What you need to know
Recently, I have had a couple meetings with equipment dealers and I have noticed some patterns in the questions I’ve been receiving. Many of you are asking about required minimum distributions, beneficiary designations, and retiring in a down market. I hope I can answer some of these questions in this column.
Required minimum distributions are a topic we have discussed before, but to review: An RMD is the amount you must withdraw from a traditional IRA or qualified retirement plan on an annual basis after age 70½. As an owner of a tax deferred retirement account, you are allowed to begin withdrawing from that account with no penalty after age 59½.
Required minimum distributions are designed to make sure owners of tax deferred retirement accounts don’t defer taxes on their retirement accounts indefinitely. So, what determines your required minimum distribution? Your RMD is dependent on a couple variable factors: your age, the value(s) of your account(s), and your life expectancy. There are various tools you can use to help determine what your required minimum distribution will be, such as the IRS Uniform Lifetime Table to determine your life expectancy.
To calculate your RMD, use this equation:
|(Account Balance @ end of year)|
|(# of years expected to live)|
Beneficiary Designation is another topic that seems to generate many questions. One place to start in regards to beneficiary designation is a will and trust to ensure that your assets are distributed and passed on in a manner that you approve of. That being said, beneficiaries of financial accounts and insurance policies will usually supplant instructions in a will.
There are two basic rules when designating a beneficiary to your retirement account. First, if you are married your spouse is legally required to be your primary beneficiary unless he or she signs a waiver. There are some legitimate reasons for a spouse not to be your primary beneficiary. One such reason could be instructions in an already established will and trust call for something else. Second, if you are single, widowed or divorced anyone you want may be designated as your primary beneficiary.
As a reminder, it is always a good idea to name a secondary or contingent beneficiary to your account should you and your primary beneficiary pass away in a common accident.
Remember, kids may absolutely be named as beneficiaries, but any minor child who is designated as a beneficiary should have a guardian or trustee to control any assets until the child is capable of managing the assets.
Down market retirement
A third topic that has been producing many questions is the prospect of retiring in a down market. Ideally, your retirement is perfectly timed, with your debts paid off and having saved enough to endure a comfortable retirement. Unfortunately for many of us, we don’t live in an ideal world. Only four out of 10 current retirees retired when they planned to. Thus, it is a good idea to prepare for the chance that you retire during a down market.
Let’s begin with the idea of Sequencing Risk, which is the risk of experiencing poor investment performance at the wrong time, i.e., the beginning stages of retirement. Market losses at the start of your retirement could have a large impact on your retirement income. Here are some ways to hedge against sequencing risk due to retiring during a down market:
- Dividing your portfolio: When it comes to your investment assets, you want to build a diverse portfolio to hedge against market fluctuations. One way to do this is to divide your portfolio into three specific “buckets” that reflect three phases of your retirement; the short term (2-3 years), the mid-term (3-10 years), and the long-term (10+ years).
- Determining withdraws: A typical rule of thumb for deciding on the amount of the annual withdraw you make is the “4% Rule.” With this principle in mind, you initially withdraw 4% of your portfolio and increase the amount every year adjusting for inflation. To some, however, this strategy proves far too risky, so make sure to make a decision that is comfortable for you. Regardless of what you choose, the three-part strategy for dividing your portfolio allows you to keep track of and monitor your asset performance in the mid- and long-term buckets, all the while drawing from the short-term bucket of cash and cash equivalents. Even with thoughtful planning, retirement can bring surprises to the table, so it would be smart to be prepared.
Furthermore, in the five to six years leading up to your retirement be sure that your money is allocated properly. One of the biggest mistakes I see investors make is being too aggressive with their retirement assets in the immediate years before they retire. You have worked tirelessly to get to this point. Don’t put yourself in a hole right before you are set to retire due to an overly aggressive allocation. This is another reason why it is important to sit down with your plan advisor or financial advisor at least annually.
As always, remember that your advisor works for you so don’t hesitate to contact them with questions or concerns.
WED – Fall 2019
About the Author
David B. Wentz is the CEO of Tax Favored Benefits, Inc. located in Overland Park, Kansas. David B. has been in the industry for over 25 years and brings a wealth of experience and knowledge to his clients. Upon graduating from the University of Kansas in 1989, David attended the University of Kansas Law School, where he graduated in 1992 with a Juris Doctor degree. Over his 25-plus year career, David has worked to build a national footprint. In addition, David has led multiple insurance companies in Retirement Plan and Life Insurance sales. David also speaks at various professional and business seminars on the subjects of pension, profit sharing, 401(k), tax favored benefits, and investment programs.