consequences.

A symposium at the recent Financial Advisors “Inside Retirement” conference (May 5-6, 2016 in Dallas, Texas) included a discussion on why people “fail” at retirement. Failure is not defined as “bankruptcy,” or inability to retire; , only a failure to live retirement as originally planned. Some of the items discussed for such failure include the following:

1. Health Care—Health care costs are increasing, even if one has health insurance. A retired couple could easily face medical costs in the hundreds of thousands of dollars over their life spans. A USA Today article (March 14, 2015, “How much will health care cost in retirement?”) quoted a study indicating that a man will spend $116,000 on health care in retirement; a woman will spend $131,000. Fidelity Investments has projected that a 65 year old couple retiring in 2015 will spend $245,000 on health care during their retirement.
2. Divorce—Surprisingly, an increase in divorces in the 50 plus age group has appeared. The reduction in assets from such a separation means a potentially lower standard of living for both parties. Multiple marriages (through divorce or death) may also bring the necessity of planning for a subsequent re-marriage. Pre-nuptial agreements, especially where a disparity of assets exists between the couple, can prevent many future problems and are a definite item to consider.
3. Overspending—Prior to retirement, a couple may spend more (especially on week-ends when they are not working) than they do in the normal course of living with a five day a week job. At retirement, every day is Saturday! Spending patterns may need to be adjusted significantly (i.e. reduced).
4. Children-Parenting never stops. Many children return home after college to save money until they “get established.” Helping a child with bills, a substance abuse problem, or even a special needs child can add significantly to retirement outflows.
5. Second Home-A second home purchased prior to retirement might be easily maintained financially while working. In retirement, property maintenance, insurance, property taxes, etc. may become more of a financial burden.
6. Business-Starting a business in retirement may sound appealing, especially if another family member (see “Children” above) is involved. Some basic rules apply: a) It will cost more than you think, and b) revenues will come in more slowly than you plan. Always have a good business plan and, if other parties are involved, have a written agreement spelling out what is to be done. Allocate a set dollar amount (the maximum which you can afford to lose in entirety) to prevent “throwing good money after bad.”
7. Identity-Many individual’s identity and self-worth are associated with their professional, work life. Retirement can change that significantly. Prepare for that transition. Retire to something, not from something.

Most individuals work long and hard during their active career; they look forward to a retirement period that matches their expectations. We at Paragon Financial Advisors assist our clients in developing plans for and during retirement. Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas.  We offer financial planning and investment management services to our clients.

“It’s the Life Insurance Guy Again”

How much should I own?

How do I know how much death benefit is appropriate for my family? This is where working with a Financial Planner can help you accurately assess how much exactly your family would need today if you were to pass. How much of your current debts, future college costs and retirement would you like covered if your family were to have to cover these costs without your income? Many times life insurance agents will try to sell more insurance coverage than is needed to earn more commission on a higher annual premium. We always recommend consulting with Paragon Financial Advisors before buying a policy.

What type of life insurance should I own?

Term Insurance- this is the most affordable way to purchase a death benefit; you can lock in your premium for a set amount of years or “Term”. Many term policies allow you to convert the policy from term or temporary coverage to a permanent policy at the same risk class you were approved on for your term policy years prior. But why would you want to do that? Let’s say that Bob was approved at Select Preferred for a 20 year term policy and a $500,000 death benefit. At year 10 of the policy being in effect, Bob gets a rare disease that could potentially cause him to die prematurely in the next 10-20 years. With the conversion option, Bob has the ability within the life of the 20 year term policy to convert it to a permanent life policy at his select preferred rating without going through medical underwriting again. Otherwise, it’s very likely he would be uninsurable and denied life insurance coverage.

Universal Life Insurance- this is a form of permanent life insurance that allows for flexibility on the premium payment each year. Universal life is generally a less expensive means to a permanent life insurance policy offering the same death benefit compared to other forms of permanent insurance. Additionally, VUL (Variable Universal Life) or IUL (Indexed Universal Life) contracts offer higher potential returns than some other fixed insurance contracts. With a VUL or IUL contract the insurance and administrative expenses are not fixed and could increase as the insured nears mortality age. As interest rates continue to fall since 2008, many Universal Life policy holders from pre 2008 have received notice that their premiums are going up. The flexibility that these life insurance companies offer comes with flexibility on their end as well. Another disadvantage to Universal Life policies are surrender charges to cash values, which can vary from company to company, but many times are 10 years or more. This limits your ability to access the full portion of the cash values until the surrender schedule has been met. Let’s quickly explain some of the different types of Universal Life contracts.

• Guaranteed Universal Life: a “GUL” contract accrues little cash value, maintains a level death benefit and a level premium guaranteed to a certain age (Most are to age 100 or for life). This looks and acts very similar to term insurance, except it is for the insured’s lifetime.
• Variable Universal Life: a “VUL” contract does accrue cash values and has a potentially increasing death benefit with a minimum guaranteed face value that stays in force as long as the premiums are paid. The accrual of cash values and the death benefit is tied to the performance of “separate accounts” which for all intents and purposes are mutual funds. These contracts offer the policy owner market participation via these separate accounts. If the policy underperforms than it could require the policy owner to dump more money into the contract to keep it in force.
• Indexed Universal Life: “IUL” contracts are the most popular universal life policies currently sold. Unlike a VUL contract, they are actually a fixed interest rate product that offers a crediting rate tied to an index, mostly the S&P 500. Insurance companies generally offer several crediting methods: monthly sum, monthly average, a trigger method, or the most popular point to point. These policies many times offer a “floor” or minimum crediting rate to the policy of say +.5% even though the S&P 500 Index return for the year was negative. However, they also “cap” the upside potential of the return of the index and it’s important to note that the insurance companies do have the ability to lower the cap rate and the participation rate on inforce policies. Many IUL policies offer 100% participation up to 12.5%. One final note, the crediting rate applied based on the return of the S&P 500 does not include dividends, a sizeable portion of the total return over 10, 20 and 30 year time periods.

Whole Life Insurance- this is a permanent form of life insurance that accrues cash value and has a guaranteed “face” value or death benefit. Most whole life policies have a contractual guarantee on the return of cash values, many of the large mutual insurers offer 4% currently. It is important to note that this is not a 4% return on your total premium paid but a guarantee return on the net amount applied to cash value after all expenses have been taken out of your premium for the cost of insurance and operational expense. In addition, whole life policies may pay “dividends” into the policy, though these are not guaranteed. This term is not to be confused with the dividend that you receive from some of your stocks in your investment portfolio. Dividends from a mutual company are a return of surplus profits from their investment earnings, mortality experience (death benefits paid) and expenses over that time period and returned to their policy holders, hence the name participating life insurance. When contemplating a whole life policy, generally a well-designed one should reveal positive net cash values at the end of year 5 or 6 under the Current Assumptions Illustration.

What is the purpose of life insurance?

Risk Management: depending on how long your debts and future expenses extend, will help you determine the appropriate length of time you need coverage and what amount of coverage is needed. Many times term insurance will suffice for this need.

Estate Tax: the goal of this policy is to get the highest return of your premium on the death benefit. Many times a husband and wife will get a joint, last survivor policy that pays on the death of the second insured’s passing. This usually allows the insureds to get more death benefit for the same amount of premium. Also, when dealing with estate tax issues, it’s important to note that life insurance does offer an income tax free death benefit, but this amount is included in the value of the estate. In order to exclude the death benefit from the inclusion into the estate value for estate tax purposes, an Irrevocable Life Insurance Trust or “ILIT” is often used.

Creditor Protection & Cash Accumulation: life insurance is a creditor protected asset in the state of Texas and allows the policy holder to enjoy creditor protection on their life insurance values. Once you have maximized your retirement vehicles, life insurance if designed appropriately, may be a good place to put some excess cash.

Tax deferral & Tax Free Distributions: life insurance cash values do enjoy tax deferred growth as the policy values accumulate. In addition, after all premiums have been withdrawn, policy holders can take out cash via loans as a tax free distribution assuming the policy is not a Modified Endowment Contract

What is a Modified Endowment Contract?

A ‘MEC’ is essentially a policy that’s cash value has been “overfunded” based on the limits under the Internal Revenue Code. When a policy is classified as a MEC, any distributions from cash values of the policy are received on a taxable basis first or Last In First Out “LIFO” accounting method. The interest received on premiums is taxed at ordinary income rates and then the premium portion is returned tax free. A ‘MEC’ still benefits from a tax free death benefit, tax deferred growth and creditor protection. To determine if a contract is a MEC, a premium limit is set. This limit (referred to as a seven-pay limit or MEC limit) is based on the annual premium that would pay up the policy after the payment of seven level annual premiums. This limit is based upon rules established by the Internal Revenue Code, and it sets the maximum amount of premium that can be paid into the contract during the first seven years from the date of issue in order to avoid MEC status. Under what is known as the MEC test, the cumulative amount paid at any time in the first seven years cannot exceed the cumulative MEC limit applicable in that policy year.

What company should I use?

First, it’s important to make sure the life insurance company you’re considering is a stable and functioning company able to pay claims to its policy holders with enough reserves set aside to meet these obligations. You never want to purchase a policy from a company that is more sick than you are when you need them! Finding one with a Comdex score above 90 or a minimum Moody’s Investors Service rating of AA or higher is strongly recommended.

Secondly, we recommend using a broker to shop your life insurance need out to many different carriers. Career Agents or those working for a specific life insurance company, have strong incentives tied to their personal benefits to sell their company’s policies even though it may not be the very best one for your situation.

Please contact the Paragon Financial Advisors to review your life insurance policy(s) or help you review the available options to meet your life insurance needs. Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas.  We offer financial planning and investment management services to our clients.

 

 

Retirement-The Big Picture

In early May, we attended an “Inside Retirement” conference sponsored by Financial Advisors magazine; the topics were centered on “income and longevity.” Various nationally known speakers discussed pertinent items related to those themes. We found some of the presentations worthy of discussing here.

 Alicia H Munnell (Peter F. Drucker Professor of Management Sciences at Boston College, and director of the Center for Retirement Research at Boston College) gave a presentation with the title of this blog: The Big Picture. She has written extensively on income in retirement. Some of her major points include the following:

• More than one-half of today’s workers will not be able to maintain their current lifestyle in retirement. Why not?
• People will live longer.
• In spite of this increasing life span, people will work only a “little” longer before retiring—thus increasing their retirement life span.
• Health care costs are increasing. The increasing cost of care will be coupled with increased cost of health insurance—both private insurance through the Affordable Health Care Act and through Medicare Part B increases. In 1980, Part B Medicare premium was 6.8% of the Social Security benefit; in 2030 it is estimated to be 19.4%.
• Interest rates are at historic lows; lower rates reduce the amount of income generated from personal savings.\
• Retirement income has historically come from a combination of a) Social Security benefits, b) pension plans (either defined benefit or defined contribution), and c) individual savings. Let’s examine each separately.
• In 1985, Social Security benefits represented 42% of pre-retirement earnings. After Part B Medicare costs, the proportion decreased to 40%. Benefits were not taxable at that time so there was no further erosion due to income taxes. By 2030, those proportions are estimated to be 36% replacement before Medicare and income taxes; 32% after Part B Medicare expense, and 30% after Medicare and income taxes. Note that these percentages represent current replacement rates and do not include any potential changes to remedy the Medicare shortages currently under discussion.
• We live in a DC (defined contribution) or 401(k) world. The older DB (defined benefit) or pension plan is fast disappearing.  401(k)s limit the employer obligation only to offer contribution of funds to a retirement plan. The acceptance—and performance—of the plan is shifted to the employee from the employer. Here’s where we stand:
• Employees who don’t join the plan—21%
• Employees who contribute less than 6% of their pay—53%
• Plans with high asset fees—54%
• Plans losing assets through “leakage” (i.e. cash outs, hardship withdrawals, post 59 ½ penalty free withdrawals, loans, etc.)—25%Note: This leakage impact over the life of the plan can reduce the ending amount at retirement by as much as 25%.
• Retirees who don’t have a systematic plan for withdrawing assets in retirement—99%  How much (and when) should withdrawals be made from a retirement plan? Too much too soon and the retiree can run out of money; too little too late and IRS required minimum distributions can have significant income tax and Medicare Part B premium impact.
• Individual savings (or the lack thereof) are a topic for a separate writing; they warrant a much greater discussion which we will examine later.
• So what should a pre-retiree do?
• Work longer. A longer working career has the dual advantage of allowing retirement savings to grow and reducing the time during which retirement assets are needed.
• Save more. Savings should be increased preferably through a systematic plan (such as a 401(k)) or a periodic contribution to a savings account.
• Consider non-traditional sources of retirement income. There are two primary assets for most employees today: their 401(k), and their home. Tapping the home asset is a complex topic—another one that will be addressed in a separate writing. Home assets should be used only after careful analysis and with a full understanding of all their ramifications.

We at Paragon Financial Advisors strive to assist our clients in formulating a “big picture” for retirement. Please call us and we can discuss your individual circumstances.   Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas. We offer financial planning and investment management.

"Robo" Retirement??

There is much discussion today about “robo” or “robot” advisors (i.e. advice given by computer based on your input). Just answer a few questions, press a button, and you have the asset allocation you need for investments or you will know if you can retire.  The Saturday/Sunday February 20-21, 2016, Wall Street Journal (p. B11) also published online HERE reported an academic study of retirement calculators that warrant consideration.


Researchers at Texas Tech University and Utah Valley University evaluated 36 of the most prominent retirement planning calculators (both free and low cost). A hypothetical couple earning $50,000 each and in their early to mid-60s were used and their retirement was planned using the calculators. More than two thirds of the retirement calculators said the couple could retire with a significant degree of confidence. That significant degree of confidence was 70% or greater probability that the couple had enough money for retirement. Eleven of the 36 calculators correctly identified that the couple was in a precarious retirement position—those 11 calculators were not specifically identified. The calculators used did include ones from companies such as Fidelity Investments, Vanguard, T. Rowe Price, AARP, the Financial Industry Regulatory Authority (FINRA), and MarketWatch. MoneyGuidePro software was used by the researchers to make their own analysis.


A tradeoff exists between simplicity of input and quality of output. The more questions asked in the input phase (and the quality of those questions), the more rigorous the retirement plan output. For example, what is a reasonable life expectancy for the individual given family history? Will there be any inheritances from parents/relatives? Are there expected Social Security benefits? Will the individual have pension plan income; if so, is there a survivor benefit? A question frequently omitted is the smoking background of the individual (a factor that has significant impact on life expectancy).


In addition, there are numerous assumptions underlying each planning model. Does the model consider inflation? What rate of return is assumed on investment assets? How are those returns predicted (every year on average or by some other methodology)? These are only a few of the many planning assumptions in most retirement models.


Anyone using such a retirement calculator should look for a model that asks pertinent questions for input. Also, the model assumptions should be available for validation. Ideally, multiple calculators should be compared. Retirement is generally not difficult in the first few years; but those later years, when an individual is no longer able to work, can cause the problem.


We, at Paragon Financial Advisors, assist our clients in their retirement planning. That planning should be done well in advance and, as a process, should not be taken lightly. (By the way, we use MoneyGuidePro to assist in our retirement planning.)  Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas. We offer financial planning and investment management.

Medicare in 2016

All Social Security recipients are aware there was no cost of living increase in Social Security benefits for 2016. However, some recipients are facing a reduction in their Social Security check. The reason: the Medicare Income Related Monthly Adjustment Amount (IRMAA). The amount individuals pay for their Medicare coverage is a function of their modified adjusted gross income (MAGI) as reported on their tax return to the IRS. Higher income levels mean increased cost for Medicare for the same level of Medicare benefit. If the MAGI plus any tax exempt interest income exceeds $85,000 for an individual or $170,000 for a couple, the cost of Medicare Parts B and D increase. There is an increasing increment paid based on 5 levels of income.

Parts B (Doctors) and D (Drug)

For example, at the highest level, an individual making more than $214,000 ($428,000 for a couple) will pay $389.80 per month instead of the standard $121.80 for Part B benefits. That additional amount is paid by both spouses in the case of a couple receiving Social Security benefits. Those individuals in the highest income bracket would pay an additional $72.90 for their Part D drug benefits. The bottom line: each spouse in a couple receiving Social Security benefits (who are in the maximum tax bracket) will pay an additional $340.90 per month with no increase in benefit.

What to Do?

We will not get into the debate of higher income individuals should have to pay more, even though they have been taxed once on wages subject to the Social Security tax. Our point is that prudent financial management dictates managing one’s affairs to minimize tax payments. To that end, there are some basic things that could be done. By managing MAGI, one can possibly eliminate stepping into a higher Medicare bracket. Type of account (taxable or tax qualified) holding various investments, tax loss harvesting on securities held, and required minimum distributions made directly to a church/qualifying charity from an IRA are some examples of actions available.

We at Paragon Financial Advisors will help our clients evaluate possible courses of action the help reduce Medicare (as well as other tax) costs; however, these actions should be verified with your personal tax preparer or CPA to ensure they are appropriate for your circumstances. Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas. We offer financial planning and investment management.