Planning Beyond the Numbers

Financial planning is key at all stages of life, but there are a few areas in which those over age 55 need to be more aware of as they move forward in life. Below, you will find helpful advice on such topics, as provided by financial advisor Christian DiPretoro, with Smith Barney.
 
While it’s never a bad time to revisit the fundamentals of investing, it’s an especially good time to do so when volatile markets start making investors feel anxious and uncertain. It’s during times like these that you’ll hear a lot about asset allocation.
The whole point of asset allocation—the spreading of funds across different asset categories, such as stocks and bonds—is to achieve your long-term financial goals with less risk. But in order for your asset allocation to be truly effective, your goals must be based on more than just market returns, industry sectors or the interest rate on a bond. Instead, your financial goals should correspond to your lifestyle, family and passions. Only when you’ve identified what you want to get out of life can you begin to build an appropriate long-term investment plan around that insight.

How do you get started? Get ready to have a number of intimate conversations with your spouse or partner and other integral family members. These discussions should help clarify the lifestyle you wish to maintain when you are no longer in your peak-earnings years. In addition to funding your vision of retirement (do you want to live like you do today, more modestly or more extravagantly?), you should consider how you will cover tuition expenses, charitable outlays and anything in between near and dear to you, while still having enough readily available to jump on new opportunities.
 
Let’s Talk About Risk
 
Risk is a notion that gets thrown around a lot, in terms of how much of it can you tolerate for that extra bit of return that may come with it. But when you are thinking about your long-term plan, it’s important to consider risk. Ask yourself these questions:

How would I fund a large, unexpected expense or face a job loss, illness or other catastrophic event that occurred before the end of my investment time horizon?

How do I respond to every market swing? Maniacally or steadily?

What do I worry about when it comes to dispersing my money among various asset classes?

What would make me feel more secure about my financial future?

Also ask yourself if you are more of a conservative or aggressive investor—and why. If you consider yourself conservative, for example, is it because you had a bad past experience? Do you understand how issues such as the possibility of living longer than expected factor into a conservative allocation? The more you can articulate who you are and what matters to you, the better equipped you will be to put together a portfolio that aims to help you fulfill your goals and ideals.
 
Getting Down to Brass Tacks
 
Now that you’ve done the hard part—the architectural plans, let’s say—you can get started building the foundation, and that begins with a thorough look at all your holdings. This evaluation should include any illiquid holdings (such as real estate or a business) and concentrated positions (say to one stock or one type of asset class) you may have. You might be surprised just how undiversified you could be despite all your “diversification.” Also, remember that life events—such as retirement, divorce, the sale of a business, a child’s marriage or the death of an elderly parent—will affect not only your asset allocation but also your entire financial picture, so a regular review of your investment strategy and overall situation is highly recommended.
If all this assessment, planning and monitoring sounds daunting, it doesn’t have to be—there are many qualified professionals with a host of resources at their disposal to help you with more than just investment choices. Because as important as a sound asset allocation strategy is, it’s only as good as the goals and ideals you’ve identified. The performance of your investment portfolio has to do more than just look good on paper—it has to also be good enough to allow you to get what you want out of your life.
 
 
 
IRA Rollovers:
Stashing Your Retirement Nest Egg
 
Whether you are a boomer saying goodbye to the daily grind or a Gen-Xer moving on to the next level of your career, retirement or a job change can create an ideal time to ask yourself what you want to do with your accumulated retirement funds. Unfortunately, there is no cookie-cutter answer to this question.
In pondering the next steps for your nest egg, you will need to assess the distribution options available to you and decide which ones will help you accomplish your goals. Here are just a few important reasons to consider an IRA rollover:
You retain the tax-deferred status of your retirement investments.
You have a broader array of investment choices in a self-directed IRA—and can craft a more appropriate portfolio to generate retirement income.
You can structure a payout plan at any age that avoids the usual early-withdrawal penalty tax.
An IRA rollover accommodates more customized beneficiary designations than most retirement plans.
Another important benefit of an IRA rollover is that it allows a surviving spouse to continue seamlessly with the IRA account—or consolidate it into his or her own IRA. Other beneficiaries, such as your children or grandchildren, also can receive payments from an inherited IRA over the course of their entire lives (this “stretch-IRA” strategy lets you take advantage of tax-deferred compounding while giving you the ability to spread the income-tax liability over many years). All IRA beneficiaries will be able to invest their self-directed IRA portfolios according to their individual needs.
 
The Rollover Reconsidered
 
There are some situations where rolling over your nest egg to an IRA may not be a desirable course of action. Here are a few of those possible situations:
You want to seamlessly continue the tax-deferred status of your retirement investments.
If you retire between age 55 and 59½ and need income from this retirement account, you may want to leave some or all of it with your former employer in order to receive penalty-free distributions, where income taxes are due upon withdrawal.
You were born before Jan. 1, 1936 and want to elect 10-year averaging tax treatment for your distribution from the employer plan. (10-year averaging—which is also available to the beneficiary of someone born before Jan.1, 1936—is not available if you roll over to an IRA.)
You are able to transfer from one employer’s plan to another.
You prefer the investment choices offered by your former or new employer’s 401(k).
If your balance is less than $5,000, the rollover option may not be available to you.
Of course, a decision to not roll over your retirement nest egg to an IRA could impact your spouse, who down the road may have to deal with a former employer’s plan representatives at a difficult time and make quick decisions—especially if immediate income is needed. Your spouse can roll over to an IRA in his or her own name, but if younger than age 59½, he or she will be at a disadvantage if income is needed.
As for nonspouse beneficiaries, the Internal Revenue Service issued regulations in 2007 that allow them to request a rollover to a beneficiary IRA. Unfortunately, the regulations are not mandatory for plan sponsors, so there is no knowing if your plan will allow your children or grandchildren to take advantage of an IRA rollover and the “stretch-IRA” strategy.
A comprehensive planning approach that factors in elements such as education funding you may be planning for your children or grandchildren can help you arrive at the best answer for how to manage your retirement account. And you don’t have to go through this process alone—consider enlisting a financial professional to help you identify the possibilities, weigh the outcomes and make informed decisions that result in your wealth working hard for you.