Useful IRA charitable rollover, made permanent, helps donors plan

The news that the IRA charitable rollover has been made permanent comes as a relief for the charitably inclined. Enacted in 2006, Congress has had to extend it annually. And every year they wait until the last minute to renew it, so it has always been somewhat of a gamble whether or not to plan to take advantage of it. Now donors know it’s always there.

“The IRA charitable rollover is designed for someone who is motivated to make a gift to a charity,” says John Schuman, Chief Planning Officer at Budros, Ruhlin & Roe, Inc. “You don’t do this to make money, but if you’re committed to making donations then you can take the money out of your IRA and donate it directly to charity under this provision. The donor gets to give the full gift without incurring any negative tax consequences.”

Smart Business spoke with Schuman about the IRA charitable rollover and how it can be used to a donor’s benefit.

How might knowing the IRA charitable rollover is permanent affect a person’s giving strategy?

Of the various assets that could be used for charitable purposes, the best asset to use as a means of donating to charity is an IRA. While it is exposed to the highest tax bracket and its mandatory deductions are taxed as ordinary income, all of that can be avoided when it’s used to make donations directly to a qualifying charity.

When an individual decides to take a distribution from his or her IRA and donate it to charity, the money withdrawn will be taxed at 39.6 percent. Without the charitable rollover, donating from an IRA meant it would first be counted as income and subject to tax before the remainder could be gifted.

For instance, let’s say a person takes $100,000 out of his or her IRA, which would be counted as income. There is the opportunity to take a $100,000 federal tax deduction for giving it to charity, but adding that amount to a person’s taxable income could mean other itemized federal deductions, such as those designed to offset health care costs, get phased out, so he or she wouldn’t get a dollar-for-dollar deduction. Ohio-based income doesn’t allow itemized deductions, so that $100,000 donation from an IRA to charity also meant that the donor would move into a higher tax bracket in the state as well.

Those at or above age 70 1/2 are required to take minimum distributions from their IRAs. Fortunately for them, a donation counts as a minimum distribution. And by giving it to charity it’s not taxed. Using this method of charitable donation also means that the donor will stay below the phase-out thresholds and likely not move into a higher tax bracket since the distribution never gets counted as ordinary income.

What charities qualify to receive donations through this method? Which don’t?

Any charity is eligible to receive donations from an IRA, including community foundations. One restriction, however, is that money can’t be given to a donor-advised fund as it allows the donor to continue to control that gift.

There’s a lot of flexibility regarding the way distributions can be disbursed. It’s interesting to note that a donor doesn’t have to give all of the distribution to one charity, but can split it among as many as he or she likes.

Giving through an IRA has become a useful mechanism for charitably inclined individuals. For charities, it’s a preferred method of receiving donations and an easy way to solicit gifts from donors. It’s a great tool to make it easy for people to give larger gifts to charity. And, thanks to recent legislation, it’s a method that’s with us forever, which makes planning much easier than it had been.

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

As you work to build your business, don’t forget to secure your future

Nancy Kropko has seen too many stories of self-employed individuals who have incredible passion for their work but fail to make the same commitment to their own future.

“Being self-employed doesn’t mean that you have an eight- or nine-hour job every day and then you go home and have leisure time,” says Kropko, a financial professional at AXA Advisors, LLC.

“You dedicate your life to your business and you put everything else on the back burner to help that business grow and succeed. But when you don’t make the time to plan for your own future, you put both you and your family at great risk.”

Time is often cited as a reason for not making these critical plans. Business is booming, customers have urgent needs and there just isn’t any time to think about the next phase of your life. But those safeguards you put in place to protect your business and its customers against the unexpected are just as important for your own well-being.

“Self-employed people need to call somebody, and sooner is always better than later,” Kropko says. “It’s just not worth the risk to wait.”

Smart Business spoke with Kropko about how to help secure your own future when you’re self-employed and seemingly short on time.

Where is a good place to start your financial planning effort?

Most self-employed people, especially if they have a business, believe that their business will be their retirement. That’s usually the furthest thing from the truth. You don’t save any money, you don’t open any retirement accounts and you believe that you’ll be able to sell your business for a dollar figure commensurate with all the work you put into it. But that’s often not the case, and you’re left with far less than you need to retire. The first step to avoiding that fate is making a phone call to schedule an appointment with a financial professional. Once you meet with the professional, you’ll come away with a list of items and/or information you’ll need to collect for the next meeting when you can start making formal plans. Now you have a timeline to keep you on task.

For those who do have investments, it is often ineffective to manage them on your own. A professional can help maximize your earning potential by finding ways to potentially reduce your taxes through tax-advantaged investments. They can provide references to professional tax and legal advisors. Some people don’t think of these things on their own, especially if they’re self-employed and focused on running their business.

Another common risk when you’re self-employed is failing to buy disability income insurance. Business is good, and it’s easy to feel invincible. But you’re relying on the good times to continue so you have that income to support your business and your family. If something happens where you can’t work anymore, you might be able to get Social Security disability, but it might not pay out for two years, if it pays out at all. A financial professional can help you put protections in place to help mitigate this scenario and other unexpected events that could occur.

How do you find the right professional to meet your needs?

A good place to start is with referrals. Ask other self-employed individuals who they have worked with to do financial planning. Choosing someone who is a certified financial planner (CFP) can be a good way to go, but it doesn’t need to be mandatory. There are many financial professionals who are not CFPs, but do the right thing by their clients. It’s more important that you find somebody you can trust and that takes time. Interview a couple of professionals and get an idea of how they work. It has to be your plans, your goals and your objectives, not those of the professional. If you find a professional who has helped another person align his or her goals and objectives and developed a trusting relationship, that’s worth its weight in gold.

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

Nancy A. Kropko offers 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, AXA Network, LLC does business in California as AXA Network Insurance Agency of California, LLC and, in Utah, as AXA Network Insurance Agency of Utah, LLC.  AXA Advisors and AXA Network are affiliated companies and do not provide tax or legal advice. GE 109460 (11/15)(Exp 11/17)

Recent legislation closes once-beneficial loopholes in Social Security

On Nov. 2, 2015, President Barack Obama signed the Bipartisan Budget Act of 2015 into law. While the act’s primary purpose was to raise the federal debt ceiling, it also contained provisions that will affect millions of Americans entering retirement who are entitled to Social Security benefits.

“The act moves to simplify the Social Security system while closing inadvertent loopholes that were signed into law on April 7, 2000, by former President Bill Clinton,” says Shawn Ballinger, CFP, a wealth manager at Budros, Ruhlin & Roe, Inc.

“It effectively eliminates a married couple’s ability to use the well-known Social Security claiming strategies ‘file-and-suspend’ and ‘restricted application’ for spousal benefits. Fortunately, the act does not impact those currently receiving benefits, and allows those who are at full retirement age, or will reach it by April 29, 2016, to file for benefits under what are now the old rules.”

Smart Business spoke with Ballinger to learn more about this change and its impact.

What limitations does the change to the Social Security system bring?

The first strategy, file-and-suspend, allowed the first spouse to file for Social Security retirement benefits but then immediately suspend them. This allowed the first spouse’s benefit to continue to grow while the second spouse filed a restricted application to receive one-half of the first spouse’s benefit. The important point here is that a spousal benefit could not be received unless the first spouse had actually filed for his or her benefit. The process of file-and-suspend enabled the second spouse to receive a current benefit on the first spouse’s record while the suspended benefit of the first spouse accrued an 8 percent increase each year it was delayed from age 66 to age 70, a potential 32 percent lifetime increase in benefits.

The second strategy, filing a restricted application, allowed the second spouse to claim a spousal benefit on the other spouse’s record, but then switch over to his or her own benefit at age 70. The impact of one spouse filing-and-suspending his or her benefit and the other spouse filing a restricted application was that both spouses could effectively delay receiving their benefits until age 70 and still receive one spousal benefit while they waited.

Under the new rules, when either spouse now files for benefits, he or she is deemed to file for both individual and spousal benefits, which will require the individual to receive benefits on his or her own record, or the spouse’s record if higher.

The question to ask is, ‘How will this affect those nearing the age that Social Security benefits can be claimed?’ That answer depends on the person’s age and whether or not he or she is grandfathered under the old rules or subject to the new legislation.

At what age will someone be impacted by the changes?

In essence, the act created three sets of rules based on an individual’s birthday:

  • Those born on or before April 30, 1950.
  • Those born on or before Jan. 1, 1954.
  • Those born on or after Jan. 2, 1954.

Individuals born before April 30, 1950, or who will turn age 66 by April 30, 2016, will be largely unaffected by the changes as long as they identify their optimal claiming strategy and file for benefits before the April 30, 2016, deadline.

Those who will be age 62 during 2015 — or born on Jan. 1, 1954, or earlier — will still be able to file a restricted application on their spouse’s benefit as long as the other spouse is receiving benefits, or is grandfathered under the old rules and has filed but suspended their benefit. This nuance will become especially important for married couples where one spouse will reach age 66 by April 30, 2016, and the other will not.

Lastly, those individuals born after Jan. 2, 1954, will be subject to the ‘deeming’ rule that will require, upon application for benefits, claiming all benefits for which they are entitled. This eliminates a spouse’s ability to claim a spousal benefit while earning delayed credits for his or her own record.

Even with the limitations imposed by the new legislation, working with a Certified Financial Planner to analyze the timing around receiving Social Security benefits will continue to be an important facet of maximizing the planning opportunities available.

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

Important financial moves investors should consider prior to year’s end

While many set out at the beginning of the year with a list of financial goals, most procrastinate and miss big opportunities to take advantage of rules to reduce income taxes or transfer wealth.

Smart Business spoke with Aaron T. Armstrong, a senior wealth manager at Budros, Ruhlin & Roe, Inc., about financial moves to consider making before the end of the year.

How can gifts benefit an investor?

Each year the IRS allows individuals to make annual exclusion gifts up to $14,000 for any purpose without using their lifetime gift tax exemption. While these gifts by themselves will not have a significant impact on the donor’s estate in any given year, there can be significant wealth transferred to the next generation over time by pursuing an annual gifting strategy.

Further, making a gift to a trust for the child’s benefit is a great option for those who want to provide future capital to their children, but whose children are not yet ready to manage that new responsibility.

Investors who hold education in high regard and have a goal to fund children’s or possibly grandchildren’s college educations have a great vehicle to help achieve their goal in the Qualified Tuition Programs. Better known as 529 plans, they allow contributors to accelerate five years of gifts into a single year. To take advantage of the 2015 annual exclusion, a gift must be completed prior to Dec. 31.

What should donors consider before making charitable gifts?

While no decision to fund a charity should be made unless there is a charitable goal supporting the decision, making a charitable contribution can provide a significant tax benefit to the donor.

To maximize the benefit, an individual should consider completing the gift by transferring highly appreciated securities, which have been held for at least 12 months, to the charity. By making the gift with securities, the investor will avoid the gain he or she would have realized on the sale while receiving an income tax deduction equal to the fair market value of the securities being used to make the gift.

As a 501(c)(3) organization, the charity will pay no income tax on the sale of the gifted securities. Gifts must be made prior to Dec. 31 to provide an income tax deduction for this year.

In what situations should investors accelerate tax payments or income?

The timing of state and local tax, estimated income tax payments and property tax payments can impact income tax liability from year to year. Taxpayers who expect to be in a higher income tax bracket this year than next year should consider accelerating these payments by making them before Dec. 31 to qualify for a higher 2015 income tax deduction. The prepayment of these expenses will lower their income tax liability and possibly their marginal tax rate.

Alternatively, if individuals expect their income tax rate to increase next year, they should consider waiting until January to make the payments.

The timing of the payments will get more complicated if the individual is subject to the Alternative Minimum Tax (AMT). State and local income and property taxes are considered preference items and provide no deduction against the AMT.

Similarly, while it often makes sense to defer the realization of income to postpone paying income taxes, there are some cases in which individuals should choose to accelerate income and the payment of the resulting income tax.

Transferring value from an IRA to a Roth IRA is a great way to take advantage of the lower income tax brackets after retirement, but before required minimum distributions begin from IRAs at age 70½. Choosing to accelerate income to pay taxes at a lower rate in the current year will not only lower a taxpayer’s average income tax rate during retirement, but it also provides a great source of income tax-free capital in the future.

While it is important to consider these and other strategies individually, the real benefit can come in implementing some of these ideas together. For example, large contributions to charity can be used to offset the income tax from Roth conversions. The results can be the completion of a goal and better positioning for income taxes in the future.

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

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 (, 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