What am I eligible to recieve?

If you leave a job, you'll be entitled to a distribution of the vested balance in your account. Your vested balance will always include your contributions (pretax or after-tax) and any growth or earnings on those amounts. It also includes your employer’s contributions that have satisfied your plan's vesting schedule. 

This schedule will vary by employer so, it's important for you to understand how your particular plan's vesting schedule works. Your 401(k) Plan Document (available through your HR department) will spell out how the vesting schedule for your particular plan works. If you're on the cusp of vesting, it may make sense to wait a bit before leaving, if you have that luxury.

Should I roll over to my new employer's 401(k) plan or to an IRA?

When it comes to the decision of where to move your 401(K), there's no right or wrong answer to this question.  You need to consider all of the factors, and make a decision based on your own needs and objectives.

Reasons to roll over to an IRA:

• When investing in an IRA, You generally have more investment choices than with an employer's 401(k) plan. You can freely move your money around to the various investments, including individual stocks and bonds along with mutual funds and you may divide up your balance among as many of those investments as you want. By contrast, 401(k) plans typically give you a limited menu of investments (usually mutual funds) from which to choose.
  

• You can easily transfer your IRA dollars among different IRA accounts. This gives you flexibility to change trustees often if you are dissatisfied with investment performance or customer service. With an employer's plan, you can't move the funds to a different trustee unless you leave your job and roll over the funds.
  

• An IRA may give you more flexibility with distributions. Your distribution options in a 401(k) plan depend on the terms of that particular plan, and your options may be limited. However, with an IRA, the timing and amount of distributions is generally at your discretion (until you reach age 70½ and must start taking required minimum distributions in the case of a traditional IRA).
  

• You can roll over (essentially "convert") your 401(k) plan distribution to a Roth IRA. You'll have to pay taxes on the amount you roll over (minus any after-tax contributions you've made), but any qualified distributions from the Roth IRA in the future will be tax free.
  

Reasons to roll over to your new employer's 401(k) plan:

• Most employer 401(k) plans have loan provisions. If you roll over your retirement funds to a new employer's plan, you may be able to borrow up to 50% of the amount you roll over if you need the money. You can't borrow from an IRA--you can only access the money in an IRA by taking a distribution, which may be subject to income tax and penalties. (You can, however, give yourself a short-term loan from an IRA by taking a distribution, and then rolling the dollars back to an IRA within 60 days.)
  

• A rollover to your new employer's 401(k) plan may provide greater creditor protection than a rollover to an IRA. Most 401(k) plans receive unlimited protection from your creditors under federal law. Your creditors (with certain exceptions) cannot attach your plan funds to satisfy any of your debts and obligations, regardless of whether you've declared bankruptcy. In contrast, any amounts you roll over to a traditional or Roth IRA are generally protected under federal law only if you declare bankruptcy. Any creditor protection your IRA may receive in cases outside of bankruptcy will generally depend on the laws of your particular state. If you are concerned about asset protection, be sure to seek the assistance of a qualified professional.
  

• You may be able to postpone required minimum distributions. For traditional IRAs, these distributions must begin by April 1 following the year you reach age 70½. However, if you work past that age and are still participating in your employer's 401(k) plan, you can delay your first distribution from that plan until April 1 following the year of your retirement. (You also must own no more than 5% of the company.)
  

• If your distribution includes Roth 401(k) contributions and earnings, you can roll those amounts over to either a Roth IRA or your new employer's Roth 401(k) plan (if it accepts rollovers). If you roll the funds over to a Roth IRA, the Roth IRA holding period will determine when you can begin receiving tax-free qualified distributions from the IRA. So if you're establishing a Roth IRA for the first time, your Roth 401(k) dollars will be subject to a brand new 5-year holding period. On the other hand, if you roll the dollars over to your new employer's Roth 401 (k) plan, your existing 5-year holding period will carry over to the new plan. This may enable you to receive tax-free qualified distributions sooner.
  

When evaluating whether to initiate a rollover always be sure to (1) ask about possible surrender charges that may be imposed by your employer plan, or new surrender charges that your IRA may impose, (2) compare investment fees and expenses charged by your IRA (and investment funds) with those charged by your employer plan (if any), and (3) understand any accumulated rights or guarantees that you may be giving up by transferring funds out of your employer plan.

What about outstanding plan loans?

In general, if you have an outstanding plan loan, you'll need to pay it back, or the outstanding balance will be taxed as if it had been distributed to you in cash. If you can't pay the loan back before you leave, you'll still have 60 days to roll over the amount that's been treated as a distribution to your IRA. Of course, you'll need to come up with the dollars from other sources.

Exchange-traded funds (ETFs) have become increasingly popular since they were introduced in the mid-1990s. Their tax efficiencies and relatively low investing costs have attracted investors who like the idea of combining the diversification of mutual funds with the trading flexibility of stocks. ETFs can fill a unique role in your portfolio, but you need to understand just how they work and the differences among the dizzying variety of ETFs now available.

What is an ETF?

Like a mutual fund, an exchange-traded fund pools the money of many investors and purchases a group of securities. Like index mutual funds, most ETFs are passively managed. Instead of having a portfolio manager who uses his or her judgment to select specific stocks, bonds, or other securities to buy and sell, both index mutual funds and exchange-traded funds attempt to replicate the performance of a specific index.

However, a mutual fund is priced once a day, when the fund's net asset value is calculated after the market closes. If you buy after that, you will receive the next day's closing price. By contrast, an ETF is priced throughout the day and can be bought on margin or sold short--in other words, it's traded just as a stock is.

How ETFs invest

Since their inception, most ETFs have invested in stocks or bonds, buying the shares represented in a particular index. For example, an ETF might track the Nasdaq 100, the S&P 500, or a bond index. Other ETFs invest in hard assets--for example, gold bullion. In such cases, a commodity or precious-metals ETF may buy futures contracts or quantities of bullion. With the rapid proliferation of ETFs in recent years, if there's an index, there's a good chance there's an ETF that invests in it.

More and more new indexes are being introduced, many of which cover narrow niches of the market, or use novel rules to choose securities. Many so-called rules-based ETFs are beginning to take on aspects of actively managed funds--for example, by limiting the percentage of the fund that can be devoted to a single security or industry.

Pros and Cons of Exchange-Traded Funds

Pros:
-ETFs can be traded throughout the day as price fluctuates
-ETFs can be bought on margin, sold short, or traded using stop orders and limit orders, just as stocks can
-ETFs do not have to hold cash or buy and sell securities to meet redemption demands by fund investors
-Annual expenses are often lower, which can be especially important for long-term investors
-Because ETFs typically trade securities infrequently, they have lower annual taxable distributions than a mutual fund

Cons:
-Dollar-cost averaging will require paying repeated commissions and will increase investing costs
-If an ETF is organized as a unit investment trust, delays in reinvesting its dividends may hamper returns
-An ETF doesn't necessarily trade at its net asset value, and bid-ask spreads may be wide for thinly traded issues or in volatile markets

The new wave of ETFs

New and unique indexes are being developed every day. As a result, ETFs that might seem similar--for example, two funds that invest in large-cap stocks--can actually be quite different. Many indexes define which securities are included based on their market capitalization--the number of shares outstanding times the price per share. However, other indexes and the ETFs that mimic them may select or weight securities within the index based on fundamental factors, such as a stock's dividend yield.

Why is weighting important? Because it can affect the impact that individual securities have on the fund's result. For example, an index that is weighted by market cap will be more affected by underperformance at a large-cap company than it would be by an underperforming company with a smaller market cap. That's because the large-cap company would represent a larger share of the index. However, if the index weighted each security equally, each would have an equal impact on the index's performance.

The cost advantages and tradeoffs of ETFs

As indicated above, one of the reasons ETFs have gained ground with investors is because of their low annual expenses. Passive index investing means an ETF doesn't require a portfolio manager or a research staff to select securities; that reduces the fund's overhead. Also, investing in an index means that trades are generally made only when the index itself changes. As a result, the trading costs required by frequent buying and selling of securities in the fund are minimized.

However, don't forget that you'll generally pay a commission with each ETF trade (depending on the type of account you have). That means a one-time lump-sum investment in an ETF will be more cost-effective than dollar-cost averaging, which involves frequent, regular investments over time.

ETFs and taxes

ETFs can be relatively tax efficient. Because it trades so infrequently, an ETF typically distributes few capital gains during the year. In the past, there have been times when some investors found themselves paying taxes on capital gains generated by a mutual fund, even though the value of their fund may actually have dropped. Though it's not impossible for an ETF to have capital gains, ETFs generally can minimize the ongoing capital gains taxes you'll pay.

Just how much impact can reducing taxes have over the long term? More than you might think. Even a 1% difference in your return can be significant. For example, if you invest $50,000 and earn an average annual return of 5% (compounded monthly), you would have a pretax amount of $82,350 after 10 years. Even a 1% increase in that return would give you $90,970 at the end of that time. (This hypothetical example is for illustrative purposes only and does not represent the performance of any particular investment. Actual results will vary.)

Make sure you consider how an ETF's returns will be taxed. Depending on how the fund is organized and what it invests in, returns could be taxed as short-term capital gains, ordinary income, or in the case of gold and silver ETFs, as collectibles; all are taxed at higher rates than long-term capital gains.

What are some other reasons investors use ETFs?

· To get exposure to a particular industry or sector of the market.Because the minimum investment in an ETF is the cost of a single share, ETFs can be a low-cost way to make a diversified investment in alternative investments, a particular investing style, or geographic region.

· To limit losses. Being able to set a stop-loss limit on your ETF shares can help you manage potential losses. A stop-loss order instructs your broker to sell your position if the shares fall to a certain price. If the ETF's price falls, you've minimized your losses. If its price rises over time, you could increase the stop-loss figure accordingly. That lets you pursue potential gains while setting a limit on the amount you can lose.

How to evaluate an ETF

1.     Look at the index it tracks. Understand what the index consists of and what rules it follows in selecting and weighting the securities in it.

2.     Look at how long the fund and/or its underlying index have been in existence, and if possible, how both have performed in good times and bad.

3.     Look at the fund's expense ratios. The more straightforward its investing strategy, the lower expenses are likely to be. An index using futures contracts is likely to have higher expenses than one that simply replicates the S&P 500.

Your financial professional can help you decide how ETFs might fit your investing strategy.

Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual's personal circumstances.  To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.  These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

Negative returns early in retirement can have a devastating long term impact. There are numerous studies on the impact of volatile market returns on your income from retirement savings. However, the sequence in which those returns happen can be the difference in barely making it through retirement or leaving a multimillion dollar legacy to your family.  Despite these studies, I still see many traditional retirement income plans that utilize a constant average rate of return in their projections. This flat, no volatility average can lead pre-retirees and retirees to believe that they face minimal or no risk in funding their retirement. These conventional retirement plans completely exclude sequence of return risk and the impact of negative years early in retirement. 

Suppose you need $50,000 in annual income from your investments. You have $1,000,000 in investments and you project a 6% average annual return which would give you that amount of income and still give you growth in order to adjust for the historical inflation rate of 3.6%.  It appears on the surface like your investments can provide you with a retirement income that will maintain your standard of living and possibly maintain most of your original investment.

Unfortunately in the real world, market returns are not a constant 6%, rather they are not constant at all and can fluctuate significantly year to year. Let’s assume you have a portfolio that has an  average annual return of  6%, with repeating series of returns - depending on when you retire you can get (+6, -13, +25) or (-13, +6, +25) or (+25, +6, -13).

Pre-Retirement The Sequence Of Returns is Irrelevant

During the accumulation phase the sequence of returns does not matter.  When there are no withdrawals, a $1,000,000 initial investment after a 3 year cycle will always ends up being worth about $1,152,750 no matter what order the returns come. 

At Retirement, Sequence Of Returns is Crucial 

When you start retirement income the sequence of returns makes a significant difference in portfolio longevity. Assume you retire today at age 65 and you have a $1,000,000 portfolio and need $50,000 annually and want it adjusted for the historical inflation rate of 3.6%.  The best sequence with the positive returns coming first, (+25, +6, -13), means your annual income will last until age 94. The worst sequence with the negative and smaller positive returns coming first, (-13, +6, +25), results in your portfolio being depleted at age 86. With life expectancies approaching the late 80’s, the difference of 8 years can be the difference between having enough and having to sacrifice when you need it most.

Consider a Real World Example

Let’s look at one of the more significant historical examples.  Consider 3 individuals each retiring on January 1st in 3 consecutive years and each had a 30 year retirement. The first retired in 1962-1991, the second in 1963-1992 and the third in 1964-1993. Assume they each retired with $1,000,000 and withdrew $50,000 annually indexed to the average inflation. You might think that their balances would all be similar after 30 years of retirement.  That makes sense when you see that the average annual rate of return for a balanced portfolio (60% Equity & 40% Fixed Income), over the past 60 years, was over 8% and the average inflation rate was 3.7% and you are only taking out 5% indexed to inflation.

This is not the case!

Because the first year of retirement for the individual that retired in 1962 was negative (remember withdrawals will amplify a negative return) and significantly different from the first year of retirement of the individuals the retired one and two years after, their ending value is surprisingly different.

The question boils down to how much of your retirement success or failure and how much of the legacy you leave to your family do you want to leave to chance?

The purpose of this article is not to be fatalist, but to point out that if you want to truly have a secure retirement you need to consider a plan that is tested and considers multiple tools to help you grow your income and account value over time, but that also protects a minimum income in the scenario that the market does not perform in your first years after retirement.


Bryon E. Townsend, CFP® is Managing Director at W.R. Anderson & Co, LLC a Houston, TX based financial planning firm.  Securities and Investment Advisory services offered through Cetera Advisors LLC, member FINRA/SIPC. W.R. Anderson & Co is under separate ownership from Cetera Advisors.  The information presented above is not intended to promote any specific investment vehicle nor any specific strategy. As well it is not intended to represent financial advice.  The calculations and charts were prepared from research by W.R. Anderson & Co. Registered branch address: 2190 N. Loop W., Ste 103 Houston, TX 77018

To pay off debt or save for your retirement is an age long debate.  When it comes to paying off debt there are a variety of methods that will not only reduce the amount of interest paid, but significantly reduce the amount of time it takes to pay off the debt.  On the flip side we hear all of the studies that the more we save earlier in life, the more of an impact compound interest has later in life, and could potentially reduce the amount of money I you would need to save to reach your retirement goals.  Both are important; both can give you a more secure future. If you are not able to afford to tackle both at the same time, which should take priority?

Unfortunately, there is no right answer for every situation, but here are some elements to consider during your decision making process.

Your Debt Interest Rate vs. Your Investment Rate of Return

Often the most discussed way to decide whether to pay off debt or to fund investments is to determine whether you could earn a higher after-tax rate of return from your investments than the after-tax interest rate you pay on the debt. For example, say you have a credit card balance on which you pay nondeductible interest of 15%. By getting rid of those interest payments, you're effectively getting a 15% return on your money. That means your money would generally need to earn an after tax return greater than 15% to make investing a smarter choice than paying off debt. That's a pretty tough challenge even for aggressive investors.

Keep in mind, the higher the rate of return, often there is greater risk on investments. If you make investments rather than pay off debt and your investments incur losses in the near-term, you may still have debts to pay, but you won't have had the benefit of any gains. By contrast, the return that comes from eliminating high-interest rate debt is a sure thing. In summary, the higher the interest rate on your debt the wiser it is the pay off debt instead of investing.

A 401k Match May Boost Your Return on Investments

If your employer matches a percentage of your 401k account contributions, that can make the debt vs. investing decision more complicated. Let's say your company matches 50% of your contributions up to 6% of your salary. That means that you're earning a 50% return on that portion of your retirement investment account. If surpassing a 15% return from paying off debt is challenging, getting a 50% return on your money simply through making contributions to our 401k is even more difficult. In this scenario, you know in advance what your return from the match will be; very few investments can offer the same degree of certainty. That's why many financial experts argue that saving at least enough to get any employer match for your contributions may make more sense than any other investment option.

Don't forget the tax deductibility of contributions to a 401k plan. By contributing pretax dollars to your plan account, you're deferring anywhere from 10% to 39.6% in Federal income taxes.

Maybe a Combination Might Be Easiest

If you itemize deductions, the interest you pay on a mortgage is generally deductible on your federal tax return. Let's say you're paying 5% on your mortgage and 15% on your credit card debt and your employer matches 50% of your retirement account contributions. You might consider directing some of your available resources to paying off more on the credit card debt and enough towards your retirement account in order to get the full company match, and continuing to pay the normal tax-deductible interest mortgage payment.

There's another good reason to explore ways to address both goals. Time is on your side when saving for retirement. If you say to yourself, "I'll delay saving for retirement until I completely pay off my debt,"  you run the risk that you'll never get to that point, because good intentions about paying off your debt may falter at some point. Putting off saving also reduces the number of years you have to save for retirement and weakens the power that compound interest has to grow your retirement savings.

Bear in mind that even if you decide to focus on retirement savings, you should make sure that you're able to make at least the monthly minimum payments owed on your debt. Failure to make those minimum payments can result in penalties and increased interest rates which will only make your debt situation worse.

Other Factors to Consider

When determining whether to invest for retirement or pay off debt you should consider the following factors.

• Do you have the ability to refinance or consolidate larger interest rate debt to a lower interest rate.
  
• If you decide to down debt first, set up your payments to be made automatically from your checking account, so there won't be any temptation to reduce or delay payments.
• Do you have an established emergency fund?  If you pay off your debt, you run the risk of building it back up in an emergency if you don't have an appropriate cushion to protect you.

Whichever decision you decide it important to build a budget and plan to accomplish your goal and then critical to stick to that goal.

As you evaluate your retirement strategy and make 401k plan investment decisions you will need to consider your investment objectives, your comfort with risk, and each investments performance over time in order to make sound investment decisions. However, a real problem can arise if you are not considering the 401k fees and expenses.  These fees and expenses are hidden factors that may disrupt the entire 401k and retirement planning process by reducing the amount of money you have at retirement.  

Why are 401k plan fees important to me?

In a 401k plan, your account balance will determine the amount of retirement income you will receive from the plan. While contributions to your account and the earnings on your investments will increase your retirement income, fees and expenses paid by your plan may substantially reduce the balance of your account.

Assume that you're an employee with 30 years until retirement and a current 401k account balance of $25,000. If returns on investments in your account over the next 30 years average 8% and fees and expenses reduce your average returns by 0.5%, your account balance will grow to $218,874 at retirement, even if there are no further contributions to your account. If fees and expenses are 1.5%, however, your account balance will grow to only $165,359. The 1% difference in cost would reduce your retirement account by approximately 30%.*

The table below illustrates how increasing investment costs can impact the growth of the hypothetical 401k plan account after 30 years, assuming a $25,000 starting balance, 8% annual return before expenses and fees, and no additional contributions.

How do I determine what my plan's fees are?

First it is important to differentiate between the two different types of costs charged by your 401k plan, and the way they are allocated to plan participants. The best way to do this read the fee disclosure information that is part of the 401k Plan Document.

Cost #1: Investment Expenses

The largest portion of 401k plan cost is associated with the investment options themselves. Your disclosure statement should clearly indicate the total annual operating expenses of each investment option. For example, in the case of a mutual fund, these operating expenses may include investment management fees and 12b-1 fees. These fees are charged against the assets of the fund and reduce the fund's total return. The annual operating expenses will be shown both as a percentage of assets (expense ratio) and as a dollar amount for each $1,000 invested. For example, a fund may have an expense ratio of .50%, or $5.00 for each $1,000 invested. In this case, the $25,000 invested in the fund would cost $125.00 annually (25 times $5.00).  It is also important to note that many funds with the same names sometimes have different share classes (or expense structures) for investments that are part of a 401k plan, so always use your Plan Document to determine expenses.

This disclosure material will also disclose any transaction type fees that may apply to investment options. These could be cost such as sales charges and loads, withdrawal fees and surrender penalties, or costs to transfer between investment options.

These differences in costs may help you choose between multiple portfolio options that are otherwise similar in investment objective and performance.

Cost #2: Administrative fees

The daily administration of a 401k plan also involves expenses for basic operations (activities such as plan record keeping, accounting, legal and trustee services) that are necessary for running the 401k as a whole. These fees can either be paid by the employer directly or paid by the plan participants.  If they are paid by plan participants you will see the fees assessed one of two ways. Either as a flat fee to each participant’s account (so that each person pay’s the same fixed cost) or charged on a proportional basis (so that participants with larger accounts pay more of the overall expenses). Your plan’s fee disclosure is required to contain an explanation of all costs and charges that will be applied to an individuals accounts.

Fees and expenses are just one factor in determining which investments in your 401k will help you meet your retirement planning needs.  However, it is important to consider your fees and expenses when calculating your return needed to achieve your goals. The higher the cost, the higher the required return and most likely the higher the risk that needs to be taken.  Check with your financial advisor to review your 401k plan and determine if you retirement savings in on track.

Determining how big of a nest egg you will need to generate enough retirement income is the most commonly asked question when it comes to retirement planning.  There are many rules of thumb to calculating your retirement number. I have read articles that say to calculate your retirement account size, simply take 80% of your current income and multiply it by 25.  These basic retirement goal calculations are OK, because it gives you a goal to target. However, I will give you a more targeted  6 step approach to calculating your nest egg and better set your retirement goals.

How to calculate "Your Number":

    1.) Start with how much money you would need to live today. There are 2 ways to figure this out: You could calculate your base expenses and spending budget or you could take a percentage of your current annual income.  (For this example lets assume I calculate that I make $60,000 in salary annually. Rule of Thumb says you would use 80% of this number. So my current living income for this calculation would be $48,000/year).

    2.) Then determine at what age you would like to retire. How many years from now? (EX: Lets assume I would like to retire 20 Years from today.)

    3.) We need to determine an assumed interest rate. Most industry insiders will use an interest rate of between 3-4%. (EX: To be more conservative in my calculations I will assume a higher inflation rate and select to use 4%.)

    4.) Using a Financial Calculator adjust your income from Step # 1 to create an inflation adjusted income at your retirement age. (EX:  Initial Deposit or Present Value/PV is $48,000; End Date is today's date 20 years from now or N= 20; Rate of Return or i =4; remember to compound annually.  That equals an inflation adjusted income of approximately $105,000 at my planned retirement in 20 years.)

    5.) Now determine what other sources of income you might have at retirement.  For example Social Security or a company pension.  (You can use the calculators at ssa.gov to help determine what your Social Security payment might be) then subtract that amount from the amount that you calculated in Step #4. ( Assume that I will have $30,000 annually in Social Security benefits, then my income gap is $105,000 - $30,000 or  $75,000)

    6.) Take your future income number from Step #5 and divide it by .05 which will represent a 5% withdrawal rate on your investments at retirement ( or divide by .04 to be very conservative) that result is the total amount of money you will need to retire, your number! (EX: $75,00 divided by .05 = $1,500,000 which is what I'll need to retire in 20 years from now)

When visiting with a financial planner that you are considering working with, treat the initial meeting as a mutual interview. The financial planner should ask you about your current financial situation, financial goals and your personality as it relates to investing. By getting to know your financial situation, the financial planner can begin to formulate an investment strategy that is specific to your needs.  At the same time, you should be prepared to ask questions that will allow you to determine if you would feel comfortable working with this financial planner.

Do not feel that you need to work with the first person you meet with, you should interview at minimum 3 financial professionals.  Remember you can’t control what will happen in the stock market, but you can control your quality of service.  With this in mind, make sure to interview each advisor thoroughly so that you feel comfortable with your decision.  Depending on where you live, there are probably dozens, if not hundreds of advisors within a 30 minute drive from you, so if you are not 100% comfortable, keep interviewing. Just as you would visit several car dealerships and test several car models before making a purchase, you should make sure to check each advisor to make sure that the advisor’s qualifications, personality and overall business model match with your goals.

The goal of this article is to prepare you for the interview by letting you know what to expect, what to ask, and what you should know about your financial advisor.  By investing a small amount of time now, by setting forth personal financial goals, as well as some objective qualifications that you would expect of an advisor, you can save yourself from worrying about whether you made the right decision later on.

Determing Your Financial Goals

Your goals can be broad, such as wanting to be able to travel in retirement, or they can be specific, such as wanting to buy a new home within the next couple of years. Below are some areas for consideration before you meet with a financial professional.  Write down your goals and bring them with you to the interview.

  A. What are your goals? What are you saving for?
      Examples: A down payment on a home, vacation, sending your kids to college, planning for retirement.

 B. How much progress have I made toward obtaining each of your goals?
      Include how much you currently have and where it is currently invested.

  C. What is your time frame? How soon do I wish to accomplish these goals?
      Break each goal into short-term (3 year or less), medium-term (3 - 10 years) or long-term (10+ years)

Preparing for the Interview

By having your goals written, you are already ahead of most people when it comes to their financial planning.  It is important that you give consideration to each advisor so that you can be comfortable with making the most informed decision possible. This section is aimed at giving you some basic guidelines on what to expect, what to ask, and what you should know about your financial advisor. Make sure to write these questions down and bring them to your interview. Have the advisor answer as much information as possible, and write down the responses so that you are able to compare several advisors objectively later on.

Attached are some questions to get the information you would need to properly evaluate the advisors. Tip: Print these questions and take them with you to the interview.

 1. What Services Do You Provide?
      Tax planning?
      Estate planning?
      Insurance Reviews?
      Retirement planning?
      Recommendations for investments or investment products?
      Anything else?

 2. What licenses or qualifications do you hold?
      Do you hold professional certifications or designations?
      How long have you held each of these?
      What states are you licensed in?
      What types of investments are you licensed to offer?
      Do you belong to any financial organizations or societies? Which ones?

 3. How would you prepare my financial plan? Qualified advisors might use the following methodologies:
       Gathering current financial data
       Setting goals and understanding risk tolerance
       Analyzing and evaluating financial status
       Developing and presenting a full range of alternatives and their particular recommendations
       Preparing a written plan
       Counseling on how to implement the plan

 4. What continued services will I receive after the initial plan?
       Do you sell financial products?
       How often do you send out portfolio reports?
       What are your market research methods?
       Will I continue to receive written analysis of my financial situation and your recommendations?
       Will you provide continued advice on non-investment financial issues?
       Do you take possession of, or have access to my assets?

Look for a financial advisor who provides ongoing services to advise and assist in your plan's implementation as well as future plan revisions.

The next important area of questioning has to do with how the advisor is paid. At this point, your examination of what services the advisor provides should have given you a basic idea of how much value you would derive from them. Now, by finding out about the advisor’s fees, you can see whether you expect to get your money’s worth by hiring him/her. You should ask:

 5. How is your compensation calculated?
 6. Do you provide an initial meeting at no cost? (Financial professionals generally provide a free initial meeting)
 7. How does the advisor charge for the services?
         Hourly rate
         Flat fee
         Percentage of assets
         Commission (fee per financial product sold)
         Is the fee schedule flexible?
     
Although there is no best answer for everyone, it is important for you to understand how your advisor will be compensated. Hopefully, by having these questions answered, you will have a good idea of whether an advisor provides the services you desire. Look for a very strong fit here, but keep in mind that the more extensive the services are the more expensive they will be.

What About Your Credentials and Record of Integrity?

The advisors that you visited probably told you of their numerous qualifications. Be sure to do your homework on those designations, because not all designation are built on are equal.  Certain designations require significant study and examination, while others are simply marketing gimmicks that require minimal effort. Designations such as the Certified Financial Planner (CFP) designation is considered to be the highest for Financial Advisors and the Chartered Financial Analyst (CFA) is considered to be the highest among Asset/Portfolio Managers.

There are two main sources of information that will help you to answer this question: government agencies and fellow clients. Any financial advisor who provides advice about securities must be registered with the Securities and Exchange Commission (SEC) and/or the state securities agency, depending on the total value of assets under management. Most advisors will provide a roster of clients who can share their experiences with you.

Obtain a copy of the advisor’s registration form, Form ADV. Part 1 discloses information about the advisor’s education, business, and whether the advisor has had problems with regulators or clients. Part 2 outlines the advisor’s services, fees, and strategies. You can get Form ADV from the advisor, the SEC, or the state securities regulator, depending on the size of the advisor’s business.

Call your state securities regulator to see if the advisor has a record of complaints. You can also verify the advisor’s educational and professional background by going to the Broker Check section of the websites below:
  The Financial Industry Regulatory Authority (FINRA) at 800-289-9999 also provides information about the advisor’s licensing and any consumer or regulatory complaints.
  Call the Securities and Exchange Commission (SEC) at 1-800-732-0330 to verify that the advisor is registered with the SEC.
  The Certified Financial Planner (CFP) Board of Standards at 888-CFP-MARK(237-6275) will verify whether an advisor has earned the CFP designation. You can call the CFP Board of Standards (303) 830-7543, ext. 219 to check on license and disciplinary record of Financial Planners.

After the Interview

Now that you have met several financial advisors it’s time to start reviewing the information that you’ve received in order to make a final decision. Remember: make sure to select advisors based upon their qualifications rather than their personalities. While selecting an advisor that you get along with is important, it is even more important that they have the skills and knowledge to effectively handle your investments.

Review the qualifications that each advisor listed. Did anything stand out for each advisor that made you uneasy? Reassured? Make notes of such sentiments while you draw comparisons. Did the advisor listen to what your goals, risk tolerances and questions were?

An advisor’s track record is the best indicator of what the advisor will do for you. Explore further if there are any differences between what the advisor told you and what your research told you.

Making A Decision

If you have gotten this far, then you have just about all the information you will need to make a decision regarding which advisor seems the best for you. Don’t settle for someone you are unsure of because there are many advisors to choose from. You should be able to find one with a strong track record of providing the services you need at a reasonable cost. Most importantly, you should feel comfortable with the professional that you choose. You want someone that you have confidence in; after all, this is your money that we're talking about. No matter what his or her title is, your professional should seem like the right choice to you. 

Answer:

Individuals who choose not to join a Medicare Part D prescription drug plan when they are first enrolled in Medicare may have to pay a Late Enrollment Penalty every month for the rest of their lives when they eventually do join a Medicare Prescription Drug (Part D) plan.

What Is the Late Enrollment Penalty?
The Late Enrollment Penalty is a monthly amount added to a persons Medicare Part D premium if the individual does not join a Medicare Part D prescription drug plan when first entitled to Medicare Part A and/or enrolled in Medicare Part B and does not have any other creditable prescription drug coverage. This penalty does not apply to those receiving the low-income subsidy.

The late enrollment penalty will also be added to the Medicare Part D premium if, at any time after the initial enrollment period is over, there's a period of 63 consecutive days when the individual does not have Part D or other creditable prescription drug coverage.

How Much Is the Penalty?
It all depends on how long the individual has delayed enrolling in a Medicare Part D plan.

The Late Enrollment Penalty is calculated as follows:

• Multiply 1% of the “national base beneficiary premium” ($31.17* in 2013)
• Times the number of full, uncovered months that the member was eligible but didn’t join a Medicare prescription drug plan and went without other creditable prescription drug coverage.
• Then round the final amount to the nearest $.10 and add the total penalty to the monthly premium.   

Since the “national base beneficiary premium” is subject to increase or decrease each year, the penalty amount may also increase or decrease every year. The member may have to pay this penalty for as long as they have a Medicare prescription drug plan.

*Annual changes in the base premium used to calculate the late-enrollment penalty can be found at www.Medicare.gov.

A federal estate tax overview

• An unlimited marital deduction is generally available for transfers of wealth between you and your spouse.
• Made permanent in January 2013, an estate of $5 million (The $5 million amount will be indexed for inflation. Making it $5.25 million in 2013) can be sheltered by a $5 million basic exclusion amount and a tax rate of 40% applies to any excess. 
• Any unused portion of the basic exclusion of a deceased spouse is portable and can be transferred to a surviving spouse. 

 
The A, or power of appointment marital, trust

The A trust is structured to qualify for the marital deduction. You give your surviving spouse a right to all of the trust's income for life and the power to appoint who receives the trust property at your spouse's death. You would typically fund the A trust (together with a Q trust, if desired) with the amount of your estate in excess of the applicable exclusion amount.

The B, or bypass credit shelter, trust

You would typically fund the B trust with an amount equal to the applicable exclusion amount, or credit shelter amount. You can give your spouse interests in the B trust, but generally none that would cause the trust to be includable in your spouse's estate for estate tax purposes (thus, the B trust bypasses your spouse's estate). You can name the persons who will receive trust income or other distributions from the trust. You can also provide that, at your spouse's death, the trust will continue for the benefit of, or be distributed to, your children or other beneficiaries. Or, you could give your spouse a limited power to appoint property among a limited class of beneficiaries, such as your children from your current marriage.

The Q, or QTIP marital, trust

The Q trust, typically a QTIP trust, is also structured to qualify for the marital deduction. You give your surviving spouse a right to all of the trust's income for your spouse's life. However, you retain for yourself the right to designate who receives the property at your spouse's death. This can be useful when you have children from a prior marriage who you would like to benefit after your spouse's death. You would typically fund the QTIP trust (together with an A trust, if desired) with the amount of your estate in excess of the applicable exclusion amount.

Everything to spouse versus A/B trusts

Because the exclusion amount higher and portable, some couples may think they do not need A/B or A/B/Q trusts. Everything could be left to the surviving spouse who uses both spouses' exclusions. However, there are still potential tax advantages to using this basic planning strategy as shown in the following example.

Example: John dies in 2013, leaving $10 million to his wife Mary. The transfer qualifies for the marital deduction, no estate tax is due, and John's unused $5 million exclusion is transferred to Mary. A $5.25 million basic exclusion amount that is indexed and portable, and a top estate tax rate of 40%) and that, by the time of Mary's death, the basic exclusion amount has increased to $10 million and the value of Mary's estate has doubled. Mary's estate of $20 million is partially sheltered by her applicable exclusion amount of $15.25 million ($10 million basic exclusion plus John's unused $5.25 million exclusion). After estate taxes of $1,900,000 are paid, $18,100,000 remains for John and Mary's children.

Assume instead that John leaves $5 million to Mary in an A trust and $5 million in a B trust for Mary and their children. No estate tax is due. Mary's basic exclusion amount at the time of her death is $10 million, and that assets have doubled in value. Mary's estate of $10 million is sheltered by her basic exclusion amount of $10 million. No estate tax is due. The entire $20 million (the $10 million B trust plus Mary's $10 million estate) remains for John and Mary's children. By using the A/B trusts, estate tax has been reduced by $1,900,000, and the tax savings go to John and Mary's children.

Other trust benefits

The use of trusts can also provide other benefits, such as control over who receives your property and when, investment management of trust property for trust beneficiaries, avoidance of probate, and asset protection. To learn more, consult an estate planning professional.

Your countable income must be below an annual pension limit set by law. This pension limit is higher based on whether you have a spouse and/or dependents. You can reduce your countable income by deducting unreimbursed medical expenses that exceed 5% of the appropriate annual pension limit.

While there's no stated limitation on your net worth in order to qualify for pension benefits, the VA states that net worth can't be excessive. Generally, you may not be eligible for benefits if your net worth is large enough to live on for a reasonable period of time.

Your benefits are calculated by totaling all of your countable income reduced by eligible unreimbursed medical expenses. This figure is subtracted from the appropriate annual pension limit to determine your total annual pension, which is then paid monthly. For example, assume the appropriate annual pension limit is $11,830; you have unreimbursed medical expenses of $1,500 and countable annual income of $8,500. Your countable income ($8,500) is reduced by your unreimbursed medical expenses that exceed 5% of the appropriate annual pension limit ($1,500 - $592 = $908). Your countable income ($8,500 - $908 = $7,592) is then subtracted from the appropriate annual pension limit ($11,830 - $7,592), resulting in an annual pension of $4,238, or $353 per month. Your monthly benefit may be increased if you're eligible for Aid and Attendance or housebound benefits. For additional information, visit the United States Department of Veterans Affairs website at www.va.gov.