Elderly parents and their finances: Having the transition conversation

Parents don’t always share information about their finances with their children, even when those children are adults. But it’s important for aging parents to talk with their sons and daughters about their assets so that when the time comes for the children to take over their parents’ finances it’s an easy transition.

“It’s often the case that sons and daughters don’t have the complete picture of their parents’ finances,” says Andrea N. Ellis, CFP®, a senior wealth manager at Budros, Ruhlin & Roe, Inc. “That means adult children don’t know anything, or very little, about their parents’ estate and that can cause problems if the parents become incompetent or die unexpectedly.”

Smart Business spoke with Ellis about the questions that children should ask their elderly parents to make the transition of assets seamless.

What problems might arise if children have no knowledge of their parents’ finances?

Often sibling rivalries can be exacerbated if no one knows who’s responsible for what. If, for instance, a child is named as a joint owner on an account rather than just having power of attorney, the sibling named on the account inherits all the assets in the account regardless of whether that’s what the parents wanted. That makes it difficult for those assets to be split among the other siblings.

Further, if the parents become incompetent and their children need to manage the estate, it can get challenging without clear roles or the legal designation to do what’s needed. For instance, it’s hard to work with brokerage accounts if you’re not the appointed power of attorney or named trustee. That’s why an estate document is so important. It specifies who can make decisions.

What should children know about their parents’ finances?

Parents should be open with their children about estate documents. Those documents should name an executor in the will, a trustee if there’s a trust, a financial power of attorney and a health care power of attorney.

Parents should specify what accounts they have and where they’re located. They don’t need to reveal the value of each account, just enough details so they can be accessed in the event of a disability or their death.

Here are some questions individuals should ask their elderly parents:

  • Do they have estate documents and where are they kept?
  • Who is named as the executor of their will and trustee of their trusts?
  • Do they have a financial power of attorney document and, if so, who will fill that role?
  • Do they have health care power of attorney and living wills and, if so, who have they named to make health care decisions?
  • What assets do they own and how are the assets titled?
  • Who are their advisers and what is their contact information?

How can parents decide which child to put in which role?

Ideally, the executor of the estate would reside in the same state as the parents. While it’s not legally necessary, it makes it easier to navigate probate court. For the health care power of attorney, it’s even more important to name someone who is close by so they can be present if needed.

The executor or trustee doesn’t need to be one of the children. It could be an outside party such as an attorney or bank. Also, consider naming more than one executor or trustee so if someone steps down, another can step up.

When should the discussion about finances take place?

The conversation should happen when the parents feel the children are mature enough to handle the discussion, typically when the children are independent and taking care of their own finances. Hold a family meeting in the office of a lawyer or financial adviser. These meetings don’t have to be about numbers, just a plan for how things should be handled and who is responsible for what.  A financial adviser or attorney can help facilitate the conversation or explain things in deeper detail. It also allows the children to get to know the parents’ advisers so they feel comfortable working with them.

These decisions must be made. It’s better for the parents to have their say than to leave it to their heirs, or worse the courts, to fight it out.

Insights Wealth Management is brought to you by Budros, Ruhlin & Roe, Inc.

How to create an investment portfolio that aligns with your values

Socially responsible investing is becoming more and more mainstream, although investors aren’t necessarily asking for it by name.

“Fifteen years ago it was rare to express social concerns about investing. At this point, it’s more common for people to bring up specific areas they wish to support, and areas where they don’t wish to invest,” says Gregg Daily, AIF®, manager of institutional investment accounts at Fragasso Financial Advisors. “Even if it’s not declaring ‘I want to be socially responsible in this way,’ people will say, ‘I don’t want to own companies that profit from tobacco.’ Or, ‘I don’t want to own companies that profit from the manufacture of arms and weapons.’”

Smart Business spoke with Daily about incorporating socially responsible investing into your portfolio.

What is socially responsible investing?

It has different meanings for different people. Your areas of support may be based on a combination of concerns for, and a desire to invest in, companies that are good environmental stewards, or whose practices don’t violate religious beliefs, or whose operations aren’t seen as violating human or animal rights. Sometimes those perspectives dovetail, and sometimes they don’t, so a clear understanding of what you mean by responsible investing is a critical first step.

Also, it’s easier to be socially responsible in some investment categories, such as buying stock in large U.S. companies, whose operations tend to be more transparent and easier to track, versus foreign companies or emerging market stocks, which are needed to diversify your portfolio but can be difficult to quantify. You may need to compromise. If you believe you should own international equities or foreign bonds, you probably won’t be socially responsible with everything. If you only want to invest in a socially responsible way, you may have a less diversified portfolio than you should.

How has the market responded?

At the outset, there were limited product choices. Over time a cottage industry of investment opportunities has developed around changing philosophies and social ideals, partly driven by a new generation of socially conscious investors. Again, that’s why a clear definition is important — a variety of choices and fund options cater to a wide variety of social sensitivities.

But this movement isn’t limited to younger investors. Nonprofits are much more concerned with being good capital stewards, and wish to avoid companies or sectors that are contrary to the mission of the organization.

If the point is to make money, does this kind of investing jeopardize that?

Any time you’re investing, whatever your focus, you should have a clear understanding of what or who you’re investing with. You and your adviser need to do your homework. If an organization or fund advertises itself as socially responsible but can’t provide specific definitions of how, or their criteria seems unclear, keep looking.

Then, you can determine whether this policy hampers performance. If a mutual fund buys large cap companies within a well-defined socially responsible framework, how does it do compared to other funds that buy large cap companies with no restrictions? As the movement has grown, the performance gap has narrowed. A lot of that has to do with more companies actively working to fit within this category, due to the changing philosophies and views of some corporate leaders, as well as pressure from actively engaged investors.

You don’t have to blindly assume lesser performance in exchange for being socially responsible. And if you do sacrifice some performance for greater social good, proper analysis allows you to do it from a position of knowledge, understanding all factors.

Can employers implement socially responsible investing in retirement plans?

You can’t choose for your plan participants, but if your workforce believes strongly in certain issues, you can make socially responsible options available. This probably works best for smaller or non-publicly traded companies, but it can be applied in any retirement plan where demand exists.

Leave the selection broad enough that if somebody didn’t want exposure to something that was socially responsible they wouldn’t have to have it, but if an employee did, he or she would have choices available.

Insights Wealth Management is brought to you by Fragasso Financial Advisors

Common investor behavioral biases and how to mitigate them

Investors often incorrectly make judgments based on personal beliefs, past events and preferences. These biases lead them away from rational, long-term thinking while focusing on only one aspect of a complex problem, often to the detriment of their financial success.

“Typical investor behavior is irrational,” says Shawn Ballinger, a wealth manager at Budros, Ruhlin & Roe, Inc. “They’re often chasing performance based on recent investment trends with little thought to due diligence.”

Smart Business spoke with Ballinger about the more common biases and how they hurt an investor’s chances of making financially successful investment decisions.

What are the more common cognitive and emotional biases that lead investors to make investing mistakes?

There are many biases that have been identified in the modern study of behavioral finance. Among them is availability bias, which sees people tend to weight their decisions toward more recent information. This is especially problematic for today’s investors with 24-hour coverage of the global financial markets.

Anchoring and loss aversion biases, which typically coincide with each other, are the tendencies for investors to hold on to losing stocks for too long in an attempt to break even, and sell winning stocks too soon. These investors are willing to assume a higher level of risk in order to avoid the negativity of a prospective loss because losses hurt more than gains feel good.

Familiarity or home bias is the tendency for investors to invest in what they believe they know best. An example would be a corporate executive whose net worth is almost exclusively tied to the stock price of his or her corporation. Of course, this was to the detriment of many bank executives during the Great Recession who held a lot of their corporation’s common stock and ultimately suffered huge losses.

With hindsight bias, a person believes, after the fact, that the onset of an event was foreseeably obvious when it could not have been reasonably predicted. A great example of this is the high valuations of technology stocks in late ’90s. Only after the tech bubble burst in early 2000 did it seem logical that stock prices were extremely overvalued.

What are considered to be the two primary classes of investors?

Most investors can be categorized as either ‘overconfident’ or ‘status quo.’

Overconfident investors trade frequently while status quo investors leave their portfolios largely unmanaged. This doesn’t mean that the status quo investor is taking less risk. Either type of investor can have a high-risk portfolio because of either inaction or overreaction.

Overconfident investors tend to overestimate their investment ability, often resulting in higher trading costs and undiversified portfolios.

Status quo investors fail to assess their financial condition despite potential gains from doing so.

How can investors increase the probability of a successful investment outcome?

Investors should stay focused on their long-term planning goals and steer clear of herd behavior or the latest investment trend.

Additionally, they should maintain an adequate liquid cash reserve for living expenses. Knowing that you don’t have to react to today’s market headline to meet your everyday needs will help keep your emotions in check and increase the probability of a successful, long-term investment outcome.

Who can help ensure investors are pursuing a sound investment strategy?

If you can’t control your emotions and don’t have the time or necessary skill to manage your investments, consider working with a fee-only adviser, ideally a CFP®, to formulate a written investment policy statement. This can prevent investors from making irrational decisions during times of economic stress or euphoria. Selecting an asset allocation strategy that is suited to your need, ability and willingness to take risk will help you weather turbulent markets. Review your portfolio annually for appropriateness and identify where adjustments need to be made due to relative performance.

While behavioral biases cannot be completely eliminated, recognizing them is the first step in reducing their effects and avoiding self-destructive behavior.

Insights Wealth Management is brought to you by Budros, Ruhlin & Roe, Inc.

Expenses may change when you retire, but they don’t ever go away

There is a common misconception among people who have yet to retire that when the time comes for them to stop working, their expenses will be reduced.

“That’s really not true,” says Christopher Hogan, ChFC, CLU, a financial professional at AXA Advisors, LLC.

“The reality is people today will live longer, healthier retirement lives and they will experience more opportunities to do things like travel and take advantage of things they either couldn’t do or didn’t have time to do when they were working,” he says. “The reality is you end up replacing the expenses you had when you were working with expenses you have in retirement.”

The problem is you’re no longer earning a regular paycheck when you retire, so you must rely on whatever funds and accounts you set up to be there for you in retirement.

“The average person won’t account for issues or challenges related to making their retirement income last their entire lives,” Hogan says.

Smart Business spoke with Hogan about how to deal with those challenges and ensure that you do have enough money to support you and your family when you’re done working.

What is the biggest mistake people make in trying to determine how much income they will need?

People fail to account for inflation when they plan for retirement. Inflation is the rising cost of consumer prices over time. A good rule of thumb is to use a 3 percent inflationary rate, which is what the average was from 1926 until 2013.

Where do you begin the process of determining how much income you’ll need?

Identify your fixed annual needs such as housing, food, utilities, etc. and break it down into a budget that accounts for everything including your cable bill, your cellphone bill, your mortgage bill, your property tax bill, etc.

In addition to that, you want to build on top of that the annual or monthly budget for things you are going to do that are going to replace the working hours with playing hours.

Determine the wants you have for things such as travel, spoiling the grandkids and other discretionary items. Most people today will live healthy lives in retirement for an average of 10 to 15 years. They will want to use those years to get their ‘bucket list’ items completed.

When should you begin making plans for retirement?

There’s no right time to start planning for retirement other than today. Everybody should have a written retirement plan with a forecast and an understanding that things will change.

It’s like an athlete with a goal. They develop a plan, they usually write it down and then they try to stay with the plan. By having a written plan, the probability of reaching your goal is far greater than if you don’t have a plan.

What about the possible need for long-term care?

In many cases, it will be an in-home, long-term care need. A person who has a stroke may go through a period of time in a rehabilitation unit and then go back home and still need long-term care as they rehab.

The only real way you can plan for that is by obtaining long-term care insurance, preferably while you’re in your 50s. If you wait too long to address that need, you find that the cost is prohibitive or you no longer qualify for it medically.

Christopher Hogan offers securities through AXA Advisors, LLC (NY, NY 212-314-4600), member FINRA/SIPC, and offers insurance and annuity products through AXA Network, LLC. Christopher Hogan, AXA Advisors and AXA Network do not offer tax or legal advice. Chris Hogan is unaffiliated with Smart Business. AGE- 105674(07/15)(Exp.07/17)

Insights Wealth Management is brought to you by AXA Advisors, LLC

Knowing your charitable options is the first step toward a legacy of giving

Philanthropy can be contagious and can inspire others to take action. It can also establish a family legacy that will be supported through the generations. But before giving, consider your strategy, and more importantly, your values and interests.

“It’s important to have a connection to or be passionate about the charity to which you give,” says John P. McHugh, Senior Wealth Manager at Budros, Ruhlin & Roe, Inc.

Often people don’t dedicate the time to think about their philanthropic goals until they come to an adviser, he says, and this unknown can lead to decision paralysis with regards to major charitable gifting. With a little guidance, that can be overcome.

Smart Business spoke with McHugh about charitable giving strategies and how to execute them.

What typically stops someone from charitable giving?

For many, if they don’t know the outcome of their actions they may end up doing nothing. Donors want to know their money is being used wisely, and understanding all the pieces of charitable giving is liberating.

The primary question of whether potential donors believe they have enough to give and still maintain their lifestyle is paramount. Secondly, the question of how much to leave to heirs, or how much their heirs need, is a key concern.

What are the main options for donors to execute a charitable giving strategy?

Among the tools that donors can use for giving are charitable remainder trusts, charitable lead trusts, donor advised funds, private foundations, bequests at death and outright gifts during lifetime.

In a charitable remainder trust, a donor makes a gift via trust and the donor or a beneficiary receives an income from the trust for his or her lifetime. When the income beneficiary passes, the remaining trust funds go to the charity of the donor’s choosing. This is a good vehicle to use if the income is needed during a donor’s or beneficiary’s lifetime.

A charitable lead trust is similar to a charitable remainder trust except that the charity gets the use of the stream of income generated during the term of the trust. At the end of the trust term, the remaining assets go to the donor or donor’s heirs. This is a good choice if the donor doesn’t need the income during his or her lifetime but wants the assets to remain within his or her family after death.

A person who has a significant income tax event during a year — say, the sale of a business — might consider a donor advised fund. These vehicles are managed by community foundations and provide donors with an immediate tax deduction, and time to decide how and when to allocate the typically large sum of money among the person’s favorite charities. The donor advises where the foundation should send the money, which can be done in any increment the donor chooses. This mechanism also grants donors privacy, since any grants made this way are not public record.

A private foundation is typically created by a family for the purpose of charitable giving in which the family is fully in control of how the funds are granted to charity. It can be expensive and time-consuming to run because its complexity requires someone knowledgeable to administer it, handle the taxes, execution, etc. When a donor makes a grant through his or her foundation, it’s documented in its annual tax return and is public record.

Bequests are written into a person’s will and specify that a certain gift will transfer to a charity upon the donor’s death. Bequests are typically given for a certain purpose, such as to honor a person’s memory.

An outright gift is just that — a person feels a charitable connection and he or she makes a donation. This gives the donor the satisfaction of seeing how the donation helps the charity during his or her lifetime.

Who should be involved in a charitable giving strategy on the donor side?

A person’s immediate family can be an important part of the philanthropic decision-making team. Otherwise, a team of trusted advisers — an accountant, financial adviser, attorney, an insurance agent if life insurance is involved — working in collaboration can help a donor deal with the complex tax and legal implications of giving. The team also ensures the gift is thoroughly vetted and gives the donor the confidence that it’s the right thing to do.

Insights Wealth Management is brought to you by Budros, Ruhlin & Roe, Inc.

How to spot hidden fees in retirement plans, which drag performance down

Hidden fees are not only common; they essentially help run the entire retirement plan services industry. But these fees aren’t easy to find, even for the trained professional in the industry, let alone a busy business owner or manager.

“After consulting with thousands of employers regarding their retirement plans over the years, I’ve learned that rarely, if ever, do plan sponsors read and understand how all of the fees are charged and to whom,” says Robert Yelenovsky, vice president and manager of Fragasso Retirement Plan Advisors.

Smart Business spoke with Yelenovsky about what you need to know about hidden fees and revenue sharing arrangements.

What’s an example of hidden fees or revenue sharing arrangements?

The plan’s mutual funds — or sub-advised annuity funds if it’s an insurance company plan — have expense ratios, which help pay for asset management, administration, operations, sales and marketing. The portion that covers the account service and sales costs, called 12b-1 fees, may be used to pay the broker a commission, or paid directly to the record-keeper to offset his or her costs.

These kinds of investment expenses can be a burden on the plan and become a drag on participants’ retirement goals.

Does it matter what type of plan you have?

Not really. Whether you have a 401(k), 403(b) or 457 plan, you can expect fees to be part of the overall plan and participant cost.

Didn’t the new government rules address this problem?

The latest fee disclosure rules made an attempt to address the problem of hidden fees. The lobbying efforts, however, of those with the most risk from transparent fee disclosure, such as big banks, big insurance, big fund companies and high-paid commissioned brokers who often take a 1 percent commission upfront to move a plan to a new provider — that means a $50,000 commission if the company has a $5 million plan — caused the Department of Labor to fall short of full transparency.

The rules that came out were a watered down version of the original proposal.

Now, they’re making another attempt, but these newer proposed rules still will likely fall short of really helping both the plan sponsor and participant understand all fees associated with a retirement plan.

What’s the best way to ensure you don’t fall victim to these kinds of mistakes?

Read all of the documentation provided, such as initial sales agreements and all disclosure notices. Ask for a review to ensure you have a good understanding of all associated fees. As a fiduciary, plan sponsors need to make sure plan fees are ‘reasonable;’ you must first understand all fees before you can decide if they are reasonable.

You need to ask specific questions or give instructions to the broker who is paid either by the plan provider or by the plan, such as:

  • Ask for a list of all fees, commissions and ongoing revenues paid to all companies and/or individuals who provide services to the plan in any capacity. There are more than 20 different types of fees and charges to both the plan and its participants. Get to know what they are.
  • Ask for a list of rebates or revenue sharing arrangements between any parties who provide plan services, and specifically who gets what revenue and when.
  • Ask the adviser if he or she is acting under a suitability or fiduciary capacity standard. If he or she is a fiduciary, get it in writing and signed by an officer of the firm as to what specific fiduciary capacity he or she is covering, i.e., to the plan or just to the selection of funds in the plan. There is a big difference.

Is there anything else you’d like to share?

In sponsoring a retirement program, so the company can provide a tax-efficient vehicle to help owners, officers and employees save for retirement, you’ve taken on a fiduciary role. You assume both professional and personal liability for not only the decisions you make, but also for those others may make as well.

Take time to understand your role as a fiduciary, and what is expected of you. You always have the option of seeking help, such as hiring a registered investment adviser to take on the role of co-fiduciary, and share both the risk and the reward, instead of a commission check.

Insights Wealth Management is brought to you by Fragasso Financial Advisors

Investment strategies for navigating today’s highly valued market

Many stock market valuation metrics today, such as price to sales, price earnings and total market capitalization relative to gross domestic product, point to a relatively highly valued market. While not every stock in the market is overpriced, the broad market is looking expensive compared to historical valuations.

“Investors often struggle with how to respond to a highly valued market,” says Daniel Roe, CFP, Chief Investment Officer at Budros, Ruhlin & Roe, Inc. “Regardless of one’s personal portfolio strategy and allocation, we believe that investors should be taking less risk today than they were 12 and 24 months ago. We think there are some prudent steps investors can take in order to begin to reduce the risk in their portfolios.”

Smart Business spoke with Roe about risk-management strategies in today’s market.

What portfolio strategies are best in today’s market?

For any portfolio that has a known cash flow component required to be paid each year — a retirement income portfolio that requires cash for groceries and travel, foundations or endowments that need to meet grant needs, etc. — it’s recommended to hold a full two years’ worth of known cash withdrawals in a safe money market or bank cash account. While 12 months of need might be acceptable in ‘normal’ periods, it is appropriate to move to a full two years’ worth of withdrawals today.

Further, consider holding higher allocations in positions and strategies that tend to be more defensive and have less downside exposure. These could include opportunistic fund managers who are willing to hold cash, and are doing so currently. Some value-oriented fund managers are currently holding 25 to 35 percent in cash, given market levels. That’s not always the case, but this gives them an option on future opportunities.

One way to gauge how much market risk you have in your stock allocation is to figure out your stock portfolio’s market Beta. This is the number that estimates how sensitive your stocks are relative to the Standard & Poor’s 500 index, or some other broad market index. The Beta for the whole market is 1.0, so if your stock portfolio measures out at, say, 0.85, then you would likely experience 15 percent less decline should stocks fall. Likewise, if your Beta is 1.15, then your stocks would probably fall 15 percent more than the decline in the broad market.

How should valuations affect an investor’s overall stock and bond allocation?

Most institutional portfolios, like pension plans and foundations, have investment policy statements that help guide the big allocation decisions. For example, a portfolio strategy might call for a target allocation to stocks of 65 percent, but with the ability to be anywhere in the range of, say, 55 to 75 percent. This allows for valuations to impact the allocation, but does not allow speculation, such as moving to 100 percent stocks, or all the way to 100 percent cash. That would be market timing and not advisable.

Today, an investor could move to underweight their target equity allocations as it is a good idea to be sensitive to and conscientious about valuations. When valuations are low, it’s advisable to take more risk. But when valuations are stretched, it’s best to carry less.

What’s the biggest mistake an investor can make in today’s market?

The biggest mistake investors can make is to chase past performance, yet it happens all the time, in every market cycle. It’s encouraging that there are solid flows to overseas stocks this year where it seems there are some better opportunities to diversify and earn higher returns.

How long do you anticipate these conditions will exist in the market?

It’s tough to predict how long current conditions will persist. It’s important to remember that market volatility is a normal thing, but was largely absent for a few years through the end of 2014. At the moment, we are in the third-longest stretch in the past 50 years without a 15 percent market correction. That’s a pretty odd thing when compared to historical trends. Ten and 15 percent corrections should be viewed as normal and healthy for the markets as they can set the stage for the next round of gains.

Insights Wealth Management is brought to you by Budros, Ruhlin & Roe, Inc.

How to prepare for the six risks that impact retirement

As baby boomers approach retirement, many find themselves in different economic circumstances than what they planned for.

“We are facing a new retirement reality. In the past, most retirees had two things going for them —pensions and shorter life spans, on average,” says Adam Spiegelman, wealth management advisor at Northwestern Mutual. “And if they did live longer, Social Security was there.”

Today, the top fear in retirement is running out of money, while recent economic events have taught Americans the downside of risk.

Smart Business spoke with Spiegelman about how to keep your retirement plan on track and soften the impact of six key risks.

What are the risks common to most retirees? How can you plan around these?

Longevity — Americans can outlive their resources. There is a 10 percent chance that a 65-year-old male will live to 97 years of age and a 1 percent chance the same male will live to 105 years of age, according to Medicare.gov. Yet, average life expectancy is only 85 years.

Your retirement plan needs to weigh the likelihood that you might live to 90, 95 or longer —  and you could be retired longer than you worked.

Long-term care — The cost of care for an unexpected event, or long-term illness not covered by private insurance or Medicare, is requiring more Americans to prematurely deplete their assets. A 2009 Life Insurance Marketing and Research Association survey of people ages 55 to 75 found that health care and long-term care expenses account for 12 to 15 percent of retirement expenses, depending on the household income.

Make sure you include funding for long-term care to help protect your savings and reduce reliance on others. Keep in mind, however, that you cannot protect against the full loss potential.

Health care — Rising medical and prescription drug costs, fewer employer-sponsored retiree benefits and the limitations of Medicare are all impacting income and retirement savings. According to Medicare.gov, estimated health care costs for a 65-year-old range from $3,000 to $10,000, including premiums, deductibles and co-pays but not including long-term care, vision or dental expenses.

Health care expenses can be significant, but many people don’t have a good gauge of what these costs might be. Be sure to take time to adequately plan for this risk.

Legacy — Many Americans want to leave a legacy by leaving a financial gift to a loved one or a charity. You need to balance this desire with the need to fund your retirement. If you’d like to leave a legacy, start planning as early as possible to ensure you can maintain your lifestyle, too.

Inflation and taxes — With inflation reducing purchasing power and taxes impacting liquidation strategies, less money will be available to spend or invest in retirement planning. At a 4 percent inflation rate, if it takes $100,000 a year to support your lifestyle at age 65, it would take almost $200,000 to support that same lifestyle at age 80. The money you’ve set away in a traditional IRA is subject to ordinary income taxes, and if one spouse passes away, the survivor switches to single tax rates and can see a jump in the tax burden.

In retirement, it’s no longer about how much you have; it’s about how much you get to keep.

Market — Participating in the stock market can give your retirement savings and income the potential to keep pace with inflation, but market volatility significantly affects your income and savings. Market risk is always there. You can’t avoid it, and the closer you are to retiring, the greater the risk. All you can do is mitigate the impact by working closely with a financial adviser.

Is there anything else you’d like to share?

Planning for retirement is like planning for the longest vacation in your life. It’s critical that you put in the time. This will help ensure you enjoy it, that you can do everything you want and that your income lasts as long as you do.

Article prepared by Northwestern Mutual with the cooperation of Adam Spiegelman. Spiegelman is a Wealth Management Advisor with Northwestern Mutual, the marketing name for The Northwestern Mutual Life Insurance Company (NM), Milwaukee, Wisconsin, and its subsidiaries. Spiegelman is based in San Francisco, California.

Why a happy retirement requires a mix of both planning and discipline

It’s one thing to maintain spending discipline when you are still working. You can afford to take a big vacation with the kids or make a major improvement to your house because you are still drawing paychecks on a regular basis to replenish your account.

It all changes when you decide to retire.

“The biggest exercise we go through with clients is retirement income planning,” says Gregg LaSpisa, CLU, executive vice president at AXA Advisors, LLC’s Cleveland Branch.

“You go through your working career and you always contributed money to your 401(k) plan or your retirement plan and you are more in an accumulation mindset. When you retire, you have this big lump sum asset. How do you get income off of that? The retirement income plan is critical. You have to match expenses with income.”

Smart Business spoke with LaSpisa about why it’s never too late to put yourself in a better position to enjoy retirement.

What are the most significant retirement planning challenges?

One of the biggest issues is the fact that we are living longer. Of course, it’s great that we are living longer, healthier lives. But the downside is when you are talking to a financial professional about planning for your retirement, because now you have to plan to live to 90, 95 or even 100. Previous generations were only planning to live to age 75 or 80, so the total money needed for retirement was a lot less.

How do lower interest rates figure in?

It’s huge. If you think back to the 1980s, interest rates were at 12, 13 or 14 percent. Most pension plans invest in government bonds or some sort of bond portfolio. Now many of those rates are at 2 percent or less. Corporations need more capital to generate the income they are guaranteeing. The trend has been to get away from pension plans and push the responsibility for retirement to the employee as opposed to the employer.

What’s the most important thing I can do to plan for retirement?

Have a realistic budget of what it’s going to cost at retirement. How much income do you need to cover your expenses? People will say, ‘My home is paid off, so I won’t have that expense.’ That may be true, but there are expenses you will have, such as health care, that will increase. If you want to help pay for your grandkids to go to college, you’ll need money for that too.

So you need to know what your income sources are going to be and what kind of protection you have against inflation.

We talk about the withdrawal rate in terms of how much you can take out of your portfolio. Some clients want to take 8 to 10 percent out a year. That’s often way too high. On average, you should plan to take maybe 4 percent out a year. That’s the kind of discipline you need to have.

How can I help my financial planner?

Have an understanding or have access to all of your accounts. In other words, be aware of what benefit plans you have from work or the CDs, IRAs or 401(k) plans that you have set up. Take the responsibility to know where your assets are and gather all those documents before you meet with your planner. If you don’t tell your planner what you have, they can’t do their job effectively.

Is it ever too late to start?

It’s never too late to start. There are ways to improve your position and it may not get you to the ideal situation, but it can certainly improve your current situation. If you have done planning, it’s a good idea to review your plan every six months to make sure it is still in accordance with all your objectives and has been updated to include any major changes in your status. The goal of a planner is to make you aware of the issues that are out there because there are too many moving parts to do it alone. Engage a professional and take ownership of your future.

Financial services available to individuals and business owners through AXA Advisors, LLC include: strategies and products for financial protection and investments; asset allocation, college, retirement, business and estate planning strategies; life insurance, annuity and investment products, including mutual funds. Securities products are offered through AXA Advisors, LLC, NY, NY, member FINRA, SIPC, 10104 (212) 314-4600. Insurance and annuity products are available through an affiliate, AXA Network, LLC and its subsidiaries.

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Insights Wealth Management is brought to you by AXA Advisors, LLC

How to protect your financial portfolio from yourself

When it comes to investing, people tend to chase performance — looking at what worked last year at precisely the wrong moment.

And it’s no different now. Investors are asking, “If the market hit new record highs last year, why didn’t my portfolio reflect that?” “Why should I bother investing overseas, when only the U.S. market is doing well?” “Does diversification still work?”

That last question is concerning, because diversification remains critical, whatever the market environment.

“Whenever people think it’s no longer important, that’s when it matters most. That’s when you wish you’d stuck with your guns, instead of changing to something that has worked in the recent past and is just about to change,” says Andrei Voicu, CFP®, AIF®, chief investment officer at Fragasso Financial Advisors.

Smart Business spoke with Voicu about portfolio allocations and the current market.

How much do market conditions impact portfolio allocation strategies?

As investors, you need to stay humble and recognize the fact that predicting the future is very difficult. For example, last year many feared interest rates would rise, when in fact they declined. That’s why diversification and a balanced approach are so important. You don’t want to bet the house in one direction.

At the same time, some things don’t need to stay static; you can adjust certain values over time, given the market conditions. You would invest differently today with interest rates so low, than 10 years ago when they were significantly higher.

It’s important to have a diversified core that does not change — it only changes if your life goals change. That’s your major allocation of stocks, bonds, etc., which are based on your age, goals and cash flow needs.

Then, at the edges you can make adjustments along the way to respond to oil prices, currency or interest rates. But whenever you make an adjustment, consider: ‘What’s the worst case scenario?’ ‘Can I afford to be wrong?’ ‘How am I going to recover if I’m wrong?’ The answers dictate how much you want to respond to market conditions.

How should an investor set up a portfolio?

With the help of your adviser, you’ll want to start with your long-term goals. Then, figure out what is the real return that you require, how much risk you’re comfortable with and how you feel about losing X percent of your money in any given year.

The safest course is an indexed portfolio that gives you diversified access to the various markets. Then, you can look to improve upon your returns with different strategies — but only at the margin. If you happen to be wrong, you want to come back and fight another day.

But once you’ve determined a course, it’s possible your risk tolerance could change when market losses actually materialize. You may have said you’d be comfortable with a 10 percent loss, but you’re really not when it happens.

Or perhaps your goals and expectations need to be adjusted, as you go through life changes like having kids. There’s always a give-and-take that’s part of the ongoing part of planning.

When investors get nervous about the market or their portfolio’s performance, how does your firm advise them?

You should have already determined the proper allocation for the long term. And assuming things have not changed with that, there’s no reason to change the allocation if the market goes down. It’s actually counterproductive because you’re selling low and buying high when you feel comfortable.
Your adviser will try to re-educate you about how markets move up and down, and how they recover. If you sell when your heart tells you, it’s probably the worst time.

If you’re still nervous, you can create a cash cushion or hedge the portfolio as incremental steps to keep you on course as much as possible. It’s important that you don’t make temporary losses into permanent ones by selling at the bottom.

Set a plan based on knowing yourself and understanding how you react, and stick to that plan. Do you tend to panic? Do you watch the financial markets every day? This allows you and your professional adviser to put together the right mix for your future, and set processes in place to guard your portfolio against yourself and knee jerk reactions.

Insights Wealth Management is brought to you by Fragasso Financial Advisors