Potential pitfalls and risks of saving and drawing on your retirement

Many people put off saving for retirement, thinking there’s just not enough money at the end of the month, or often focusing on current lifestyle.

“They tell themselves they’ll start putting something away for the future as soon as there’s extra,” says Chad Vavpetic, Regional Vice President at AXA Advisors, LLC.

“The problem is, it never gets easier. Demands on your money will always expand to consume your full income, if you allow it to happen.

“It’s common for young professionals starting out now to have tens of thousands of dollars in student loan debt. They often feel like, ‘Retirement is 40 years off, I can’t start thinking about that now. I have to pay off these loans, buy a car, get my own place.’ That’s a huge challenge. Time is everything when it comes to accruing sufficient retirement assets, and starting early is key, even if you start saving a relatively low percentage of your income initially.”

Smart Business spoke with Vavpetic about the common risks and pitfalls related to retirement planning.

What are some mistakes people make when projecting how much money they will need in retirement?

The first mistake for most is failing to understand that saving for retirement is no longer the responsibility of your employer or union through a defined-benefit pension plan. It often now falls completely on you. Many are not saving enough in defined contribution 401(k) or 403(b) plans to make up for the reduction or absence of that traditional pension.

Even those who are committed retirement savers may not be adequately prepared for two of the primary risks facing financial security in the golden years, inflation and longevity. While inflation has averaged 3.18 percent over the last century (inflationdata.com), many financial professionals believe that the fiscal policy the federal government has employed since 2008 will likely result in the devaluation of the dollar, growing the cost of living at a faster-than-normal rate in coming decades. That means more retirement dollars will be required just to maintain preretirement lifestyle, not to mention the added expense of traveling to visit the grandchildren or that winter home in Florida. Couple inflation risk with increased life expectancies, and the possibility of outliving retirement assets becomes a very real concern.

What about tax liability?

Tax liability is one of the biggest deterrents to accumulating retirement assets; you need a strategy that is conscious of that. Traditional pretax and Roth retirement contributions are very simple and powerful ways to save on a tax advantage basis. There are also more advanced strategies, often used when IRAs and employer-sponsored options are limited or have been phased out due to income level. Saving on a tax-advantaged basis is essential.

Tax liability is also a major concern at distribution time. For example, cashing in a big chunk of your retirement to pay off low-interest debt like a mortgage in lump-sum fashion could have big tax implications and may not be the most advantageous decision. As you transition into retirement, it’s more about cash flow than assets and liabilities. Having a sound distribution strategy is extremely important.

Is it possible to successfully plan your retirement on your own?

Retirement planning is no longer a do-it-yourself endeavor. Markets are as volatile as ever, as has been evident in recent weeks. Tax laws and regulations are more complicated than ever. Financial products are increasingly advanced, as the industry continues to innovate in response to the changing economic environment.

Somebody has to be knowledgeable of all of this. You can either become an expert, or work with someone who has that knowledge. The need for qualified professional advice has never been greater.

A good adviser can help you design a strategy that serves your individual goals and addresses your concerns, while seeking to both protect and maximize your retirement income.

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

Chad Vavpetic offers securities through AXA Advisors, LLC (NY, NY, 212-314-4600), member FINRA, SIPC, offers investment advisory products and services through AXA Advisors, LLC, an investment advisor registered with the SEC, and offers annuity and insurance products through AXA Network, LLC. AXA Advisors and AXA Network do not provide tax or legal advice. 107310 (09/2017)

Retrieving the departed’s digital assets is tough. Here’s how to make it easier.

Dying has become increasingly complicated in the 21st century. With these complications comes the need to change how people think about their estate plan. Most people own assets that are purely digital, ranging from sentimental family photos to highly valuable enterprise documents, each of which must be accounted for in succession plans, trusts and wills. Estate planners must consider many new issues that, if not dealt with, could block survivors and beneficiaries from accessing assets.

Smart Business spoke with Isaiah Stidham, CPA, CFP®, associate wealth manager at Budros, Ruhlin & Roe, Inc., to learn more about estate planning in the digital age.

What are digital assets?

Digital assets comprise anything formatted as a binary code. That can include social media accounts and files stored on cloud servers or personal computers, such as documents, photos, music and movies. They also include online bank and investment accounts that require login credentials for access.

From a business perspective, many companies have chosen to go paperless, requiring clear procedures for continuing access to that digital information in the event of the business owner’s death.

Why should digital assets be accounted for in estate planning?

It’s easy to overlook digital assets until after someone has died. Even when these assets are properly identified, there are many questions about what happens to them.

Valuing digital assets can be particularly difficult, as not all of them have a clear monetary value. Family photos stored on a computer or a file-sharing website, for instance, do not have much or any monetary value, but can have significant sentimental value. For a professional photographer or author, however, images or a manuscript stored digitally can have substantial value.

Even more important than determining the value of a person’s digital assets, is insuring continued access to these assets. Without a plan, there is a risk that these assets may be inaccessible and in some cases lost forever. Authorization is required to work with banks to access online accounts, and it can be difficult if not impossible to be granted access to a private email account as those providers work to improve security. That’s why it’s important to pass along login information to survivors and specifically name successors when the option is available.

With digital assets that have primarily sentimental value, individuals should also consider how they want assets distributed among their beneficiaries. Similar to making a specific bequest of which child inherits grandma’s silverware, a person can decide during their lifetime how their digital assets should be divided. Although there may not be significant monetary value in the division of these assets, the emotional aspects of estate planning are often even more critical to family dynamics.

How can these assets be properly considered in an estate plan?

Inventory all digital assets. Keep track of user names and passwords either manually or through services that manage passwords for users, such as SecureSafe or entrustIT. They can track the online sites you’re using and the associated usernames and passwords. Users can leave a master access to those accounts to their executor or trustee, giving them one source from which they can access all of the individual’s digital information.

Insuring an executor, trustee or personal representative has access to online accounts upon someone’s death can be difficult because the law hasn’t kept up with this issue. That’s why it’s a good idea to add language to current estate documents that specifically grants power to an executor, trustee, power of attorney holders and personal representative to access, handle, distribute and dispose of digital assets both at death and in the case of an individual’s incompetency.

When a person passes without leaving a means of accessing their digital assets, their survivors are left in a lurch. Be proactive and communicate your desires for these assets while you are still living to ensure your wishes are fulfilled upon your death.

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

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.