Category: Fiduciary

What is a fiduciary financial advisor?

Just because a financial advisor is technically a fiduciary, does it mean they are automatically superior to other financial advisors? 

What is a fiduciary financial advisor in the first place?  

Are fiduciaries always fiduciaries?  

What are the limitations of a fiduciary financial advisor?  

How do fiduciary financial advisors charge?

Let’s unpack the jargon and dive into what really matters when hiring a financial professional to assist with your financial goals.    

So, what is the definition of a fiduciary financial advisor?

How about a definition from good ole’ ChatGPT?!  

“A fiduciary financial advisor is a financial professional who is legally and ethically obligated to act in the best interests of their clients. This means they are required to put their clients’ financial well-being ahead of their own profits or interests. The fiduciary duty is a higher standard of care than the suitability standard that some financial professionals adhere to.” – OpenAI

Overall, I’m okay with the definition!  I might add that a fiduciary financial advisor also has the responsibility of ensuring the recommendations continue to be in the client’s best interests.  Whereas the suitability standard only requires that the recommendation (or product) is “suitable” at the time of sale.

What happens when life changes?  Or the markets change?  Is your financial strategy still in your best interest?  

A fiduciary financial advisor/planner would be required to ensure this is the case on an ongoing basis, as long as you are working with that individual or team.

Are fiduciary financial advisors always fiduciaries?

fiduciary financial advisor always a fiduciary

Let’s first talk about how you will know if your financial advisor is a fiduciary.  

The easiest way is to review their client engagement contracts.  Here is a snippet from mine:

“IFS hereby accepts appointment and fiduciary duty of utmost good faith to act solely in the best interest of each Client pursuant to the terms and conditions set forth in this Agreement and to comply with impartial conduct standards.”  

It’s pretty cut and dry.  My firm is registered as an RIA, or Registered Investment Advisor.  RIA’s are always fiduciaries, period.  

However, some firms operate as a “hybrid.”  This means they act on behalf of an RIA and a broker/dealer.  This is where things become clear as mud.  

A broker/dealer is a firm that sells products like insurance, annuities, mutual funds, or other investment products.  These products pay commissions to the selling agent or broker.  In this arrangement, the agent or broker is not a fiduciary, but oftentimes they put themselves out to be a fiduciary.  

I’m not saying these products are all bad.  However, much of the abuse in the financial services industry comes from the broker/dealer model.  Have you heard the sales pitch for a life insurance policy with juiced-up cash value?  Or the annuity that has upside potential with downside protection?  In this model, your compensation is dependent on how much you sell, not on the quality of the advice you provide.  

Here’s another confusing issue.  The CFP Board (CERTIFIED FINANCIAL PLANNER), claims that CFPs act as fiduciaries.  However, CFPs are not required to work for a Registered Investment Advisor.  Many of them work for brokers or hybrid firms.  This means you could say you are a fiduciary because you hold the CFP marks, but you may only act as a fiduciary “sometimes.”  


What are the limitations of a fiduciary financial advisor?

Here is the other side of the coin.  Because full-go fiduciaries don’t sell insurance and annuities, they often don’t understand how these products work.  After all, the model of RIA firms is to charge advice fees, whether it be a % of assets under management or a flat fee.  Herein lies the conflict of interest with the fiduciary financial advisor model!  

I was having a conversation with another fee-only financial advisor at a conference recently about permanent life insurance.  He was telling me about a case he’s dealing with where he recommended his client surrender a 10-year-old whole-life policy in exchange for term insurance.  If you listened to episode 26 of our podcast, you know there are 7 reasons to own permanent life insurance in retirement

I stayed curious and asked about the facts of the client.  It turns out, this is a business owner with a large estate and is only in his 40s!  There is a good chance he will be over the estate tax exemption by the time he passes away.  Thus, permanent life insurance could be a great tool to help his beneficiaries pay the federal estate taxes without having to go through a fire sale of his business.

The other advisor was like a deer in headlights.  

I don’t bring this up to poke fun at other advisors, I was very fortunate to have spent my first 12 years working for broker/dealer firms to get an understanding of how these products can fit.

However, many fee-only fiduciary financial advisors don’t have that luxury.  Many of them started in the fee-only space.  Or, they are career changers who were dissatisfied with the abuse from commission-based advisors and decided to become one themselves to make the industry better.

And believe me, the industry is in a much better place than it was when I first started in 2008!  

With that being said, many clients who work with fee-only, fiduciary financial advisors may not get the advice they need when it comes to purchasing life insurance, long-term care insurance, and/or annuity products.  And for the right client, these products are great fits!  

This is the exact reason I’ve created a service offering for those who are interested in a comprehensive financial planning process that removes biases regarding buying insurance and annuities!  

How do fiduciary financial advisors charge?

flat fee fiduciary financial advisor fee structures

I dedicated an entire blog post to fees, and if you’re interested in diving deep, check out my article here.  

To keep it simple for this post, fiduciary financial advisors can charge in three ways:

  1.  % of assets under management (typically 1% – 1.5%/year of your investment portfolio)
  2. Flat fee 
  3. Hourly or project-based

The % of assets model is by far the most popular, as many of the larger RIA’s have been operating in this arrangement for decades.  But, there are inherent challenges to this model for my practice.  First and foremost, many of my clients are in spending mode during retirement!  They want honest opinions when it comes to paying off a mortgage, gifting to charity or maximizing their spending in retirement!  I’ve heard some horror stories about AUM %-based advisors fighting clients to withdraw funds from other accounts instead of the ones they are managing.  This is a big reason retirees are seeking flat-fee financial planners/advisors.

Additionally, as someone’s net worth grows, the complexity of their financial situation doesn’t necessarily grow in lockstep like the % of assets model would suggest.  With the % of assets model, the larger the portfolio, the larger the fee.  

For flat-fee financial advisors, oftentimes the fee is based on complexity, which isn’t solely predicated on how much of your investment portfolio is managed with that firm.  

Furthermore, what if you want to purchase a rental property with some of your funds, or pay off your mortgage?  Do you think you will get an unbiased viewpoint if your advisor’s fee goes down because of a large withdrawal from the portfolio?  

And finally, you have hourly or project-based advisors.  These advisors just give advice, they don’t touch your investment portfolio!  This is a very important distinction as this is a great opportunity for advisors to add value to people who otherwise wouldn’t be able to hire an advisor.  

Perhaps you are a business owner with all of your net worth tied up in your business.

Or, perhaps most of your funds are in a 401k plan at work.

Or, perhaps you are just getting started in your career and don’t have the asset size to hire a traditional “AUM” advisor.  

Our firm also has a one-time engagement model where we can add a ton of value to someone who otherwise wouldn’t be able to receive customized advice.  Oftentimes these clients turn out to be long-term ongoing relationships, but at least we can establish a solid foundation when they need it the most.  

Final thoughts

There is a lot to digest here, but just know that there is no right or wrong fee model!  Furthermore, just because a financial advisor can say they are a fiduciary, doesn’t mean you should hire them!  

Here are a few tips for those planning for retirement and looking to hire an advisor:

  1.  Of course, make sure you hire a fiduciary who is always a fiduciary!
  2. Make sure they have professional designations!  The CFP is the general financial planning designation, but the RICP is the Retirement Income Certified Professional!  These individuals have deep knowledge of all things retirement planning.
  3. Decide what role you want to play in the relationship.  If you want to continue to DIY your investments, you could hire an advisor for a one-time engagement or hourly work.  If you don’t want to deal with the headache of managing investments and portfolio withdrawals, or you have more important things to spend your time on, I would suggest hiring a flat-fee financial advisor or even an “AUM” based advisor who can help with retirement planning and investment management!  
  4. Regardless of the “fee model,” make sure the advisor has experience serving others like you!  You can either ask for references, look at reviews on Google, or ask them to share their experiences working with your “client profile.”  
  5. Make sure the advisor communicates with how you like to receive communication!  if you want to see how the watch works, make sure the advisor is comfortable communicating with showing you their work.  If you want to stay high level, make sure that the advisor isn’t diving deep into spreadsheets every time you have a meeting.
  6. Get a feel for what questions they are asking you!  To truly do comprehensive planning, they should be asking about your relationship with money, your family history, your family background, relationships that are important in your life, worries that are keeping you up at night, etc.  (not just the financial statements).  
  7. And finally, if you fall into the camp of being a worrier with a very low-risk tolerance, you need to consult with a fiduciary who also deals with insurance and risk management! 

I hope this helps!  If it did, make sure to subscribe to my newsletter below where I put out all of the retirement planning content in one consolidated email (monthly-ish).  

Follow me on Instagram @imaginefinancialsecurity if you are a high-income Millennial or Gen X looking to achieve financial independence early!

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If you are interested in learning more about how we can serve you, make sure to take our complimentary “Retirement Readiness Analysis” and we’ll reach out with our initial thoughts on how well you’re tracking towards your goal of financial independence.  The cool thing is, you don’t need to share ANY financial statements or personally identifiable information to participate!

Thanks for reading!

How to self insure for long term care

The numbers don't add up...

These three statistics don’t add up to me!

1.  70% of Americans over 65 will need long-term care during their lives.

2.  Fewer than half of you over the age of 65 own insurance to pay for long-term care.  Essentially, you are planning to self-insure for long term care.

3.  This is the crazy part. 70% of the care being provided is done by unpaid caregivers!  Aka. family members…🤔

I wrote about long-term care planning before, but my convictions on this have only increased over the years.  

In my previous article, I talked about considerations on whether or not you should purchase insurance. 

We also just finished recording a three-part series on The Planning for Retirement Podcast (PFR) about how to fund long-term care costs.  Episodes 22 and 23 were about using long-term care insurance and episode 24 was about how to self fund long-term care

So why do these statistics bother me?

If the majority of retirees will need care, and they are intentionally not buying insurance, that means they plan to self fund for long term care (by default).  However, why are family members providing the majority of long term care and not hired help!?    

The answer:  because there was no real plan to begin with.  In reality, it was a decision that was never addressed, or perhaps in their mind they decided to “self fund.”  However, that decision was never communicated to their loved ones.  

Let me ask you.  If you are in the majority that plans to self fund, what conversations have you had with your spouse?  Your power(s) of attorney?  Your trustee(s)?  Do they know how much you’ve set aside if long term care was ever needed?  Do they know which accounts they should “tap into” to pay for long-term care?  

The chances are “no,” because I’ve never met a client who did this proactively on their own.  Ever.  And I’ve been doing this for 15 years.  

So, this article is for you if you are planning to bypass the insurance route and use your own assets to “self fund long-term care.”  I believe this is one of the most important decisions you can make when planning for retirement because it can save how you are remembered. 

How much should I set aside to self insure long term care?

how much to set aside to self fund long term care?

It is impossible to pinpoint the exact number YOU will need for care.  But let’s pretend your long-term care need will fall within the range of averages.  

On average, men need care 2.2 years and women 3.7 years.

The 2021 cost of care study by Genworth found that private room nursing homes cost $108,405/year.  Assisted living facilities cost $54,000/year.   These are national averages, and the cost of care varies drastically based on where you live.

So let’s use this ballpark figure of $118,800 – $238,491 for men, and $199,800 – $401,098 for women (2.2x the averages for men and 3.7x  the averages for women). 

The major flaw in using this math is that most people have some sort of guaranteed income flowing into their bank accounts.

  • Social Security Income
  • Pensions
  • Required Minimum Distributions 

Of course, not all of that income could be repurposed, especially if you are married.  However, perhaps 25%, 50% or 75% of that income could be repurposed for caregivers.

Let’s say you are bringing in $100k/year between Social Security, Pension, and Required Minimum Distributions.  Let’s say you are married, and all of a sudden need long term care.  For simplicity’s sake, your spouse needs $50k for the household expenses.  The other $50k could be repositioned to pay for long-term care.  After all, if you need care, you probably are not traveling any longer, or golfing 5 days/week.  This unused cash flow can now be dedicated to hiring professional help and protecting your spouse from mental and physical exhaustion.  

If we assume the high-end range for men of $238,491, but we assume that $110,000 could come from cash flow (2.2 years x $50k of income), then only $128,491 of your assets need to be earmarked to self fund long term care.

Hopefully, that’s a helpful framework and reassurance that trying to come up with the perfect number is virtually impossible.  After all, you may never need care.  Or, perhaps you will need care for 5+ years because of Alzheimer’s.  

My key point in this article is to address this challenge early (before you turn 60), and communicate your plan to your loved ones.  

What accounts are the best to self insure long term care?

which bucket to tap into

My personal favorite is the Health Savings Account, or HSA.  I wrote in detail about HSA’s in another blog post that you can read here.

Here’s a brief summary:

  • You can qualify to contribute to an HSA if you have a high-deductible health plan.
  • The contributions are “pre-tax.”
  • Earnings and growth are tax-free (you can invest the unused HSA funds like a 401k or other retirement plan).
  • Distributions can also be tax-free if they are used for “qualified healthcare costs.”

What is a qualified healthcare cost?

Look up IRS publication 502 here, which is updated annually.

One of the categories for qualified healthcare costs is in fact long-term care!  This means you can essentially have a triple tax-advantaged account that can be used to self insure long-term care in retirement.

However, you need to build this account up before you retire and go on Medicare.  Medicare is not a high-deductible health plan!

But, if you have 5+ years to open and fund an HSA, it can be a great bucket to use in your retirement years, particularly long-term care costs.  

The 2023 contribution limits are $7,750 if you are on a family plan and $3,850 if you are on a single plan.  There is also a $1k/year catch-up for those over 55.  

So, if you’re 55, you could add up to $43,750 in contributions for the next 5 years.  If you add growth/compounding interest on top of this, you are looking at 6 figures + by the time you need the funds for care in your 80s.  Not bad, right?  

Taxable brokerage accounts or "cash"

This bucket is another great option.  Mostly because of the flexibility and the tax advantages of taking distributions.  Unlike a 401k or IRA, these accounts have capital gains tax treatment.  For most taxpayers that would be 15%, which could be lower than your ordinary income tax rate (it could also be as low as 0% and as high as 20%+).

If you are earmarking some of these dollars for care, I would highly recommend two things:

  1.  Separate the dollars you intend to spend for care and give this new account a name (“long-term care account”)
  2. Invest the account assuming a time horizon for your 80s instead of your 60s.  In essence, you can make this account more aggressive in order to keep pace with the inflation rate for long term care expenses.

What’s nice about this bucket is that it’s not a “use it or lose it.”  Just because you segregated some assets to pay for care, doesn’t mean those dollars have to be used for care.  When these dollars pass on to the next generation, they should receive a step up in cost basis for your beneficiaries.  If the dollars are in fact needed for care, you will only pay taxes on the realized gains in the portfolio.   

🤔 Remember when we talked about tax loss harvesting in episode 19?  Well, this strategy could also apply to help reduce the tax impact if this account is used to self-insure long-term care.  

Of course, cash is cash.  No taxes are due when you withdraw money from a savings account or a CD.  Now, I wouldn’t suggest using a CD or cash to self-insure care, simply because it’s very likely that account won’t keep pace with inflation.  However, if there is some excess cash in the bank when you need care, this could be a good first line of defense before the more tax-advantaged accounts are tapped into.  

Traditional 401ks and IRAs

This bucket is often the largest account on the balance sheet when you are 55+.  However, many advisors and financial talking heads recommend against tapping these accounts to self insure long term care because of the tax burden.  

Well of course, it may not be ideal as a first line of defense to pay for care, but if it’s your only option, “it is what it is.”  

But here’s the thing.  If you are needing long term care, you’re most likely over the age of 80.  This means you are already taking Required Minimum Distributions or RMDs.  If you have a $1mm IRA, your RMD would be $62,500 at age 85.  Let’s say you also have Social Security paying you $24,000/year.  That’s a total income of $86,500 that is coming into the household to pay the bills.  This was my point earlier in that you likely have income coming in that can be repurposed from discretionary expenses to hiring some professional help for care.

This means that you may not need to increase portfolio withdrawals by a huge number if RMDs are already coming out automatically.  

But yes, you’ll have taxes due on these accounts based on your ordinary income rates.  And yes, if you increase withdrawals from this bucket, this could put you in a position where your tax brackets go up, or your Social Security income is taxed at a higher rate, or perhaps will have Medicare surcharges.  

On the flip side, this could also trigger the ability to itemize your deductions due to increased healthcare costs.  In fact, any healthcare costs (including long term care) that exceed 7.5% of your adjusted gross income could be counted as a tax deduction (as of 2023).  

The net effect essentially could be quite negligible as those additional portfolio withdrawals could be offset with tax deductions, where applicable.  

Life Insurance and Annuities

Maybe you bought a life insurance policy back in the day that you held onto.  Or you purchased an annuity to provide a guaranteed return or guaranteed income.  However, you may find that your goals and circumstances change throughout retirement.  Perhaps your kids are making a heck of a lot more money than you ever did, so they don’t have a big need for an inheritance.  Or, that annuity you purchased wasn’t really what you thought it was.  You could look at these accounts as potential vehicles to self-insure for long term care.

Life Insurance could have two components – a living benefit (cash value) and a death benefit.  In this case, you could use either or as the funding mechanism for long term care. 

Let’s say you have $150k in cash value and a $500k death benefit.  Instead of tapping into your retirement accounts or brokerage accounts, you could look at borrowing or surrendering your life insurance cash value to pay for care.  Or, you could look at the death benefit as a way to “replenish” assets that were used to pay for care. 

Annuities could be tapped into by turning the account into a life income, an income for a set period of time, or as a lump sum.  All of those options could be considered when it comes to raising cash for this type of emergency.

Roth Accounts

This is the second most tax-efficient retirement vehicle behind the HSA.  It’s not only a great retirement income tool, but it’s also a great tool to use for financial legacy given the tax-free nature from an estate planning perspective.  However, this account could be used to self insure long term care without triggering tax consequences.

Let’s say you need another $30k for the year to pay for care.  But an additional $30k withdrawal from your traditional 401k would bump you into the next tax bracket.  Instead, you could look to tap into the Roth accounts in order to keep your tax bracket level.  

Home equity

home equity line of credit and reverse mortgage strategy

The largest asset for most people in the US is their home equity.  However, people rarely think of this as a way to self insure long term care.  In fact, this is why many caregivers are family members!  They want their loved ones to stay at home instead of moving into a nursing home.  But perhaps there isn’t a huge nest egg to pay for care.  If you have home equity, you could tap into that asset via a reverse mortgage, a cash-out refinance, or a HELOC.  There are pros and cons of each of these, but the reverse mortgage (or HECM) is a great tool if you are over the age of 62 and need access to your equity.  

The payments come out tax-free, the loan doesn’t need to be repaid (unless the occupant moves, sells, or dies), and there are protections if the value of the home is underwater.

Inform your key decision makers

Now that you have a decent understanding of how much to set aside and which accounts might be viable for you, it’s time to have a family meeting.  

If you’re married, have a conversation with your spouse.

If you have children, bring them into the discussion, especially those that will have a key decision-making role (powers of attorney, trustee etc).

You know your family dynamic best.   The point you need to get across is that you do have a plan to self insure long term care despite not owning long term care insurance.  Your loved ones need to know how much they could tap into (especially the spouse) in the event you need care.  This is very important, give your spouse permission to spend!  Being a caregiver, especially a senior woman, will very likely result in burnout, stress, physical deterioration, mental exhaustion, and resentment.  If you simply leave it to your spouse to “figure out,” they will always resort to doing it themselves in fear of overspending on care. 

❌ Don’t do this to them!  

I hope you found this helpful!  Make sure to subscribe to our newsletter below so you don’t miss any of our retirement planning content!  Until next time, thanks for reading!

Benefits of Working with an Independent Financial Advisor

Thinking about your financial future can be mind-numbing, let alone searching for a financial advisor who can help you.  Why are there so many different titles?  Do they all do the same thing?  Is a financial advisor a fiduciary?  Are they ALWAYS a fiduciary?  Finally, what differentiates advisors who work for large companies vs independent firms?  In this blog post, we will  unpack and answer those questions for you, and help you understand the benefits of working with an independent financial advisor.

Quick Disclosure

I spent the first 12 years of my career as a financial advisor for a large broker-dealer and a large bank.  In 2020, I made the decision to go independent for all of the reasons I will talk about below and I haven’t looked back.  So YES, I am extremely biased in my belief that the independent financial advisor avenue is where clients are provided the best service!

Let’s start with a general lay of the land. 

The Wall Street Crash in the autumn of 1929 led to an increase in regulation of the financial industry.  As a result, Theodore Roosevelt officially signed the The Glass-Steagall Act of 1933, creating a clear division between different types of financial services companies.  Simply put, insurance companies were then designed to sell insurance and banks were either investment banks or commercial banks.  Wall Street Firms/Broker-Dealers sold securities. 

Decades later, The Financial Services Modernization Act of 1999 was passed, and this law deregulated the financial services industry and essentially allowed everyone to play in each other’s sandbox.  Insurance companies could now sell securities, banks could sell both insurance and investments, and brokers could now sell insurance products and act as a bank. 

This led to a drastic shift in the financial advisor’s role.  In the 1980’s, an insurance agent would just sell insurance.  Over time the role of an insurance agent evolved, and now new hires at insurance companies are being licensed not just to sell insurance, but to sell variable products like annuities and mutual funds and even manage client assets as an investment advisor. 

In the banking world, you have representatives who help customers with deposits, but they also have licensed insurance agents and investment advisors on staff.  Have you ever gotten a call from your existing bank about a “wealth management” offering?  If you keep a meaningful amount of cash in the bank, the goal for the wealth management team is to convince those banking clients to also purchase both insurance and investment products. 

And finally, the wall street folks.  These large brokers and investment banks can now sell annuities, life insurance, long-term care insurance etc.  

My initial take on this...

I’m very keen on the idea of looking at everyone’s situation comprehensively.  As a Certified Financial Planner, I believe we need to ensure all assets on the balance sheet are coordinated and risk is managed properly.

The biggest challenge I see, however, is that the big firms aren’t truly looking at it that way.  Their main goal is to increase and diversify revenue for their stakeholders.  I’ll say it again, their main goal is to increase and diversify revenue for their stakeholders.  Not for you.  Not for your family.  But for THEIR balance sheets.  

When it comes down to working with a financial advisor, there are some phenomenal advisors that work for large firms.  The challenge is they all have their own metrics and minimums they must achieve in order to be successful and reap the rewards.  So whether consciously or subconsciously, the consumer is always left thinking, “Is this recommendation 100% in my best interest?”

This is at the core of WHY I decided to leave a big firm and launch an independent firm.  Rather than having people wonder if the recommendations are aligned with their best interests, why not simply cut out the conflicts of interest???

Let’s get into some of the reasons why working with an independent financial advisor could benefit you.

Fiduciary Standards

fiduciary independent financial advisor

It is much more difficult to abide by a true fiduciary standard when you are acting as a fiduciary some of the time.  Oftentimes advisors who are working for insurance companies or big banks might have incentives to recommend certain products.  These products often follow the less arduous standard of “suitability,” and not a fiduciary standard.  This means the product just has to be suitable at the time the recommendation is made.  This can often lead to conflicts of interest in working with clients. 

Kyle Newell, Owner and Financial Planner of Newell Wealth Management based in Orlando, Florida said this reason was a big motivator to go independent. 

“My main driver in going completely independent, is the freedom to make decisions solely for the benefit of my client.  No production/sales goals to hit, no shareholders to make happy, or managers to make look good to the higher-ups,” said Kyle. 

When you hire an independent financial advisor, they are working for YOU, not their employer!  Isn’t it nice to be sitting at the SAME side of the table as your advisor when discussing your financial future?

The Ability to Customize

customize retirement plan

At most big firms, the investment models are pre-packaged for clients.  The advisor might do some sort of risk questionnaire, and anyone who has the same risk score will have identical portfolios. 

But what about personalization?  What about taxes?  What about the time horizon of different accounts?  What about different financial objectives? 

As an independent firm, we utilize cutting-edge research and analysis but we’re able to implement it in a way that is customized to each individual family. 

I’ll give you an example.

By late 2021, we knew interest rates were going to begin to spike in 2022 (because the Fed told us so).  We had used primarily bond mutual funds and ETFs up to that point as interest rates were historically low over a decade.

At the beginning of 2022, we began to transition out of the traditional mutual funds and ETFs for some of our clients and implement their own customized individual bond portfolios.  Additionally, we used hedging strategies within the fixed-income space to protect against the rise of rate hikes.  This helped save tens and even hundreds of thousands of dollars for clients over the past year.  

This would have been virtually impossible working at a big, institutionalized firm. 

The ability to be nimble and pivot during uncertain times is invaluable over the life of a client relationship.

Independent Financial Advisors Have Modern Fee Schedules!

Have you heard of the financial advisor who babysits client assets for a management fee and does NO financial planning?  (I’VE HEARD A FEW STORIES!)

Consumers are getting smart and are tired of overpaying for financial advice that doesn’t deliver.  Many people are learning about different models like “advice only,” “flat fee financial advisor,” or “one-time engagements.” Most of the big firms charge the traditional methods of either commission-based compensation or a percentage of assets under management.  But more importantly, they don’t require any financial planning for that fee!

Jeff McDermott is the owner of Create Wealth Financial Planning, an independent firm based in St Johns, FL serving young families and professionals.  He had this to say about the fee models of independent advisors;

“A client who doesn’t fit the traditional advisor mold because they don’t yet have substantial investment assets, are looking for planning to address specific needs, or possibly hourly or one-time project planning might be more likely to find a good fit in the independent financial advisor world.”

My firm, Imagine Financial Security, serves retirees and pre-retirees for a flat fee.  Our firm also provides one-time financial plans to ensure clients are on track. 

It’s fun to be able to serve people in different ways that are innovative and ultimately better for the client. 

Innovative Technology

One of the biggest challenges as an advisor working for a large firm is adopting and adapting to new technology.  Oftentimes these big enterprises have technology embedded in their systems that are years or even decades old.  If they had to change their technology, it could take years to integrate properly.  Imagine the impact of making a change that affects one million or two million customers! 

Many independent firms serve fewer than 250 households making new integrations much more palatable. 

“The independent advisor space has advanced significantly in technology and breadth of services available,” says Newell.

Our firm utilizes two financial planning tools to help address the needs of our pre-retirees and retirees.  RightCapital allows us to model cash flows and changes in a retirement scenario using Monte Carlo analysis.    

We also use Income Lab to help manage withdrawal rates for clients throughout retirement.  Additionally, if there is a need to make an adjustment, Income Lab is there to ensure those are made in a timely fashion. 

Furthermore, these tools allow us to model Roth conversions to identify tax planning opportunities. 

This has been a game changer to add further value to the families we serve.  

Tax Planning

Speaking of Roth conversions, now we are getting to the heart of retirement planning challenges…TAX PLANNING!  Once you crossover a certain asset threshold, let’s say $1mm of investment assets, taxes in retirement become a big deal.  Social Security taxes, Medicare surcharges, tax bracket management, Required Minimum Distributions, and finally, death taxes.  The value of maneuvering through all of these hurdles successfully in retirement is worth far more than how the investments are performing relative to their benchmarks.

Every movement of money has a tax consequence.  So, wouldn’t it be nice to know what those tax consequences are before the money is moved??? 

Does your advisor have a copy of your most recently filed tax return?  If the answer is “no,” then how in the world are they able to know what the impact of money movement is on your tax situation?  

The more money you can save on taxes in retirement, the more you will have to travel or gift to your grandkids!  Win-win!


niche, specialist

If you look at the client roster of a traditional financial advisor working at a bank or broker, you will find the demographics vary widely.  There might be a 25-year-old just getting started with their investing career all the way to a 65-year-old preparing to retire.  This might seem great on the surface as that advisor can serve multiple demographics.  However, how specialized is that advisor in working with people just like YOU?  Many independent firms specialize in working with a specific age demographic, occupation, or even serving those with certain political beliefs!  This specialized expertise allows for a deeper understanding of the client’s needs and ultimately adds more value to the relationship.

Think of a general practitioner vs. a specialist.  If you need heart surgery, you’re probably not going to see your family doctor.

It's all about the relationship

I know we’ve talked about some of the value adds and financial benefits of hiring an independent financial advisor.  But at the end of the day, the relationships and families we serve are at the forefront of why we do what we do.  

I was talking to a friend who works at a larger firm and he complains annually about how much his annual goal has increased.

And don’t get me wrong, I have business and personal goals myself.  Any motivated individual has goals.  However, when the goals get in the way of serving your clients, that’s a problem.  And that is at the core of why independence is so important to me and many others who continue to break away from big firms.  

When I review the list of families I serve, I get excited.  Helping people plan for retirement is extremely rewarding.  But furthermore, I love to help people reduce fear and start living their BEST years with the gift of time!  Who wants to sit around and play with their investment portfolio (and likely screw it up), or try to find tax planning opportunities rather than pursue their passions!?  Or spend more time with their families?  Retirement is not the end, it’s the beginning of financial freedom!  So enjoy it!

In Summary

Simply put, the independent advisor movement is growing in popularity. According to Fidelity’s 2020 Advisor Movement Study, 2/3 of all advisors who left employee financial advisor arrangements in the last 5 years left for independence.  And the trend is only accelerating.

Third-party organizations like XY Planning Network, NAPFA, Fee-Only Network, and Wealthtender all offer “find an advisor” search tools to help you narrow down what you’re looking for. 

Our firm focuses on working with individuals and couples who are over 55 and have accumulated at least $1mm for retirement (or will have accumulated at least $1mm when they do retire).   If you are curious about how we can help you, feel free to book an initial 30-minute “Mutual Fit” meeting so we can get to know one another.  Also, make sure to subscribe to our blog so you never miss out on our latest posts!

Until next time. 

What can Retirees learn from Silicon Valley Bank’s failure?

Easy money policy beginning in 2009 led to a historical run in tech companies.  Companies that rely on leverage to aggressively grow were borrowing money for next to nothing!  Investors weren’t even concerned with cash flows, or healthy balance sheets.  If the idea seemed like it could stick, they would take their bets.  Some paid off, and some flopped.  But the overall sentiment was “risk-on.”

These policies led to the success of Silicon Valley Bank, or SVB.  Out of all of the start-ups in the US, SVB provides banking services to nearly half of them.  Whether it was providing them loans or deposits, they were the go-to Bank for start-ups. 

But what happens to these tech companies (with no positive cash flows) when rates go up?

Instead of borrowing “free money,” they begin to use their own cash (really their investor’s cash) for operations.  Why would they borrow for 8% or 9% when their cash is only earning 1% or 2%?   At some point, the interest on debt isn’t sustainable.

So, they go to their bank and pull funds for their operations.  After all, they still have payroll and other overhead to keep the business going.

Remember the run-on banks in “It’s a Wonderful Life?” No, they don’t keep your money in the bank! It’s invested somewhere!

In SVB’s case, over half of their assets were invested in bonds!  What’s more is that the majority of these bonds had long-term maturities, over 10 years, instead of shorter-term maturities.

We talked about interest rate risk in several of our market commentaries over the last couple of years, and SVB completely missed the mark on hedging interest rate risk.  Maybe they should’ve been reading our blog!

So how did they raise cash to give to their depositors?  

They had to sell their bonds…

What happens to bond prices when interest rates rise?

They go down, simple as that.  Think about it.  If you bought a 10-year treasury 3 years ago, it was yielding less than 1%.  Today, new issues of 10-year Treasuries are yielding 3.7%!  So, for anybody to want to buy your bond, you would need to discount it significantly.  Otherwise, they will just buy a new issue for almost 4x the interest!

So, instead of SVB holding their bonds to maturity, as they intended to, they needed to sell (at a significant loss) to meet their obligations.  The loss realized was $15b, which was equivalent to nearly all of its tangible capital.  This led to their ultimate collapse and is the second-largest bank failure in US history (second to Washington Mutual in 2008).

Why didn’t SVB hedge interest rate risk?

I’m not putting the blame on one individual, but it’s no coincidence that the CFO of Lehman Brothers (who left Lehman right before their bankruptcy in 08) is now an executive at SVB.  Additionally, the Chief Risk Officer of SVB worked for Deutsche Bank during the subprime-mortgage crisis in 2008. 

Some banks are more conservative.  They lend to small businesses or individuals.  SVB, on the other hand, catered to start-ups in Silicon Valley.   These tech start-ups have significantly more risk than the bakery shop next door.  Additionally, their deposits were padded over the last two years because of the easy money policy over the last decade coupled with record amounts of stimulus.  

The bottom line is that SVB got greedy.  Instead of looking at the interest rate environment as a risk, they ignored it.  They sought higher yields in longer-term bonds without hedging the need for short-term cash flows.  They never expected a “run on the bank.”

So what does this mean for SVB’s deposit holders?

The Federal Deposit Insurance Commission, or FDIC, officially announced on Friday that SVB was closed.  This led to a selloff in stocks and of course, those holding SVB stock will lose their investment.

But what about the deposit holders and borrowers?  The FDIC typically protects balances up to $250k per entity/bank.  In SVB’s case, most of their customers had significantly more than the FDIC limit.  After all, these are big wigs out in Silicon Valley.  Not surprisingly, here comes the Government to “bail them out.”  But they aren’t calling it a bailout, as we saw in 2008/2009, because they say that stock and bondholders in SVB are not protected.  However, they are using “emergency-lending authorities” to make funds available to meet bank withdrawals, even those that exceed FDIC limits!  In fact, 85% of the bank’s deposits were uninsured!   And you can’t argue their customers don’t understand FDIC.  These are some of the supposed best and brightest innovators in our country.  This is absolutely a bailout; they just aren’t calling it one. 

lessons to learn from svb failure

What are the lessons we can learn from SVB’s failure?

After all, SVB is an investor, just like you and me.  The principles they failed to adhere to can also lead to an investor running out of money during retirement.  The only difference is the Government has no interest in bailing YOU out.  So, it’s important to have a plan and process while you are navigating a potential 30+ year retirement!

Lesson #1: Diversification


This is a basic principle of “Investments 101” – Don’t put all of your eggs in one basket!  Diversify!  In SVB’s case, they put all of their eggs in the tech start-up basket, and they had quite a run-up until 2022.

Coincidently, when I review prospective client portfolios, technology is by far the most concentrated sector.  I’m not going to argue the merits of tech companies, but most banks tend to diversify their clientele.  This provides less risk of one industry going through hard times.  

Oftentimes people bury their heads in the sand in hopes that “things work out.”  Well, if you haven’t done anything with your portfolio in a while, there is a good chance you’re overexposed to assets that are overpriced. 

SVB chose not to diversify.  They decided to stick with their niche, and ultimately the Fed’s aggressive rate hikes put pressure on their customers leading to the run on their bank.

Lesson #2: Match retirement cash flows with YOUR time horizon!

match your retirement cash flows with time horizon

When you are planning for retirement, there are two types of expenses: 

  1. Known expenses
  2. Unknown expenses

For your “Known expenses,” wouldn’t it make sense to match those up with “known cash flows” and not “unknown cash flows”?  Well, SVB decided to keep their bond portfolio LONG term.  The longer the term of the bond, the more interest rate risk it has.  It’s important to not chase rates.  Just because a bond is paying a higher coupon, doesn’t mean it aligns with YOUR portfolio goals. 

This is why I am a big fan of individual bonds for the “core” bond portfolio.  With individual bonds, you can hold them to maturity for the “known expenses.”  Sure, there is a time and place for bond mutual funds or bond etfs, but those funds have redemption risk, similar to what SVB experienced.  In their minds, they wanted to hold their bonds to maturity to match up with later cash flow needs, but their customers wanted cash now.  

With bond funds, what if OTHER investors who own that fund want their cash before you do?  Well, these are known as redemptions and ultimately the fund may have to sell at an inopportune time, just like SVB!  In essence, you lose one of the most important characteristics of a bond, the maturity date!

So, if you have a bond portfolio and are planning for retirement, you must absolutely match your bond portfolio up with YOUR time horizon and YOUR cash flow needs!  This eliminates interest rate risk as much as possible.  And for retirees, risk management is the name of the game.

Lesson #3: Have a contingency plan

Ok, that’s a great plan for the “known expenses,” but what about the “unknown expenses?”  In retirement, things ALWAYS come up.  We just don’t know what they will be, and how much they will set us back.

This is why I advocate for an emergency fund OUTSIDE of the retirement portfolio.  With high-yield savings accounts offering north of 3% interest, cash can at least earn something while sitting idle.  Of course, stick within FDIC limits, but anywhere from 1-2 years worth of FIXED expenses is appropriate for a retiree’s emergency fund.  Unlike an investor who is still working and has time to get a new job or allow the portfolio to recover, retirees don’t have those luxuries.  Sure, you could beg for your old job back, but that might not be what you WANT to do.  Instead, if you have 1-2 years of fixed expenses, this will help preserve your investment portfolio from a larger-than-anticipated withdrawal. 

For some, you may not want so much cash sitting around for that “what-if” scenarios, so here are a couple of compliments to a cash reserve fund:

  1. Home Equity Line of Credit
  2. Life Insurance Cash Values

Home Equity Lines of Credit, or HELOCs, are a great way to limit how much you keep in cash.  Most people use these for home improvements, but having a HELOC can also help with your emergency fund.  Let’s say 1 year of fixed expenses is $100,000.  Instead of having $100k-$200k in high-yield savings, you might keep $50,000 in cash, and have a $150k HELOC for the JUST-in-case scenario.  That way, your savings account can be your first line of defense.  And only if needed, the HELOC can come in as a backup.

Cash Value Life Insurance is probably my favorite emergency fund vehicle in retirement.  Unlike term insurance, it can act as a pool of funds available when you really need it. 

And unlike a bond which can decline in value based on interest rates, cash values have a minimum guaranteed rate, so the cash can never go down.  Think about the power of this tool in the market we are in now where bond prices are down over 15%!

And I’m not talking about Indexed Universal Life policies or Variable Life Policies, I’m talking about a traditional fixed product.  If you build up enough cash value over time, you may only need 3-6 months of fixed expenses in cash given the rest of your cash buffer is inside of your life insurance policy.  I’m going to write another article on Cash Value Life Insurance later, but it’s a great tool for the right person.  But for the wrong person, it’s one of the worst products you can buy!

For what it’s worth, our firm does not sell any insurance products and we have no skin in the game.  These products should also be gone over with a fine-tooth comb as they can be extremely complex.

Bonus Lesson #4: Don’t chase the shiny new toy

As I began writing this piece, Signature Bank became the next casualty of the run on banks Sunday, March 12th.  Their Bank was also focused on a niche, commercial real estate.  However, in 2018, they decided to chase the shiny new toy, cryptocurrency, or digital assets.  As concerns arose from the failure of FTX as well as SVB, customers started to pull their funds from Signature, leading to what is now the 3rd largest Bank to fail in US History.

I repeat, don’t chase the shiny new toy!

What does this mean for the markets?

It was interesting because the stock market rallied on Monday after both SVB and Signature closed their operations.  WHY??

Well, it seems that investors feel the Fed might slow their rate increases in light of the casualties it caused.  Slower rate hikes mean potentially less pressure on profits and ultimately earnings.  However, I don’t think we’ve seen the end of this narrative.  Starting with FTX’s collapse last fall, and now these two large banks failing, other companies that are overweight in speculative investments will continue to unravel.  The magnitude of these rate hikes cannot be overstated and this type of carnage has been what we’ve been concerned about since the beginning of 2022.  

The story we are very interested in is the impact on small “moms-and-pops” businesses.  After all, many of the customers SVB serves provides service to everyday businesses.  Whether it’s payroll, cloud services, or other technology, small businesses across the US rely on tech.  And if these tech companies are beginning to falter, what does that do to the economic system as a whole?  Also, is this going to lead customers of other regional banks to panic?  Will they take their money and put it at a larger bank or under the mattress or in cryptocurrency?  This could put significant pressure on banks all over the US, which would have a trickle effect on the economy.  

In the end, the Fed may not get the soft landing it wanted, but a recession may not be fully priced into the market at this point.  

The one silver lining is that inflation does continue to ease, and that’s good news when it comes to what the Fed does next.

For those of you who are close to, or already retired, I have 5 major takeaways for you.

1. Are you overweight in speculative investments?

Tech, consumer discretionary, digital assets, or even speculative real estate.  These assets have certainly appreciated significantly over the last decade, but things tend to fall in and out of favor.  Therefore, it’s important to review and re-balance your portfolio on an ongoing basis to reduce risk.  Even if your portfolio consists of several mutual funds or ETFs, it’s also very possible they are concentrated in certain sectors with higher risk.  

2.  What does your bond portfolio consist of?

Are the time horizons of your bond portfolio consistent with your personal retirement goals and objectives?  If you need help reviewing this, consult a professional (we can help you!).

3.  What major unexpected expenses might you run into during retirement?

Sure, we may not have a “run-on-your-retirement” as we had with SVB.  However, I can guarantee there will be significant unknown expenses during a multiple-decade retirement.  One, in particular, I can think of is the need for long-term care.  This is perhaps the largest unknown expense for retirees, and the cost can drain a retirement portfolio much sooner than desired.  It’s important to have a contingency plan to protect and preserve the retirement portfolio if the need for care arises.

4.  Where do you bank?

The notion of FDIC has come back into play with the collapse of SVB.  Are you over the $250k FDIC limit with your bank?  While the Fed announced it’s going to make customers of SVB and Signature whole, that may not be the case with smaller regional banks, so it’s important to keep your safe money safe.

5.  Don’t be reactive, be proactive.

News like this is never good for the markets.  We have been talking about the Fed’s rate hikes for over a year and how certain sectors are going to take a hit.  Now, the impact is beginning to rear its ugly head, and we might have a few more quarters of continued bad news.  However, you are investing for retirement.  Retirement is not just a few quarters, it’s a few decades!  As long as your portfolio is aligned with your retirement goals, there is no need to make a knee-jerk reaction to the bad news.  After all, if you’ve learned from the lessons SVB’s failure taught us, you can implement a successful retirement plan for “all seasons.”

If you have questions about how these lessons can be implemented into your retirement plan, we would love to meet you and learn more about you.  

And finally, make sure to subscribe to our newsletter to stay up to date with all of our latest retirement planning content.

Until next time, thanks for reading.


What are the rules for Required Minimum Distributions?

Congratulations!  Lots of blood, sweat, and tears went into a successful career, and you have saved enough to start thinking about when to retire.  If you’ve been saving into a 401k, 403b, or another retirement plan through work, you’ve probably heard of  Required Minimum Distributions or “RMDs.”  You might be wondering;

“What are the rules for required minimum distributions?” 

“How do RMDs impact my taxes? 

Or, “What can I do now to prepare for RMDs?”  

This article is for you!  We’ll unpack all of this and provide REAL-LIFE action items to help you plan for RMDs and save in taxes!

What are RMDs and when do they start?

Simply put, RMDs are the IRS’s way of saying, “the party is over.”  Or in this case, the tax party is over! 

When you contributed to your 401k, IRA, or 403b, you likely took advantage of a generous tax deduction up front and have never paid taxes year over year on earnings.  Pretty powerful, right?

The IRS has been patiently waiting for you to start withdrawals, and RMDs are their way of starting to collect their tax revenue.  

Starting in 2023, the RMD age, or “beginning date,” is the year in which you turn 73 (for individuals born before 1960).  For those born in 1960 or later, the beginning date is the year you turn 75.

Just a few short years ago, the beginning date was the year you turned 70 ½.  The SECURE Act of 2019 pushed the RMD age back to 72, and the SECURE Act 2.0 (just passed in December 2022) pushed it back even further.  With many retirees living well into their 90s, that’s potentially 20+ years of RMDs!

These qualified plans have such powerful tax advantages because the growth year over year is not taxable!  This allows for compounding interest to avoid tax drags altogether, which is unique in the investment world.   However, there is a reason why our clients’ largest expense during retirement is TAXES!  Our job is to minimize taxes, legally, as much as possible.  Part of that job is to minimize the tax impact of RMDs in retirement.+

Changes to required minimum distributions from secure act 2.0

How are RMDs calculated?

The IRS has life expectancy tables that are updated (not so frequently), and each age has an assigned “life expectancy factor.”  Once you reach your beginning date, the account balance at the previous year’s close (December 31st) is divided by the life expectancy factor in the IRS tables. 


You have a $1,000,000 IRA balance as of December 31st of 2022.

Assuming you turn 75 in 2023 and you use the Uniform Lifetime Table (more on this in a moment), your life expectancy factor would be 24.6. 

To calculate the RMD for 2023, you would divide $1,000,000 by 24.6, which would equate to $40,650.40.

There are three types of life expectancy tables.  The Uniform Life Expectancy table (used above) is for single or married account owners.  However, if you are married, your spouse is the sole beneficiary of your account, AND is more than 10 years younger than you, you can use the Joint Life and Last Survivor Life Expectancy Table.  

The “Single Life” expectancy is for beneficiaries of IRAs that were not the spouse and inherited the account before January 1st of 2020.  For account owners who have inherited IRAs or other retirement accounts beginning in 2020, the new 10-year rule applies, which we will discuss shortly.

The older you get the higher the rate of withdrawal gets.  By the time you reach 80, the distribution percentage is close to 5%/year!  At 85, it’s 6.25%! 

An RMD for a $1,000,000 IRA at age 85 is  $62,500! 

If you add in Social Security income, perhaps a pension, and other investment income, you can see how this could create a tax burden during the RMD phase.  The IRS does not care if you need the income, they just want their tax revenue.  And not only will your taxable income in retirement go up, but could impact how much Social Security is taxed and how much you are paying for Medicare premiums!

If you miss an RMD, there are penalties.  The SECURE Act 2.0 changed the penalty to 25% from 50%, and that applies to the amount you failed to withdraw.  Using our example above with a $40,650.40 RMD, a 25% penalty would equate to $10,162.60 assuming you withdrew nothing!

Needless to say, make sure you satisfy this important rule for required minimum distributions or pay the price.  

The first RMD can be delayed until April 1st of the following year!

RMDs need to be satisfied by December 31st each year.   Some of our clients elect to take the RMD monthly in 12 equal payments; others elect quarterly.  And some take it as a lump sum.  The decision is cash flow driven and how much you need the RMD for income (or not).  There is one exception that applies to your FIRST RMD.  The first required minimum distribution can be delayed until April 1st of the following year. 

Let’s say you turn 73 in the year 2024, which would make 2024 your beginning date.  However, you also plan to retire in 2024 and might still have high wages to report for that tax year.  In 2025, you will be fully retired and will have ZERO wages, so you decide you want to take advantage of delaying the first RMD until 2025.   In this scenario, you would take the 2024 distribution by April 1st (of 2025) and of course the 2025 distribution by December 31st!  In this scenario, you have two RMDs on your 2025 tax return, but your overall income perhaps is still lower because of no W2!

Are there RMDs on my current employer plan?

If you are still actively employed and have a qualified plan you are participating in, you can avoid RMDs from those plans only.  Let’s say you plan to work until 75, and you have a large 401k with your current employer and an IRA from previous retirement plans.  You will still be required to make an RMD from your IRA, but you can avoid the RMD on your 401k altogether.  Once you are officially separated from service, that will trigger the “beginning date” for that 401k plan. 

It’s also important to note that separation from service triggers the “beginning date” for that 401k.  So, assuming you deferred RMDs in your current 401k plan, and retire at 75, you can still take advantage of deferring the first RMD until April 1st following the year you separated from service.

Finally, this rule does NOT apply to Solo 401ks or SEP IRAs.  These plans are for self-employed individuals, and RMDs can’t be delayed simply because they are still working.

Can I aggregate my RMDs into one plan?

You might be wondering if you have multiple retirement plans, can you just pull the RMDs from one account? 

My favorite answer is, “it depends.”

If the multiple retirement plans have identical plan types (perhaps they are all 401ks or all 403bs), then “yes, you can aggregate the RMDs.”   If there are different plan types, like one IRA and one 401k, those plans each have their own RMD and must be satisfied separately.   Let’s look at two examples:


Scenario 1:  Joe has two IRAs, each with RMDs:

IRA RMD #1:  $10,000

IRA RMD #2:  $25,000

Total IRA RMD = $35,000


He can satisfy the entire $35,000 from either or both accounts. 


Scenario 2:  Joe has one IRA and one 401k each with RMDs:

IRA RMD #1:  $10,000

401k RMD #2:  $20,000

Each RMD would need to be satisfied separately because they are not identical account types. 

SECURE Act’s elimination of the Stretch IRA for (MOST) beneficiaries

stretch IRA elimination

In January 2020, the SECURE Act of 2019 went into law.  Part of the plan to pay for the bill was to accelerate distributions for beneficiaries of IRAs and 401k plans. 

Under the previous law, a beneficiary other than the spouse could “stretch” the IRA based on THEIR life expectancy.  Assuming the non-spouse beneficiary was much younger (like an adult child), the RMD would be reduced significantly after the original owner’s death.  This is when the Single Life Expectancy table is used, as we alluded to earlier.  

Let’s look at an example: 

An original account holder has a $1mm IRA and is 80 years old.  Their RMD would be $1,000,000 / 20.2 = $44,504.96.  Before 2020, if that account owner passed away and their 55-year-old daughter inherited the account, her RMD would be $31,645.57.  That’s a reduction of almost $13,000 of taxable income!  In essence, it allowed the new owner to “stretch out” the distributions over a much longer period of time and thus preserving the tax-deferred status for longer.

The SECURE Act of 2019 eliminated the stretch IRA for MOST beneficiaries.  I wrote about this in a previous post, “The Tax Trap of Traditional 401ks and IRAs,” but most beneficiaries other than the spouse will follow the “10-year rule.”

What is the 10-year rule?

The 10-year rule states that a retirement account must be fully liquidated by the end of the 10th year following the owner’s death.  The exception to the 10-year rule is for those who are “eligible designated beneficiaries.”  These individuals are essentially a spouse, a beneficiary who is disabled or chronically ill, or a beneficiary who is fewer than 10 years younger than the IRA owner. 

Everyone else will follow the 10-year rule.

If the IRA owner passed away on or after the beginning date, RMDs must continue during years 1-9, and then the full balance must be liquidated in year 10.  If the IRA owner passed away before their beginning date, there are no RMDs until year 10, when the account needs to be fully liquidated.

It might be tempting to stretch the 10-year rule until the 10th year, but this would result in significant taxes owed that year.  Instead, you might consider taking somewhat equal distributions in years 1-9 and distributing the remaining account balance in year 10 to avoid a huge tax bill. 

As you can see by the (overly simplified) chart below, this has significantly increased the size of distributions required after the account owner’s death and ultimately results in higher taxes.

What can you do to minimize the tax impact of RMDs?

If you are like many of our clients, the bulk of your retirement savings might be in tax-deferred 401ks or IRAs.   However, newer plans like Roth IRAs and other Roth retirement plans have NO RMDs!  Therefore, one way to minimize the RMD impact is to increase the proportion of Roth accounts on your balance sheet.  There are two ways to do this:

  1. If you are still working, change the contribution allocation to Roth vs. Traditional (401ks, 403bs, TSPs, etc).  If your employer does not have a Roth option, you might consider a Roth IRA. 
  2. If you are retired or perhaps not contributing to a retirement plan, you could consider Roth conversions. This allows for money to be moved from tax-deferred accounts to tax-free accounts by paying taxes on the amount converted. 

Why would I want to pay more taxes now?

Perhaps you believe your tax bracket will go up due to RMDs.  Maybe you saved diligently into 401ks and IRAs and your RMD will be high enough to push you into the next tax bracket.  

Also, healthcare is a big expense in retirement!  Many people don’t realize that your Modified Adjusted Gross Income (“MAGI”) will impact how much you pay in Medicare Part B and D premiums (known as “IRMAA”)!   The base premium for Medicare Part B is $164.90, but this can increase as high as $560.50 depending on your MAGI!  Multiply this by 2 for Married Couples and we are talking over $12k/year in premiums alone!

Therefore, you might consider taking small bites at the apple now (pay some additional taxes now), so you don’t have a huge tax drag when RMDs kick in. 

Consider taking advantage of "Qualified Charitable Distributions" or QCDs

This is perhaps my favorite tax strategy for retireesQCDs allow for up to $100,000 to be donated to a qualified charity from your IRA.  You have to be at least 70.5 years old, and it has to come from YOUR IRA (not an inherited IRA).  This also means you cannot use 401ks or 403bs for QCDs! 

While you can start this strategy at 70.5, this has the most impact on those already taking RMDs. 

Because of the increase in the standard deduction, the majority of taxpayers are NOT itemizing deductions.  If you’re not itemizing deductions, the gift you made to your favorite charity is NOT deductible!  Instead of donating cash, a QCD will allow you to use some (or all) of your RMD to contribute to your favorite charity (or charities).  The best part; is there is NO impact on itemizing or using the standard deduction!  The amount donated via QCD reduces your RMD dollar for dollar (up to $100,000), which is in essence BETTER than a tax deduction!  Let’s look at how this works.

Bill’s RMD for 2023 is $50,000. 

Bill loves donating to his local animal shelter which is a qualified 501(c)(3).  He typically sends a check for $5,000, but he does not have enough deductions to itemize on his tax return.  Instead of sending a check, Bill fills out a QCD form with Charles Schwab (where his IRA is) and tells them to send $5k from his IRA directly to the shelter.  The QCD is processed, and now Bill’s remaining RMD is only $45,000 for 2023!  See, better than a tax deduction! 

It’s important to note that the charity has to be a US 501(c)(3) to be eligible for a QCD, and this excludes Donor Advised Funds and certain charities.  

Action Items

RMDs will likely always be a part of our tax code.  As you can see, however, the rules are changing frequently!  Instead of being reactive, begin planning for how to deal with your RMDs well before you start them! 

Here are some action items and questions to consider:

1.  Run a projection for what your RMD will be at your beginning date

2.  Does your RMD provide a surplus of income?  Or, do you need your RMD to maintain your retirement lifestyle?  

3.  If your RMD provides a surplus of income, consider increasing Roth contributions and reducing Pre-tax contributions.    Or, consider converting some of your pre-tax balance to Roth when the timing is right.  Typically a great time to look at this is when you retire and have a window of time (let’s say 4-5 years) before starting RMDs!

4.  If you are already taking RMDs, determine if QCDs are a viable option for you to consider 

5.  If leaving a financial legacy is important, consider the tax implications of leaving retirement accounts to the next generation.  Are your children in higher tax brackets?  If so, you might want to consider the impact the 10-year rule will have on their tax bill.  

6.  Do you believe your tax rate (or perhaps tax rates in general) will be higher or lower in the future?

It’s important to have a plan and consult with a financial professional who understands taxes in retirement!  If you have questions about how to address your RMD strategy, reach out to us and schedule an initial “Zoom” meeting!   We would love to get to know you and learn how we can help with your retirement journey.  

And as always, make sure to subscribe to our newsletter to stay up to date with all of our latest retirement planning content!

Until next time, thanks for reading!

Using the Guardrail Withdrawal Strategy to Increase Retirement Income

What is a safe withdrawal rate for retirement?

There will be ongoing debates on what a safe withdrawal rate is for retirees.  It’s the Holy Grail of retirement planning.  After all, wouldn’t it be nice to know EXACTLY how much you could withdraw from your portfolio, and most importantly, for how long?   Unfortunately, there isn’t a one-size-fits-all solution.  The most popular research in this arena is Bill Bengen’s “Determining Withdrawal Rates Using Historical Data,” which coined the “4% Rule.”  However, what if you need more than 4%/year to enjoy retirement?  Or, what if you want to spend more early in retirement while you still can?  Or, perhaps you can make other adjustments over time to improve outcomes.  This is where the Guardrail Withdrawal Strategy, or a dynamic spending plan, really helps retirees’ incomes.

In Michael Stein’s book, “The Prosperous Retirement,” he categorizes retirement into the following three phases:

  • “Go-go years”
  • “Slow-go years”
  • “No-go years”

The idea is that spending tends to go up in the first phase of retirement, and then continues to go down as we age.  Sure, healthcare costs could go up later in retirement, but not at the same rate that discretionary spending goes down.  

Another example where adjustments to spending occur is during a recession or bear market, like in 2020.  Spending was down significantly due to global lockdowns, and for retirees, this meant a significant drop in travel expenses.

On the other hand, some years might require higher spending because of unexpected medical expenses or home repairs.

The point is, life isn’t a linear path, so why should your retirement income plan be? 

Justin Fitzpatrick, the co-founder of Income Lab, and I talked about retirees’ spending powers in “Episode 14 of The Planning for Retirement Podcast.”  Those of us who specialize in retirement income are familiar with the Guardrail Withdrawal Strategy.  This involves setting a specified rate of withdrawal but understanding when to pivot during good and bad times. 

In this article, we will discuss the background of the 4% rule and its impact on retirement planning.  We will also review some of the drawbacks of the 4% rule when implementing it in practice.  And finally, we will discuss the Guardrail Withdrawal Strategy, and how it can improve retirement income by simply allowing for fluidity in withdrawals.  

Let’s dive in!

The 4% rule

what is the 4% rule

Bill Bengen was a rocket scientist who received his BS from MIT in aeronautics and astronautics.  After 17 years of working for his family-owned business, he moved to California and began as a fee-only financial planner.  He couldn’t find any meaningful studies to showcase what a safe withdrawal rate in retirement would be.  So, he began his own research and discovered the 4% rule, or “SAFEMAX” rule.

He looked at historical rates of return and calculated how long a portfolio would last given a specified withdrawal rate and portfolio asset allocation.  In layman’s terms, he figured out how much could reasonably be withdrawn from a portfolio, and for how long.  This helped solve the #1 burning question for pre-retirees; “Will I outlive the money?  Or, will the money outlive me?”   

The Findings

There is a ton of amazing detail in Bill’s research, the most famous being the 4% rule.  The main takeaway is if a portfolio withdrawal rate was 4% in the first year and adjusted for inflation each year thereafter, the worst-case scenario was a portfolio that lasted 33 years.  This worst-case scenario was a retiree who began withdrawals in the year 1968, right before two recessions and hyperinflation.  This confirms that the timing of retirement is important but completely uncontrollable!

The hypothetical portfolio within the 4% rule consisted of a 50% allocation in US Large Cap Stocks and 50% in US Treasuries. 

Bill later acknowledged that adding more asset classes and increasing stock exposure would increase the SAFEMAX rates.  For example, adding small-cap and micro-cap stocks increases the SAFEMAX to 4.7%!  

The downsides of using the 4% rule in practice

First and foremost, I must first acknowledge that Bill Bengen’s research has made a huge impact on the retirement planning industry, and certainly in my practice personally.  Every planner who focuses on retirement knows who Bill Bengen is and knows about the 4% rule. 

One common mistake is most people assume the 4% rule means multiplying the portfolio each year by 4%, thus providing the withdrawal rate.  Instead, 4% is the FIRST year’s rate of withdrawal.  Each subsequent year, the dollars taken out of the portfolio will adjust for that year’s inflation rate.  Let’s look at an example.

Let’s say you have $1mm saved.  If we used the 4% rule, your first withdrawal would be $40k (4% x $1mm).  In year 2, assuming inflation was 3%, the withdrawal would be $41,200 ($40k + 3% or $40k x 1.03).  Well, what if year 2 involved a steep drop in your portfolio value?  If you retired in 2008, and your portfolio dropped by 35%, the rate of withdrawal in year 2 would equal 6.33% ($41,200/$650k). 

What about the mix of stocks and bonds?

Some clients are more risk-averse than others.  However, most people assume the entire study was based on a 50/50 stock and bond allocation.  This is TRUE for the 4% rule, or SAFEMAX, but he also ran scenarios based on all types of allocations.  He discovered that 50% is the minimum optimal exposure to stocks.  However, he found that the closer you get to 75%, the more it will increase your SAFEMAX.  So, in addition to adding more asset classes, as mentioned above, increasing your percentage of stock ownership could also increase the safe withdrawal rate.

Word of caution:  increasing your stock exposure could certainly increase your rate of withdrawal, but it will also increase the volatility and the risk of loss in your portfolio.

This is where “risk capacity” comes into play.  The more risk capacity you have, the more inclined you might be to take on more risk.  The inverse is also true.  

The 4% rule is also based on the worst-case scenario of historical rates of return and inflation.

The majority of the time, stocks have positive returns (80% of the time).  But, what if you pick the worst year to retire, like 1968?  This was a perfect storm of bear market stock performance combined with high inflation (sound familiar?).  So, does that mean you should plan for the worst-case scenario?  If you do, in most of the trials within Bengen’s research, the portfolios lasted well beyond 50 years resulting in a significant surplus in assets at death. 

In fact, he cited that many investors did very well with a 7% withdrawal rate!  My goal is to encourage my clients to ENJOY retirement, not worry about the worst that could happen!  

How much of your retirement income are you willing to sacrifice just to prepare for the worst-case scenario?   After all, $70,000/year is a heck of a lot more than $40,000/year from the same $1mm portfolio.

What about the impact of tax planning?

tax planning season

Bill Bengen’s study assumed the entire portfolio was invested in a tax-deferred IRA or 401k plan.  This means that all income coming out of the portfolio was taxed at ordinary income rates!  But what about those who have brokerage accounts with favorable capital gains treatment?  Or better yet, what about Health Savings Accounts or Roth IRAs?  These accounts have TAX-FREE withdrawals assuming they are qualified!

If smart tax planning is implemented, this could also enhance retirement income!

If you are like many of the clients we work with, the majority of your retirement savings likely consists of pre-tax 401ks and IRAs (aka “tax deferred” accounts).  You might be wondering if you should take advantage of the Roth conversion strategy to improve tax efficiency during retirement. You can read more about that topic in a previous post (link here)

Sometimes, if you have a period of time with very low taxes (typically in the first 5-10 years of retirement), you can be aggressive with this strategy and significantly save on taxes in retirement and Medicare surcharges (aka “IRMAA”).  

Do retirees' expenses increase with inflation?

Another challenge of the 4% rule is the assumption that spending continues to increase at the pace of inflation each year.  But what about later in retirement when travel slows down?  Or, perhaps you sell the RV after years of exploring the national parks.  Wouldn’t discretionary spending go down, thus resulting in a lower rate of withdrawal?

According to Michael Stein and his research, he cites that retirees go through three life stages

  1. Go-go years
  2. Slow-go years
  3. No-go years

In the Go-go years, spending may actually go up slightly due to the simple fact that you have more free time!  You’re able to take several big trips a year, visit the grandkids often, and so on.

In the Slow-go years, expenses go down a bit and also tend to increase at a slower pace than the consumer price index.  During this phase, spending can drop up to 25% and increase at a slower pace than the Consumer Price Index.

In the No-go years, spending continues to drop with the exception of the healthcare category.  Healthcare expenses tend to increase in the No-go years, but proper planning can help mitigate these costs.

If we assume a static spending level and therefore a reduced SAFEMAX, this could mean clients would potentially miss out on more spending in the “Go-go years” in order to have a surplus of available spending later in retirement!   

Of course, we need to have a plan to address longevity and inflation risk, as well as a plan for unexpected healthcare expenses, such as Long-term care.  However, if we have those contingencies in place, I’m all for spending more early in retirement while good health is on your side.

Social Security and other income sources aren't counted

Finally, the 4% rule never accounted for a reduction of portfolio withdrawals due to claiming Social Security or other retirement income.

Let’s say you plan to retire at age 60 and delay Social Security until 70 in order to collect the largest possible benefit.   Your portfolio withdrawals in the first 10 years might be 30% or even 40% higher until you begin collecting Social Security! 

The 4% rule does not account for those adjustments, and therefore will result in far less spending early on.

Word of caution.  Accommodating for a higher than optimal withdrawal rate for an extended period of time, like 10 years, requires significant due diligence and risk management!  A downturn during this period puts your portfolio at much greater risk, so ensure proper contingencies are in place if we go through a “Black Swan” event.

What is the Guardrail Withdrawal Strategy?

At a high level, the Guardrail Withdrawal Strategy allows for adjustments based on economic and market conditions.  For simplicity purposes, this means reducing or increasing spending ONLY if a withdrawal rate guardrail is passed. 

If you picture a railroad track, the initial target is the dead center of the track.  We will then set “guardrails” on each side (positive and negative) to ensure we stay on track and make an adjustment to spending ONLY if we cross over the guardrail.  

The guardrails we like to use involve an increase or decrease in the rate of withdrawal by 20% before a change needs to be made.  If the rate of withdrawal crosses over the 20% threshold, either spending goes down 10% (Capital Preservation Rule) or up 10% (Prosperity Rule).

Let’s say we started with a rate of withdrawal of 5%; the lower guardrail would be 4% and the upper guardrail would be 6%.  Due to market conditions outlined earlier in 2008, let’s say that caused us to pass the upper guardrail of 6%. 

This would result would trigger the Capital Preservation Rule and the client would reduce their spending by 10% during that year. 

Conversely, let’s say in 2021 the lower guardrail was hit given the extreme overperformance by stocks.  This would result in the Prosperity Rule and spending increasing by 10% the following year. 

This research was back-tested for a retiree who began withdrawals in 1973, which hit the perfect storm of high inflation and bear market returns.  Despite these challenges, the maximum initial rate of withdrawal for a retiree that year was 5.8%!  (assuming the portfolio was allocated to 65% in equities and 35% in fixed income).  Increasing the stock exposure to 80% increased the initial rate of withdrawal to 6.2%!  

Key factors to consider when implementing the guardrail withdrawal strategy

Risk tolerance

A client’s tolerance for risk will impact the “tightness” of the guardrails as well as exposure to stocks in the portfolio.

If a client is extremely risk-averse, perhaps you set “tighter” guardrails.  This will increase the number of adjustments needed over time, but it could provide some peace of mind to the client.   Additionally, reducing the stock exposure close to 50% (or in some cases lower) reduces volatility in the portfolio, but will also reduce the initial rate of withdrawal.

Conversely, if a client wants to achieve a higher rate of withdrawal (or income) and is comfortable with volatility in the market, up to 80% exposure to stocks could very well be appropriate.  Additionally, you could widen the guardrails in order to limit the number of adjustments in spending. 

risk tolerance

What is the desire to leave a financial legacy?

The desire to leave a financial legacy is one of the major factors when considering the initial rate of withdrawal.  If this is a high-priority goal, reducing the initial withdrawal rate could certainly improve the ultimate legacy amount.

On the other hand, if leaving a financial legacy isn’t a big priority, allowing for a much higher initial withdrawal rate is a viable option.  

This is also where certain insurance products could be considered.  For many, using a well-diversified investment portfolio with systematic withdrawals is more than appropriate.  Fixed income would be used to protect withdrawals in a bear market, and stocks would be used as income during bull markets. 

However, maybe having a guaranteed income stream is important to a client.  In that case, consider purchasing a fixed annuity.  One positive to rates increasing is that these annuity payout rates have also increased.  I’ve seen quotes recently between 6%-8%/year.  Many of the rate quotes, however, will not adjust for inflation.  But if structured properly, this could be a nice solution to create an “income floor” over and above Social Security income.

For those of you who have a strong desire to leave a financial legacy, perhaps purchasing a life insurance policy could solve this challenge.   In essence, this creates a legacy floor that can free you up to enjoy your retirement assets!

Finally, for those who have major concerns about Long-term care expenses down the road, purchasing Long-term Care Insurance could create some peace of mind.  That way, the retirement income for the surviving spouse and/or legacy goals aren’t completely destroyed by a Long-term Care event.

Key takeaways and final word

There is no one size fits all retirement income plan.  The  4% rule, the Guardrail Strategy, and the spending stages, all tie in differently based on your personal goals, risk tolerance, and financial situation.  

Here are some key takeaways:

  1. The 4% rule is a sound benchmark, but following it may result in a significant surplus of unspent retirement capital over a normal life expectancy
  2. Retirement spending isn’t static, and using the Guardrail Withdrawal Strategy can ultimately improve your retirement income by allowing for flexibility in spending
  3. Successful withdrawal rates have ranged anywhere from 4%/year to 7%/year
  4. Risk tolerance and risk capacity drive the guardrail ranges as well as the exposure to equities in the portfolio
  5. Personal goals and risk factors further determine what the initial safe withdrawal rate should be
  6. Insurance products can help increase peace of mind and protect retirement income streams

We hope you enjoyed this article!

If you are curious about how you might incorporate guardrails into your retirement withdrawal strategy, we’d love to hear from you!  You can use the button below to schedule a “Mutual Fit” meeting directly with me.

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Last but not least, share this with someone you know who is approaching retirement!

Thanks for reading!

2022 Market Recap and Opportunities for 2023

As we start 2023, it’s important for us to take some time to reflect on this past year before turning the page.  

That way, we can bring in the new year with a fresh perspective on where the opportunities are. 

In addition to investment opportunities, the SECURE Act 2.0 passed in December, which brings about some exciting tax and retirement planning strategies

Let’s start with a recap of 2022!

2022 Was a Tough Year for Investors

We started out 2022 with record-high inflation at 7.5%, but the Fed Funds rate was still at 0%.   In order to respond to the COVID-19 pandemic in 2020, the Feds not only cut interest rates but also injected mass amounts of stimulus into the economy.  The more money in people’s hands, the more inflation you get.  Additionally, unemployment skyrocketed in the short-term following temporary layoffs in 2020, but those workers were largely seasonal and got their jobs back later in 2020 and early 2021.  Many worked remotely and never skipped a beat.  As a result of record stimulus coupled with historically low unemployment, inflation began to persist in the summer of 2021.  Instead of the Fed acting at that point (potentially increasing rates and/or reducing their balance sheet), they insisted that inflation was transitory and that it would be short-lived.  After several months of PERSISTENT inflation, the Fed announced its strategy for 2022:  Rate Hikes and Quantitative Tightening (reducing the assets on the Fed’s balance sheet). 

Meanwhile, Russia invades Ukraine, which is of course a tragedy simply due to the unnecessary loss of life.  Financially, this sent an energy shortage throughout Europe and Asia that impacted the global economy (and fuels MORE inflation).

And finally, the second largest economy in the world, China, continued its improbable journey to a zero-tolerance policy for COVID-19.

In essence, the biggest global economies in the world each had their own economic headwinds to deal with, which has now led us to where we are today.

After raising rates by 4.25% in 2022, the Fed feels like its work is starting to pay off.  However, Jay Powell believes more work needs to be done and needs “substantially more evidence” that inflation is abating.  Therefore, we should expect to see more rate hikes this year, but not as steep.  This year, the market is pricing in two 25 basis point rate hikes which will bring the Fed funds target to nearly 5%.      

fed rate hikes in 2022

The ongoing conflict in Ukraine as well as China’s rocky start to “reopening” will not help the fight against inflation.  Additionally, unemployment FELL in December to 3.5% from 3.6% in November.  Wage growth also remains above historical averages at 5.8% given the tight labor market. 

Therefore, despite further rate hikes, inflation might remain above the Fed’s goal of 2% for quite some time.  

For some positive news of 2022, let’s remember that the pandemic has brought about a tough 2 1/2 years.  But finally, it looks like everyone is moving forward into the new “post-pandemic normal.”  

Asset Class Returns 2008 - 2022

Here is a summary of the asset class returns from 2008 – 2022.  For your reference, here is some clarification on some of the acronyms:

  • “Comdty.” = commodities 
  • “EM Equity” = emerging markets
  • “DM Equity” – developed markets (excluding US) 
  • “Asset Alloc.” =  60% equity / 40% fixed income portfolio 


2022 market returns

2022 was a tough year.  All of the major asset classes were negative, and mostly by double digits.  However, looking at the past 15 years since 2008, a 60/40 portfolio (“asset alloc.”) returned 6.1%/year, and Large Cap US Stocks returned close to 9%/year!  I would argue the last 15 years the market has outperformed its historical average, so it’s not unreasonable to think we might have a down year (or two).  After all, when we have a long-term investment strategy, we are signing for up occasional volatility.  However, the only way to guarantee not getting to your destination is by bailing out of your long-term plan. 

Despite these factors, here are the opportunities we see for 2023 and beyond.  Additionally, the SECURE Act 2.0 passed in December of 2022 and brings about new tax planning opportunities for retirees and pre-retirees.  We’ll discuss all of this below.

Yield is Back in Fixed Income

Since 2008, we have seen rate cuts to historic lows, which remained unnecessarily low for too long.  As a result, yields on bonds were paying next to nothing, unless you were willing to take on substantial risk.  As a result, you were lucky to earn 2% on an investment-grade portfolio over the last decade.  Now that rates have skyrocketed, we are seeing yields on bonds push past the 4% and even the 5% range!  At the beginning of 2022, I talked about the risk of rate hikes on existing bond portfolios.  For this reason (among others), we elected to stay short term in duration within the fixed income positions for our clients.  This didn’t eliminate the volatility within bonds, but it reduced the price risk substantially and paid off well.  Now that these bonds are maturing, we have an opportunity to reinvest at the highest rates we’ve seen since before the global financial crisis in 2008. 

For retirees out there, this is a great opportunity to take advantage of purchasing bonds that can not only act as a stabilizer from equity volatility but provide meaningful returns for retirement income.  After all, inflation is expected to abate, which could lead to an intermediate to long-term term bond strategy outpacing inflation by 2% or even 3% per year!

I wrote about 4 bear market income strategies in my last article where I also discussed the value of a bond ladder as part of a retirement income plan.  Given the expectation that rates are likely not to remain this high for very long, the next 1-3 years will be a great opportunity to add duration and yield to your fixed-income portfolios. 

I might add that shorter-term bonds are yielding higher coupon payments than longer-term bonds.  As of today, the 2-year treasury is yielding 4.157%, compared to the 10-year treasury yielding only 3.449%.  This means that the market is pricing in rate decreases over the next few years.  As we mentioned earlier, bond prices go down when rates go up.  The opposite is true when rates go down, bond prices go up.  This means that fixed-income investors will not only benefit from higher yields but might also benefit from potential appreciation if/when bond prices do go up. 

bond yields in 2022

Value Stocks vs. Growth Stocks

With all of the talk about how great yields are on bonds and how poorly stocks did in 2022, we love the outlook for stocks over the next 5 years.  The question is, what kind of stocks will outperform?  Well, being an advocate for a well-diversified portfolio, we won’t be taking any big bets on any one asset class.  However, we talked about overweighting toward value stocks in 2022, and we think the same for 2023.  

Companies that rely on leverage for growth typically reap the rewards of the low-rate environment we saw since the Great Recession.  Therefore, the “growth” sectors within equities outperformed for much of the last decade.  Towards the end of 2021, we talked about the risk of being overexposed to growth-oriented stocks (tech stocks, consumer cyclical stocks) during a rising rate environment.  Just think about it; the more expensive debt becomes, the tougher it is for these companies to borrow at the pace they need for growth. 

Instead, we liked value stocks to be overweight in the portfolio, as investors would flock to safety during volatile times (think dividend-oriented, cash-flow healthy companies).

Growth stocks took the biggest hit in 2022 and lost about 30%.  Some of the biggest names in tech were down even more.

  • Google (GOOG):  -39.1%
  • Amazon (AMZN):  -49.6%
  • Tesla (TSLA):  -65%
  • Facebook (META): – 65%
  • Netflix (NFLX): -50%

On the contrary, value stocks were down only 6% in 2022. 

We do believe there is more volatility ahead, as corporate earnings might disappoint in the first half of 2023.  However, when stocks take a big hit like this, it’s a buying opportunity, NOT a selling opportunity.  As we re-balanced portfolios in 2022 and at the beginning of 2023, we were buying stocks, not selling!  And if history is an indicator, after we hit bear markets, the performance of stocks tends to be very promising in the years ahead.  After all, bear markets typically experience a -37% decline, but bull markets experience a 209% increase, on average!  

value stocks vs growth stocks in 2022

Don't ignore International Stocks!

International stocks have been underperforming relative to US stocks for over a decade.  However, international companies have looked relatively cheap for quite some time now.  These stocks were set to outperform in 2020 until COVID-19 shut down the global economy.  International stocks have taken a bigger hit since the pandemic but outperformed US stocks in the second half of 2022.  With cheap valuations, a stronger outlook for growth relative to the US, and a strong dollar, it’s important NOT to ignore international exposure within your portfolio.  For our clients, we are focusing on quality companies with steady cash flows and strong balance sheets, very similar to the story for the US sectors.  Additionally, we are limiting our exposure to companies that are owned by foreign governments, as they create additional geopolitical risk.

Of course, there are still significant risks with China’s reopening, as well as the Russian invasion of Ukraine.  These factors could certainly create lots of volatility for the asset class, which is why US stocks will continue to remain the majority asset class within our equity portfolios. 

For you historians out there, the chart below shows international stocks outperformed much of the 70s and 80s during hyperinflation.  I’m not suggesting this will be the same story, but a prudent investment strategy will certainly incorporate international stocks going forward.  

don't ignore international stocks

Bottom Line

Stocks and bonds both declining at a double-digit pace is unprecedented.  However, staying diversified and disciplined served our clients well in 2022 and will serve them even better when things begin to recover.

It’s important to always start with “why.”  Why are you investing?  

For our clients, it starts with a financial plan which includes their personalized goals, risk tolerance, and financial assets.  

Each investment strategy is tailored to its goals and involves a process to stay on track for those goals.  It’s extremely dangerous to try to guess or time the market, as it’s virtually impossible to do consistently over time. 

SECURE Act 2.0 Highlights

The Setting Every Community Up for Retirement Enhancement (SECURE) Act was passed in 2019 and went into effect on January 1st of 2020.  The SECURE Act 2.0 was officially passed in December 2022.  Some aspects go into effect in 2023, whereas others will go into effect in the years to come.  We will focus on the SECURE Act 2.0 and the major changes we believe will impact retirees and pre-retirees

Changes in Required Minimum Distributions

Required Minimum Distributions, or RMDs, is the amount required to be taken out of a qualified retirement plan once the beginning date starts.  Before the SECURE Act of 2019 was passed, the RMD beginning date was the year in which you turned 70 1/2 .  However, for those who had not yet turned 70 ½ as of January 1st 2020, the new RMD beginning date was the year in which you turned 72. 

The SECURE Act 2.0 now pushes the beginning date back further.  The table below illustrates the beginning date based on your year of birth.

Changes to required minimum distributions from secure act 2.0

The amount required for the distribution is based on the IRS life expectancy table.  For most participants, the Uniform Lifetime Table will be used.  If your spouse is more than 10 years younger, you can use what is called the “Joint Life Expectancy Table.”  There is also a single life expectancy for stretch IRAs (no longer allowed after 2020).

For illustrative purposes, let’s take a look at the Uniform Lifetime Table below, which also shows the corresponding percentage and dollar amount required to be taken from a $1,000,000 retirement account.

As you can see, for a 72-year-old, the account balance is divided by 27.4 (the divisor balance), which is equal to $36,496.35 (or roughly 3.65% of the account balance). 

You will notice the RMD goes up over time.  This is because there are fewer years of life expectancy remaining.  By the time a retiree reaches 80, the RMD is approximately 5% of the portfolio. 

Uniform Lifetime Table


Divisor Balance

% of Account

RMD for a $1,000,000 retirement account




 $                    34,364.26




 $                    35,460.99




 $                    36,496.35




 $                    37,735.85




 $                    39,215.69




 $                    40,650.41




 $                    42,194.09




 $                    43,668.12




 $                    45,454.55




 $                    47,393.36




 $                    49,504.95




 $                    51,546.39




 $                    54,054.05




 $                    56,497.18




 $                    59,523.81




 $                    62,500.00




 $                    65,789.47




 $                    69,444.44




 $                    72,992.70




 $                    77,519.38




 $                    81,967.21

For those of you turning 72 in 2023, you were probably planning to have your beginning date start this year.  However, this new legislation is in effect NOW, so your beginning date is 2024 when you turn 73!  Happy Birthday to those born in 1951!

The next group of individuals born in 1960 or later will have a beginning date of the year they turn 75. 

For the first RMD only, you can delay the distribution until April 1st of the following year. 

For example, you turn 73 in 2024 (born in 1951).  You can either take your first RMD in the calendar year of 2024 OR take that RMD by April 1st of 2025.  Just remember, if you decide to delay until April 1st, you will have TWO RMD’s for 2025 (one for 2024, and one for 2025).  However, this is helpful if your taxable income will drop substantially after your beginning date due to retirement or other reasons. 

Planning opportunities for RMDs

First and foremost, SECURE Act 2.0 gives account owners more time until they are required to start taking RMDs.  For many of you, you might be dreading RMDs as you might not NEED those distributions for income.  Perhaps your Social Security, Pension, and other investment income is more than enough to live your lifestyle.  Therefore, RMDs are more of a tax liability than anything else. 

For some, considering a Roth conversion strategy could be advantageous. 

Consider someone who is retiring at 62, and their earned income goes to 0.  Perhaps they plan to live on their investment assets until reaching 70 (their Latest Retirement Age for maximum Social Security benefits).  Assuming the beginning date is the year in which they turn 75, they have 13 years of potentially low income. 

Therefore, instead of continuing to defer their retirement account balances until 75, one might consider converting portions of those existing tax-deferred account balances for the next 13 years.  Yes, a Roth conversion would trigger taxes now based on the amount converted, but this also reduces the calculation for the RMD each year.  Roth IRAs do not have RMDs, and distributions from Roth IRAs are tax-free (assuming they are qualified).  Therefore, this could result in tax savings beginning at age 75, and could potentially last for 20+ years based on one’s life expectancy.   I wrote an article on Roth conversions and if you should consider them that you can read here.

Another positive change is the elimination of the RMD from Roth 401ks and other Roth-qualified retirement plans.  In the past, ONLY Roth IRAs were excluded from RMD calculations.  Beginning in 2024, qualified plans with Roth balances will NOT be required to take an RMD. 

Qualified Charitable Distributions (QCDs)

QCDs are a great tool for those over the age of 70 ½ and are charitably minded.   For 2023, the limit for a QCD is still $100,000, which means you can gift up to that amount from your Traditional IRA to a charity without paying taxes.  However, this limit will begin to index with inflation beginning in 2024 (finally!).  The initial $100,000 limit was set in 2001, so it’s about time they began to increase the amount allowed.

This works extremely well if you are already taking RMDs, as that income is not counted towards your Adjusted Gross Income.  Instead, it’s an above-the-line deduction regardless if you itemize or take the standard deduction. 

Example:  Susan typically donates $10,000/year to her favorite animal shelter, which operates as a 501(c)3 charity.  However, her total itemized deductions don’t exceed the standard deduction for her and her spouse, which is $27,700 for 2023.  Therefore, she technically does not receive any tax incentive for donating the $10,000.  Last year, she turned 72, so she now has an RMD of $50,000 in 2023.  Instead of taking the $50,000 as income, paying taxes, and writing a $10k check to the animal shelter, she elects to do a $10k QCD.  The QCD form is filled out through the custodian, and the custodian will write the check directly to the charity.  Now, her RMD is only $40,000 (instead of the full $50k).  The net result is a reduction in taxable income of $10,000, and the standard deduction is still in effect! Win-win!

There is a provision in SECURE Act 2.0 that allows for a $50,000 one-time contribution to fund a Charitable Remainder Trust (CRUT or CRAT).  Most individuals funding Charitable Remainder Trusts are funding them with much larger increments, as essentially you are giving away those assets to a charity, in exchange for a lifetime income and a generous tax deduction.  In most cases, $50,000 is not going to provide very much in the way of lifetime income, and that asset is no longer available on the balance sheet. 

Therefore, QCDs are mostly unchanged with the exception of inflation adjustments, but keep in mind the Charitable Trust strategy as it could come into play for some charitably minded individuals.

Roth SIMPLE IRAs and Roth SEP IRAs

Traditionally, these small business retirement plans could only be funded with pre-tax dollars.  With the SECURE Act 2.0, these businesses can now allow for Roth contributions for both SIMPLE IRAs and SEP IRAs.  This will be effective immediately starting in 2023.  However, I’m expecting some challenges and delays from the custodians of these accounts given the need to update forms, processes, and procedures. 

Just remember, a ROTH contribution into a SEP or SIMPLE IRA is non deductible, but can benefit from tax-free growth.  A Traditional (pre-tax) contribution into a SEP or SIMPLE IRA is deductible and grows tax deferred. 

The driver of what kind of contribution to make is based on what your current tax bracket is vs. what it might be in retirement (any crystal balls?).  If you are in a high tax bracket today and don’t plan to be during retirement, you might benefit from Traditional SEP contributions that are deductible.  If you are tax neutral or you might be in a higher tax bracket in retirement, you might benefit from tax-free growth (Roth contributions).  

If you have no idea, perhaps you should consider contacting a fiduciary financial planner and/or tax professional.   (or just split it 50/50!)

529 Rollovers to a Roth IRA

Yes, you read this correctly!  Parents tell me all the time that they are worried about overfunding their child’s 529 because their kid is going to be the next Mark Zuckerberg, drop out of college and become a billionaire.  So, what about those dollars that are left inside the 529? 

Most parents (and grandparents) will just liquidate the account and pay taxes and/or penalties, or simply let the account sit there indefinitely.  Beginning in 2024, 529 plans that have unused funds can be rolled over into a Roth IRA.  However, it’s NOT too good to be true as there are hoops you need to jump through.

  1. The Roth IRA receiving the rollover must be the same beneficiary as the 529 plan
  2. The 529 plan must be open for at least 15 years
  3. Contributions to the 529 within the last 5 years, and earnings on those contributions, are ineligible for rollover
  4. The annual limit for how much can be moved to the Roth IRA is the same as Roth IRA contribution limits (not including contributions directly made to the Roth IRA)
  5. The lifetime maximum that can be moved from a 529 plan to a Roth IRA is $35,000

If your child is the beneficiary, this would mean you would have to rollover their 529 balance to a Roth IRA in THEIR name.  However, could the rule allow for a change of beneficiary to name either you or your spouse, then proceed with a rollover to a Roth IRA in one of your names?  And if so, does that reset the 15-year clock?  

The law is unclear about this, but it should be addressed by the IRS before it comes into effect in 2024.  Until then, just know there is a potential solution for these unused 529 funds over time, and is perhaps one of the most interesting developments with the SECURE Act 2.0!

Spouses who inherit IRAs

The current law allows spouses to;

  • Rollover the IRA into their own IRA
  • Elect to treat the decedent’s IRA as their own
  • Or simply remain as the beneficiary of the IRA

Beginning in 2024, the SECURE Act 2.0 will now allow for the surviving spouse to essentially treat the IRA as if they were the deceased spouse. 

This could be beneficial if the surviving spouse is older than the deceased spouse, as they could potentially delay RMDs for longer.   Additionally, if the surviving spouse passes away before the initial owner would have reached RMD age, their beneficiary would have some flexibility with the 10-year rule.

IRA and 401k Plan Catch-up Contributions

When you are over the age of 50, you are eligible for “catch-up” contributions.  IRA catch-up contributions have been $1,000 for 15 years!  Finally, they will be indexed for inflation, I guess in response to record-high inflation all around.  Makes sense to me!

This will begin in 2024, and adjustments will be made in increments of $100. 

Starting in 2025, SECURE Act 2.0 will allow for additional catch-up contributions for certain qualified plan participants.  Those who are 60-63 have their plan catch-up contribution limit increased to the greater of $10,000, or 150% of the regular catch-up contribution.  This limit applies to plans like 401ks, 403bs, 457bs, and TSP accounts. 

SIMPLE IRA participants ages 60-63 also have their catch-up contributions increased to $5,000 or 150% of the regular catch-up contribution.

Catch up contributions for high income earners

Starting in 2024, catch-up contributions for workers with wages over $145,000 during the previous year will be automatically characterized as Roth contributions, not traditional.  There are several key planning considerations with this change.

  1.  There are income phaseouts that ultimately eliminate participation in a Roth IRA for individuals (for 2023, a single filer is phased out at $153,000, and married filing jointly at $228,000).   Given 401k catch up contributions have NO income phaseouts, this is a BENEFIT to some 401k/403b participants who prefer Roth contributions over Traditional
    1. If a participant between the age of 60-63 prefers Roth contributions, they could in essence max out approximately $41,250 into Roth accounts starting in 2025!
      1. $22,500 for Roth 401k/403b (regular deferral max)
      2. +$11,250 catch up contribution for ages 60-63 (new catch up limit beginning in 2025)
      3. +$7,500 Roth IRA contribution or backdoor Roth IRA contribution (if done properly)
  2. If the plan does NOT allow for Roth contributions (which are becoming less and less common), then the catch-up contributions will be pre-tax instead.

Some higher income earners might actually PREFER traditional (pre-tax) contributions, especially those who believe their tax bracket will go down in retirement.  

We still need clarity on a few provisions within this section, so stay tuned as we get closer to 2024!

Final word

There are many investment and tax planning opportunities in the years ahead, it makes me excited to serve our clients!

It has been a tough couple of years, and many of you might be wondering if you should be making adjustments to your portfolio.  Or, perhaps you have an advisor that focuses mostly on investments and not retirement and/or tax planning.

We will be accepting 12 more clients for 2023, and we would be more than happy to see if you are a good fit to work with us (and vice versa).  Feel free to schedule a “Mutual Fit” Zoom Call using the link below.

Also, make sure to subscribe to our newsletter to get our latest insights delivered to your inbox.

Until next time!


4 Bear Market Retirement Income Strategies

The 2022 bear market hits retirees the hardest

As we prepare to close out 2022, retirees and pre-retirees are facing the worst possible scenario, a triple bear market.  US stocks, along with international stocks will likely be down double digits.  US bonds will close in the red 10%+ year to date.   And cash, although yields have risen, are experiencing negative returns net of inflation.  All in all, the traditional 60/40 investment portfolio model for retirees has many questioning whether this strategy is still viable.    

Many of you will need to take a distribution to satisfy your RMD (“Required Minimum Distribution”) for 2022 and 2023, or simply need income to live on during retirement.

But, you have probably heard the old saying, “Buy Low and Sell High.”

Well, how do you implement a retirement income strategy during a bear market, particularly one in which both stocks and bonds are experiencing record losses?

Here are 4 retirement income strategies to consider during times like these.  Let’s not forget that bear markets, on average, happen every 5 years.  So, in a potential 30 year retirement time horizon, you will experience roughly 6 bear markets!  

Let’s dive in.

#1: Asset Dedication

One way to hedge bear market risk involves what is called the “Asset Dedication Strategy.” This strategy incorporates aligning a CD or individual bond ladder with specific cash flows, in this case retirement income. Let’s say your RMD is estimated to be $50,000 in 2023.  A basic example would be to purchase a high quality bond or CD for $50,000 (or a combination), that will mature at the time the cash flow is needed.  This is my personal favorite when working with clients because it eliminates the uncertainty of where interest rates might go in the future.  In general, when interest rates rise (like in today’s market), the value of bonds go down.  If you own an individual bond and hold it to maturity, the par value is redeemed in addition to the interest payments you received.  Therefore, who cares what the price fluctuation was along the way?

The challenge for bond mutual funds or ETFs is they have to deal with redemptions (other investors selling), which will inevitably impact the price of that particular fund, and ultimately its performance. 

Depending on your time horizon and risk tolerance, we would create a bond and/or CD ladder to satisfy 2-10 years of those expected distributions. 

If done properly, you will never have to sell your stocks when markets are down.  As your bonds mature and are paid to you as retirement income, you would then re-balance your portfolio (sell some of the winners) to add the next “rung to your ladder.” 

The frequency of the re-balance will depend on market conditions and how well your other investments are performing.  So, if markets rise rapidly, you might find yourself adding several rungs to the fixed income ladder by taking gains off the table.  That way, when markets are down, you have plenty of wiggle room to wait until things recover.

If the strategy involves a taxable account (non-retirement), you might consider municipal bonds, depending on your tax rate.  These interest payments are exempt from federal income taxes, and could also be exempt from state income taxes depending on the bond you purchase.  If the strategy involves a tax free or tax deferred account, investing in corporate bonds and/or government issuers will work just fine, as taxes are not a concern.

BONUS Strategy

I have to add a bonus strategy as not all bond mutual funds and ETF’s have done poorly in 2022.  In late 2021, with the help of our friends at Wisdom Tree Asset Management, we added the ticker AGZD as a core bond holding for all client accounts.  The more conservative the account, the more exposure to AGZD.  This strategy involves using traditional fixed income securities coupled with derivatives within the treasury market to hedge against interest rate increases.

Sound complicated?  Well, it is somewhat.  But in essence, when interest rates do rise (like in 2022), this strategy helps preserve principal unlike your traditional bond mutual fund or ETF.

Year to date this strategy has returned a positive return of 0.63%!  Compare that to the average bond mutual fund at -12.79%, wow!  This strategy, coupled with individual bonds, has allowed our clients to protect their retirement income during this particular bear market.

#2: “Income Flooring”

creating a retirement income floor

“Income Flooring” with annuities is another strategy that works extremely well during volatile markets. This involves purchasing an annuity to generate an income floor that can be relied upon regardless of market fluctuations.  Social Security might represent a portion of your fixed income needs in retirement, but what makes up the gap?  If you are relying solely on securities that have price fluctuations, what do you do in a market like 2022? 

An income floor will invariably reduce the amount of cash needed from a distribution, and therefore will allow your riskier assets to recover during a downturn. 

The beauty of this strategy in today’s market is that interest rates have risen sharply.  Therefore, insurance companies have been able to increase their payout rates, thus making income flooring much more attractive than it was 3-4 years ago.   

I like to compare this to purchasing an investment property designed to pay a fixed income stream.  The difference is there are no repairs, unexpected maintenance costs, or tenant vacancy gaps. 

On the flip side, it’s not an asset you can “sell back” to anyone to recoup your principal.  Additionally, there is no price appreciation like you would expect from buying real estate.

For the most part, these annuities are not liquid and should not be relied upon for an unexpected expense or emergency fund.  Therefore, I typically would not recommend exchanging a large majority of your investible assets for these contracts given the lack of flexibility. 

However, if structured properly, it can serve as a compliment to Social Security and other guaranteed income streams.

A good rule of thumb is to calculate your non discretionary expenses, and compare that to your projected fixed income payments (Social Security and Pensions).  If there is a shortfall, you might consider backing into how much money would need to be exchanged into an annuity to fill that gap.

If you have yet to claim Social Security, this strategy can be even more powerful so you avoid tapping into longer term investments for current fixed income needs.


These contracts are complex and not all annuities are created equal.  It’s important to consult with a fiduciary financial advisor who can work with you and multiple insurance carriers to select the most appropriate product. has a great article on annuities that you can read here.

#3: Cash Value Life Insurance

Cash Value Life Insurance is one of the highly debated products in the financial services industry.  Insurance companies tend to “sell the sizzle” and often fall short on fully educating the consumer. 

On the other hand, most investment advisors tend to default to the advice of “buy term and invest the difference.”

I started my career at a large insurance company, and now run my own fee only financial advisor firm, so I have sat at both sides of the table. 

I wrote an article titled “5 reasons to own life insurance in retirement” that I would recommend reading to get my insights on the topic.  For this article, I want to focus on using the cash value as an income strategy to hedge a bear market. 

Here are the basics:

  • Cash values within a fixed life insurance policy have a guaranteed interest rate + a non guaranteed interest rate. They are paid to the policy owner in the form of annual dividends that can be used to purchase more life insurance, increase the cash value (or both), and pay premiums. 
  • Cash values can be surrendered, at which point taxes will be due on any gains (if applicable)
  • Cash values can also be borrowed tax free while also keeping the policy in force

Example:  Let’s say you have a policy with $100k in cash value.  You are also retired (or planning to retire) and need $50,000/year from your investment portfolio to supplement other income sources.  In a market like 2022, you might find it difficult to take a distribution from your investment portfolio, unless you implemented strategy #1 or #2 as previously mentioned.  Therefore, instead of selling a stock or bond at a loss, you might consider borrowing $50k from your $100k cash value on a tax free basis.  The loan will be charged interest, but there is still interest credited to you on the loan.  My personal policy with Northwestern Mutual has a net charge of 3%, which isn’t bad in today’s market.  

Let’s say you borrowed from the policy and avoided selling your longer term investments.  Now what?

You have two options. 

One, you can let the loan ride, and simply ensure that the policy doesn’t run into issues down the road.  This involves reviewing your policy on an annual basis using an “In Force Illustration.”

When you pass away, the loan proceeds will be subtracted from the death benefit paid to your beneficiaries.

Or two, pay the loan back once the market recovers. 

I prefer option two if you plan to utilize this strategy again in the future.  At some point, this market will recover, and we will set new market highs.  Who knows if that will be in 2023, 2024, or even 2025.  But at some point, you might experience substantial gains within your stock portfolio that you are comfortable with taking $50k off the table and paying back that policy loan. 

In essence, you are using the cash value as a re-balancing tool in lieu of other fixed income assets.

Here’s the challenge.

You need to have the cash value in the policy to take advantage of the strategy in the first place.  This involves buying life insurance and funding the policy adequately to build up adequate cash value.

Therefore, this strategy is best suited for those of you approaching retirement that have adequate recourses to fund a policy for at least 5 years, and you’re healthy enough to buy it.  If it’s designed properly, this will give the policy time to work properly and set you up for this defensive hedge that you may need 4-5 times throughout an average retirement time horizon.


Much like annuity contracts, life insurance policies are also not created equal.  The design of the policy is key and will impact the viability of policy loans as well as the tax implications of using the cash value. 

Furthermore, this strategy works best if you have a legacy goal of transferring assets to the next generation, and the cash value is more of an ancillary benefit.

Consult with a fiduciary advisor and licensed agent to create an optimal strategy best suited for you!

#4: Tap into Home Equity

home equity line of credit and reverse mortgage strategy

Leveraging a HELOC (Home Equity Line of Credit) or Reverse Mortgage to access home equity is my fourth and final strategy.

With home values shooting up the last few years, you might find yourself with a large chunk of cash available to tap into via a home equity line of credit or reverse mortgage.  This should be done carefully as it involves leveraging one of your most important assets, your home.  However, if done properly, it could create an infusion of cash while letting your longer term investments recover. 

A reverse mortgage could be tapped into as a form of life income payments, a line of credit, or both.  At death, the loan amount would be offset by the sale of the home.  For a HELOC, the loan would generally need to be repaid within a specified term.  With rates increasing, you might be hard-pressed to find a HELOC for less than 6.5%.  However, some of you might already have a HELOC established at a lower rate and can tap into the funds cost effectively. 

Also, the challenge with reverse mortgages is that a higher interest rate will result in a more expensive loan and thus a lower payment.  However, if you are in a bind, it’s worth consulting with your financial advisor and mortgage specialist to see if it’s a viable option.

In Summary

2022 has brought unique challenges to retirees.  However, a well thought out retirement income plan is critical to weather this storm, and future storms during a 20-30 year retirement time horizon.

If you have questions about your retirement income plan, or are wondering how this bear market has impacted your long term goals, feel free to book a 30 minute initial conversation with me by clicking on the Schedule Now button below.  

Also, make sure to subscribe to our email newsletter below so you don’t miss out on any of our future insights!

Retirement planning = reduce stress and worry less!

Blended Families – You Need a Long-term Care Plan!

Don't have a Long-term care plan? You are not alone!

Nobody likes to think about the possibility of a family member caring for them later in life.  However, the number one concern I hear from my clients is “I don’t want to be a burden on my children.”  When I ask about how a long-term care event would impact the family, most people have never thought about it.  Or, they’ve thought about it but have yet to create an actual game plan.  

Now, what about long-term care for blended families?  If there are adult children from previous marriages, how does that impact the actual long-term care plan for Mom/Dad?  

In this article, we will dive into the facts about Long-term Care planning, the challenges for blended families, and the top solutions to consider!

The basics

Despite the fact there is a 70% chance you will need long-term care later in life, less than half of retirees over 65 have Long-term Care insurance.  Furthermore, 70% of caregivers are NON paid family members.  So what does this mean?

Even though the probability of needing care is high, people simply ignore long-term care planning.  Or, they simply assume buying insurance is too expensive or they will simply pay out of pocket.  

And despite not wanting to burden their loved ones, they many end up doing just that.  In fact, more than 60% of caregivers have other full time jobs in addition to being the primary caregiver! 

Many people believe Medicare or Medicaid will cover Long-term Care expenses. 

Medicare does not pay for custodial care after 100 days.  Sure, if you are in a rehab facility and expect to improve, you can rely on Medicare to help subsidize those costs for a very short period of time.  Medicaid, on the other hand, does pay for custodial care.  However, most of you will probably not qualify for Medicaid given the financial requirements of income and assets.  And sure, you might assume that your family members will hire help, but the reality is they are NOT hiring help.  Perhaps they believe they can’t afford it, or they are afraid they will burn through assets too quickly and won’t be able to maintain financial independence for themselves.  Both of these are legitimate concerns.

Long-term Care Planning Challenges for Blended Families

Blended families are becoming much more common nowadays.  In fact, 40% of weddings today will form a blended family!  For blended families planning for retirement with adult children, this can provide challenges in three ways:

  1. Who’s assets will be used to pay for long-term care expenses?
  2. How does a long-term care need for your spouse impact your ability to maintain financial independence?
  3. Who’s children will be available to coordinate care?

Who’s assets will be used to pay for long-term care expenses?

which assets to use to pay for long term care

What if you remarried and brought a much larger pool of assets to the marriage than your spouse?  You might have the goal of passing on a financial legacy to your children, but at the same time making sure your spouse is taken care of for life. 

As I discussed in my previous article, 4 Retirement and Estate Planning Strategies for Blended Families, the functionality of a trust for blended families is important.  A trust would allow for you to pass on assets to your spouse, but making sure the next beneficiary is your children once your spouse passes away.

But what if your spouse needs long-term care later in life?  Perhaps they don’t have their own pool of funds to pay for that care.  Inevitably your trust will have to be invaded to pay for those long-term care costs.  The question is, how does this impact your intergenerational wealth planning goals

What about your financial independence?

If your spouse needs care and you spent down a large chunk of your assets to pay for it, how does this impact your ability to maintain financial independence after your spouse dies? 

When your spouses passes away, the household will automatically have a reduction in Social Security income.  There could also be a reduction in pension and annuity income, on top of assets being spent down for long-term care.

If you were cruising along and on track to meet your retirement and estate planning goals, how does a long-term care event impact your ability to maintain those goals? 

As we illuded to earlier, most of the time the spouse will care for the other.  Remember, 70% of long-term care is provided by unpaid caregivers.  This means you might forgo hiring professional help in efforts to save your financial resources, but this could negatively impact your mental and physical health.  We’ve seen caregivers get sick after their spouse passes away, simply because they took on the lion’s share of caregiving and are flat out worn out.


Who’s children will be available to coordinate care?

blended family finances

This is the most difficult part of the equation.  Sure you might have enough resources to pay for care.  But, like Jean Ausman shared in our retirement readiness checklist, “a checkbook is not a long-term care plan.”

Who is going to manage the care?

Who is physically going to provide the care?  What if that person is a stepchild? 

Who is going to manage the financials and decide which accounts to tap into for care?

These are all touchy subjects, especially with a blended family where the adult child handling these issues isn’t the biological child of the one needing care.

What is a Long-term Care Plan?

As I discussed in a previous article, Long-term Care Planning, I mentioned the fact that 40% of retirement aged clients have long-term care insurance.  If you read that article, you understand that I am agnostic as to what the solution is, but we need to have a plan.  

These are some questions to get you started:

  • Where will care be provided?  If care is provided at home, you will likely have family providing the bulk of the care.  On top of this, you might hire some professional help to give relief for the family members.  If you need specialized care in a nursing home or memory care, the price tag goes up substantially.  Check out Genworth’s stats on this below.

  • What assets will be used to pay for care?  Different accounts will have different tax consequences.  Additionally, certain accounts are better to spend during your lifetime instead of leaving to your children.  Make sure you designate which accounts (in order) should be spent down first if there is a long-term care need.  Take a look at our article on how to divide assets in a blended family.
  • What’s the strategy to mitigate the tax impact of accelerated withdrawals? You might have multiple accounts to draw from, and accelerated withdrawals on certain accounts like 401ks or IRA’s might push you into a higher tax bracket.  Additionally, it could result in higher Medicare premiums as a result of “IRMAA” (income related monthly adjustment amount).  Therefore, you might work with a fiduciary financial planner who also does tax planning to ensure you are making tax efficient withdrawals.  
  • Who is the caregiver coordinator? This job can feel like a full time job, even if the individual isn’t the one providing the care.  The ongoing hiring, firing, financing, and other issues can result in major headaches for the coordinator.  For blended families, what if that coordinator isn’t your biological child?  Or, what if your biological child is the coordinator for your new spouse (their step parent)?  These are touchy issues and can cause a divide amongst the family.  It’s very important to be proactive with all of the children on who is responsible for what.   You also might consider hosting a family meeting so all of the children are on the same page.
  • Who is going to manage the assets? If you plan to hire professionals to provide the care, some additional asset management will need to be considered.  Which investments are being sold when?  How does selling those investments impact the long term viability of the portfolio?  What’s the tax consequence of selling an investment to pay for care?  How does selling an asset impact your legacy goals?  

For traditional families with shared estate planning goals, it can be perfectly acceptable to “self-insure,” as long as the plan is laid out for the decision makers. 

With blended families, particularly those with separate estate planning goals, I highly recommend Long-term Care Insurance

The potential challenges for the adult children and your spouse are endless depending on the relationship dynamics, and insurance removes them from the equation (for the most part).  

The benefits of Long-term Care Insurance for Blended Families

  1. Caregiver Coordinator benefit

Immediately after a triggering event, a Long-term Care policy will most likely have a caregiver coordinator benefit.  This allows for the client to call the carrier, and request a specialist to come out to the home.  This specialist will help create a plan to provide care within the framework of the insurance policy’s terms and budget.  Additionally, they can help make recommendations on home modifications to suit the needs of the family.  From there, if there is additional care needed, the family will then decide if they will pay out of pocket or coordinate efforts to provide care.  Nonetheless, the family will have an objective third party to help them with these major decisions.


  1. A long-term care benefit pool

Some policies provide for reimbursement, some provide cash benefits immediately upon the triggering event.  Either way, there is a defined pool of dollars that are specifically meant for long-term care needs.  In addition, the payouts are income tax free, which will eliminate unnecessary tax increases from accelerated retirement account withdrawals.   Why do you think ultra high net worth individuals own Long-term Care Insurance?  Of course they could “self insure,” but they would rather keep their long term investments on their balance sheet instead of liquidating them for care.  

The best part is, having a defined pool of assets will eliminate the question of “do I hire help or provide care myself?”  Instead of putting your spouse or adult children at risk of carrying the weight of caregiving, the insurance essentially forces the family to hire professional help.  You can’t put a price tag on preventing that burden.


  1. Hybrid policies

Over the years, I’ve had clients bring up the concern of “what if I never need care?”  Statistically speaking, there’s a good chance you’ll need care.  In fact Genworth estimates 70% of those 65 or older will need care at some point in life.  But the question is valid.  What if you don’t?  

Hybrid policies were designed to address this issue.  The gist is there is a life insurance benefit with a long-term care benefit.  Some policies are life insurance focused with a long-term care rider.  Others are long-term care focused with life insurance rider.  Either way, if long-term care is not needed.  Or, if only a portion of the benefit pool is used, there will be a death benefit when you pass away that can be left to your beneficiaries.  These policies are certainly more expensive, but you get what you pay for.  What’s also nice is all of the policies I am familiar with are guaranteed to not increase in premiums.  This has been another pain point for the long-term care industry and these policies were also designed to eliminate that concern. 

For those that are interested in leaving a financial legacy to their children, these hybrid policies are a great solution!

Final thoughts

All in all, if you are a blended family with adult children, you must absolutely have a long-term care plan.  If you are similar to a traditional family in the sense of having shared estate planning goals, long-term care insurance might be optional for you.  However, the tax benefits and having a dedicated plan for care makes insurance extremely appealing for all families. 

For blended families with different estate planning goals, long-term care insurance is the top solution!  It’s important to consult with a fiduciary financial advisor that specializes in retirement planning and specifically long-term care planning to create a plan that’s right for you.  An objective third party who can review your goals and balance sheet is invaluable.

If you are interested in discussing your long-term care plan, feel free to start with a no obligation Zoom call with us! (see the link below)

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The 7 Most Tax Efficient Retirement Income Strategies

Tax efficiency maximizes retirement income!

When I started my first job as a soccer referee at 12 years old, my Mom used to tell me; “it’s not what you earn, it’s what you keep!” 

I’m not sure if working at 12 years of age is legal any longer, but I’ve had a job ever since.  My Mom instilled in me the value of forced savings and paying yourself first.   (thanks, Mom!)

I’ve been practicing financial planning now for over 14 years, and I find this quote is highly relevant for taxes.

Tax inefficiency of retirement income is one of the biggest drags on returns.   In fact, taxes are likely the largest expense for retirees, even more so than healthcare costs!

While we can’t control the stock market, we can control our taxable income (to a certain extent).

This article will outline the 7 most tax efficient retirement income withdrawal strategies so you can maximize spending on your lifestyle, not the IRS. 

1. Roth IRAs + other Roth Accounts

As you know, this is one of my favorite tax efficient income strategies for retirement.  Sure, you will forgo the tax deduction for contributions, but in exchange for a lifetime of tax free (“qualified”) withdrawals.   I’ll take that tradeoff any day!

Here is the nuts and bolts of how these accounts work:

  • You make a contribution (whether it’s payroll deductions with work or IRA contributions).
  • You invest the money according to your goals and risk tolerance.
  • Enjoy tax free withdrawals, assuming they are “qualified”:
    • The account is at least 5 years old (for an IRA)
    • You are 59 ½ or older

Your contributions in these accounts are always tax and penalty free, but you might have taxes and penalties on earnings if your withdrawal is “nonqualified.” 

There are some exceptions like for first time home purchases, educations expenses, etc.  But if you are reading this, these will likely not be of interest to you anyhow!  Why would you cash in your most tax efficient retirement vehicle for anything other than retirement?

There are some limitations on these accounts.


  • For Roth IRAs – the max contribution for 2022 is $6,000/year (if you are over 50, you can contribute $7,000/year)
  • For a Roth 401k/403b – the max contribution for 2022 is $20,500 (if you are over 50, you can contribute $27,000/year)

These contribution limits are per person.  If you are married, your spouse has their own limits to take advantage of.

Income phaseouts:

If you are over a certain income threshold, you might be phased out completely from a Roth IRA contribution (don’t worry, there may be a loophole).

Roth 401ks/403bs etc. are NOT subject to income phaseouts.  You can make $1million/year and still max out a Roth 401k.  Check out your 401k plan rules to see if there is a Roth option in lieu of the traditional.

Enter the backdoor and mega backdoor Roth contributions

In 2012, the IRS lifted the income limits for “Roth conversions.”  A Roth conversion simply means you convert all or a portion of your Traditional IRA to your Roth IRA.  You will then be responsible for any taxes due at that time.  However, you may find this compelling based on your expectations on where taxes might go in the future.

Here’s the loophole…there is no income cap for non deductible IRA contributions.  Therefore, savvy tax planners can make non deductible IRA contributions, and immediately convert those dollars into their Roth IRA!  This is known as a backdoor Roth contribution!

Pro tip – be careful of the IRA aggregation rule or your conversion may not be tax free!

Now, companies are starting to allow for “Mega Roth 401k/403b conversions!” Depending on your plan rules, you can not only contribute the maximum to a Roth 401k, but you can make an additional non deductible contribution up to the 402g limit.  That non deductible contribution can then be converted to your Roth 401k to enjoy tax free growth!  

Sound too good to be true?  Well, lawmakers are looking to shut this down ASAP, so take advantage while you can and read your plan rules to see if it’s allowed.

tax planning for retirement

2. Health Savings Accounts (HSA)

Healthcare will likely be one of your largest expenses in retirement, so why not pay with tax free income? 

In order to participate in an HSA, you must have a high deductible healthcare plan.  Talk to your HR team about which plans allow for these accounts.  

In general, if you are going to the doctor frequently or have higher than average medical bills, a high deductible health care plan may not be right for you.  However, if you are pretty healthy and don’t go to the doctor often, you might consider it so you can take advantage of the tax free HSA.

HSA’s have a triple tax benefit:

  • Tax deductible contributions
  • Tax free growth
  • Tax free distributions (if used for qualified medical expenses)

This triple tax benefit is the reason it’s one of the most tax efficient retirement income strategies!

You can also use an HSA to help pay for long-term care costs or even pay long-term care insurance premiums tax free.  

Try not to tap into this account early

You might be tempted to reimburse yourself the year you have a major surgery or other medical bill.  If you can pay out of pocket, do that instead!  As your account grows, you can even invest it according to your risk tolerance and time horizon.  This helps amplify the benefit of tax free compounding!

Save your medical bill receipts

There is no time limit on when you reimburse yourself.  You could have surgery in 2022, and reimburse yourself anytime in retirement tax free!

Planning a major trip in retirement?  Take a look at some medical bills you paid 20 years ago and reimburse yourself from the HSA…now you have more money to enjoy that trip instead of paying Uncle Sam!

Don’t leave this as a legacy

Your beneficiaries (other than a spouse) will have to liquidate the HSA the year you pass away, which could create an unnecessary tax bill for your heirs.  Spend it while you can, name your spouse as beneficiary, and enjoy this triple tax advantaged account!

3. Life Insurance

Life Insurance is an often misunderstood, misrepresented, and misused financial tool for retirement.  However, it can be used as a tax efficient retirement income strategy, or a tax efficient intergenerational wealth strategy (dual purpose!).

I started out with a life insurance company and am so thankful I did.  First and foremost, I was taught to load up on life insurance while I was young and healthy (even before needing it), to lock in my insurability and health profile. 

Secondly, I was taught the benefits of permanent insurance and loaded up on this as well.  Again, before having any insurance needs at all! 

Over time, the cash values have grown, and I’ve been able to tap into this asset class at opportune times when other asset classes were temporarily at a discount! 

Ever hear of the concept “buy low, sell high?”  Well, how do you buy low if all of your assets are down at the same time?

As we’ve seen with the market in 2022, bonds are not immune to significant drops in performance.  Life insurance keeps on keeping on!

Long term, my plan is to keep the insurance as a tax free legacy for my three boys (and hopefully grandbabies!).  There is no other financial vehicle that provides an amplified tax free death benefit like life insurance. 

Which type of insurance should I own?

Raising children is expensive.  Inflation has made it even more difficult!  If you are strapped for cash and are worried about making rent or your mortgage on time, you should buy some inexpensive term insurance and protect your family.  

Pro tips:

  • Buy lots of coverage – a rule of thumb is 10x – 16x your gross income, but some insurance companies allow you to buy 25x your gross income!
  • Make it portable.  If you are healthy, buy a policy NOT tied to your workplace, as you never know how long you will stay there.
  • Make sure it’s convertible.  Even though you may not be a good candidate for permanent insurance today, that may change over time.  Perhaps when your kids are out of the house, or your mortgage is paid off, or your income has skyrocketed.  Being able to convert to a permanent policy without medical underwriting is extremely helpful.  

For those of you comfortably maxing your tax advantaged retirement plans and HSA’s (as discussed previously), overfunding a permanent life insurance policy can be a great supplemental savings tool.  

There are multiple flavors of permanent life insurance that we won’t go into detail on in this article.  But in general, you can invest in fixed products or variable products.  This feature will impact the performance of your cash value, and potentially your death benefit.  

You can also add a long-term care rider on some policies to kill two birds with one stone.  That way, if you are someone who never needs long-term care, your family will still receive the death benefit.  

What I have found is that the intention might be to use this cash value as a tax efficient retirement income strategy, more often it’s used for the death benefit.  All of you diligent savers will accumulate assets in your 401ks/IRAs, taxable brokerage, HSA’s etc., and you might realize that this amplified death benefit is best used to enhance your intergenerational wealth objectives.  Plus, it gives you a license to spend down your other assets in retirement “guilt free.”

Don’t worry about making that decision today, but just know this asset can be a flexible vehicle throughout your lifetime.

4. Taxable Brokerage Accounts

This bucket is one of my favorite tax efficient retirement income strategies for three reasons:  

  1. There is no income restriction on who can contribute
  2. There is no cap on contributions
  3. There is no early withdrawal penalty

The title of this account sometimes leads people to believe it’s not tax efficient.

And this can be true if you invest in certain securities within the taxable brokerage account.

However, if you are strategic with your security selection, you can have minimal tax liability during the accumulation phase.  

In retirement, you can then use losses to offset gains, sell certain blocks of securities with limited capital gains, and use tax free income as cash flow by investing in municipal bonds (if appropriate).

I find this tool is great to maintain flexibility for funding college, saving for retirement, or any other major expenditures along the way. 

Intergenerational Wealth Planning

Certain assets are better used during your lifetime instead of passing on to your heirs, as we discussed with the HSA.  However, taxable brokerage accounts are extremely tax efficient for intergenerational wealth planning

When you pass away, your beneficiaries will get a “step up in cost basis” which will limit their tax liability if/when they sell that asset themselves.  

All in all, this can be a great multi functioning tool for retirement income, legacy, or any other major opportunity that comes along!

minimize taxes in retirement

5. Non Qualified Annuities

I find consumers have a negative connotation associated with the term annuity.  And, rightfully so.  These products, like life insurance, are often oversold or inappropriately utilized.  

In it’s purest form, annuities are used to provide a guaranteed income stream in retirement.  Think Social Security or a Pension. 

Creating a “retirement income floor” is one of the most powerful things you can do for yourself.  Believe me, when the markets go south, you don’t want to be worried about how to fund your basic living expenses in retirement.  

However, if Social Security + Pension + Annuity income covers your basic necessities, you can avoid losing sleep at night when the markets do take a dive (which they will!).

The tax efficiency components are twofold:

  1.  Tax deferred growth, much like a traditional 401k or IRA
  2. Exclusion ratio for lifetime annuity income

For you high income earners, you will want to limit tax drags on  your savings.  However, once you are maxed out of your qualified retirement plans, you’re going to be wondering where to go next.  One of the  benefits for annuities is the tax deferred growth.  You won’t receive a 1099 until you start the income payments in retirement!  

In retirement, instead of the gains being withdrawn first (“LIFO”), you can take advantage of the exclusion ratio.  This allows for a portion of your retirement income to be a return of basis, and a portion to be taxable income.  Therefore, it’s a great way to spread the tax liability over your lifetime. 

In retirement, if you decide you don’t need this income stream, you can flip on the switch to fund other tax efficient vehicles like life insurance or long-term care insurance.  

Intergenerational Wealth Planning

In years past, annuities were a terrible way to leave a legacy for your children.  Beneficiaries were often forced to take a lump sum distribution or take payments over a short period of time.  Now, some annuity contracts allow for the children to turn their inherited annuities into a life income stream.  This can also help spread out the tax liability over a much longer period.

I still recommend using these accounts during YOUR retirement phase and leave other assets to your children.  Having your beneficiaries deal with the death claim department within annuity companies can be a nightmare!

6. Reverse Mortgage

One of the largest, if not the largest, asset on your balance sheet over time will be home equity.  However, many retirees don’t maximize their home equity as an income tool, which could be a mistake. 

In simple terms, a reverse mortgage allows the homeowner to stay in their home as long as they live.  These products essentially flip your home equity into an income stream.  The income stream now becomes a loan with your home as collateral. 

Because it’s a loan, the income is not taxable to the borrower! 

Instead, the loan will be repaid from the home sale proceeds when you move, sell your home, or pass away. 

Creating this essentially tax free income stream can allow you to preserve other liquid assets on your balance sheet, like the ones mentioned above. 

It can also be a part of the “retirement income floor” concept that we mentioned previously.

7. Real Estate Income

You often hear of real estate investors paying little to no taxes.  The basic reason is the ability to deduct ongoing expenses from the income.

  • mortgage payments
  • taxes
  • insurance
  • maintenance
  • property management fees
  • And the “BIG D”  – Depreciation!

This depreciation expense is the real wildcard as it can essentially wipe out any taxable income you would otherwise have to report.  Depending on the property type, this can amount to approximately 3.6% of the cost basis year after year!  There is some “true up” at the end when you go to sell the property, but it’s a huge advantage to minimize taxable income while your property still cash flows! 

And once you sell the property, you can even take advantage of a 1031 tax free exchange and buy another investment property that better suits your overall financial goals.

Investing in real estate is not for everyone.  And it’s certainly not a passive activity, even if you have a property manager.  Studying your market, analyzing trends, upgrading your property and dealing with bad tenants are ongoing challenges.  

However, if you do it right, this can be an extremely tax efficient retirement income strategy.

Final word

Minimizing taxes in retirement is one of the most impactful ways to maximize your cash flow!  

However, most people don’t think about taxes in retirement…until they are about to retire!

These strategies only work if you begin building the framework 10, 20 or even 30 years before you quit your day job.  Furthermore, not all of the strategies discussed will make sense given your goals and financial circumstances. 

It’s important to consult with a fiduciary financial advisor that can take a comprehensive look at your financial plans.  

If you are interested in scheduling a call, feel free to use the calendar link below for a 30 minute “Mutual Fit” meeting over Zoom.

Also, make sure to subscribe to our mailing list so you don’t miss out on any retirement planning insights!

Until next time, thanks for reading.