Monthly Archives: November 2014

IRA Owners: Don’t Forget to Take Your RMDs

withdraw-required-monthly-distribution

Photo via Flickr and CC

If you are the proud owner of an Individual Retirement Account (IRA) and at least age 70-1/2, then the end of the year is an important deadline that must be at the top of mind.

By December 31, all IRA account holders must take a Required Minimum Distribution (RMD) and report it to the IRS on their income taxes due the following April.

RMDs are not the same for everyone; specifically, the RMD is based on a financial formula that considers the value of the retirement account at the end of the previous year. You may want to consult your account representative to discuss your exact amount, or we can help you with the formulas as part of our retirement planning services.

What happens if I miss the RMD deadline?

If you fail to withdraw the minimum distribution from your account before the end of the year, then the IRS will charge you a hefty penalty – a whopping 50 percent.

That means if your Required Minimum Distribution is $5,000 and you forget to take it from your IRA, then you have the privilege of writing a $2,500 check to the IRS.

For obvious reasons, this is not something we recommend to our clients – but it does happen. So, when it does, we adjust the financial plan around it.

What should I do with the money I withdraw from the IRA?

When you take the money from your retirement account, you don’t necessarily have to deposit it in your personal bank account – unless you want to do so.

One possible option is to reinvest the RMD in a non-IRA account, so that it can keep the money growing. There may be other, more suitable options that make sense for your financial situation; however, it is always best to talk with an advisor who specializes in retirement and financial planning.

Whatever your pursuit, the most important thing to remember is that you must take the RMD by the end of the year – lest you risk forfeiting a greater portion of your investment.

Family + Holidays: Why You Should Be Talking Finances (and How)

As the holiday season draws near, your thoughts may be turning to the abundant time you’ll be spending with family. While much of this involves a cornucopia of hearty meals, football games and general merrymaking, what most of us don’t envision is sitting down to a serious conversation about finances.

Now, we’re not suggesting that you share the nitty-gritty about your monthly mortgage with your brother-in-law, but what is going to benefit the family is a candid discussion about your parents’ financial intentions, what that means for the rest of the family, and what it is going to take to make it work.

Here are some ideas for talking finances with the family this holiday:

  • Grab a glass of wine, and sit down together. It’s still the holidays, so fill your cup of cheer and gather around the fireplace for a real heart-to-heart. Just be sure to wait until after the meal to avoid frustration stemming from hunger.
  • Focus on one thing at a time. Do your parents have a financial plan in place to protect them during retirement and well into their golden years? Are they planning to write a will, establish trusts, or assign a power of attorney? Finding out these details in an honest and open forum can actually bring the family closer together, and helps everyone figure out what work needs to be done to secure the family unit.
  • Encourage feedback. The benefit of having the entire family together is you get different perspectives on money-related conversations. Plus, the more comfortable everyone feels, the more likely they are to participate in helping the plan come together.
  • Know it all. If your parents (or in-laws, if it’s the spouse’s parents) already have wills, trusts, estates, powers of attorney, etc., then find out where they keep them and get copies if possible. You’ll want to have these documents accessible should an emergency arise.
  • Agree to meet again. It’s likely that you’ll need to follow-up on the plans you make during the holidays, so ask who would like to participate and set a future date after the New Year to solidify everything. This is also a good time to talk about including a financial advisor in your plans.

Do you have other tips for those looking to start a financial conversation with their families during the holiday season? Let us know in the comments.

Can an Active Manager Beat the Market?

At Guidant Wealth Advisors, we believe that the best strategy for generating superior long-term investment results is to focus on creating the appropriate asset allocation (or mix of categories of investments, like large cap stocks, small cap value stocks, real estate, bonds; you can think of these asset classes like the ingredients of a recipe) and then implementing that allocation in the most cost-effective and tax-efficient manner as it relates to one’s Financial Plan. For us, this means using low cost, no-load index funds.

But there is an appeal to active management. The thought that one can find an advisor, fund manager, or some stock market oracle that can consistently identify the best investments and avoid the under-performers is powerful. This fascination is supported by millions of advertising dollars spent by the financial services industry, in an effort to convince investors that their money manager has the best crystal ball.

Guidant’s argument in favor of asset allocation utilizing low cost funds over active management funds is based in part on reams of historical data and academia that show most active managers consistently under-perform their benchmarks.

The New York Times published an article on July 19, 2014, that reviewed a recent Standard & Poors/Dow Jones Indices study. The S&P/DJ study looked at the performance of more than 2,800 actively managed mutual funds for the 12 months ending March 2010. They selected the top quartile, or 25%, of the funds, and then tracked their performance over the subsequent four 12-month periods. How many of the more than 700 funds remained in the top 25% for five consecutive years? Two. That is exactly 0.27%.

What’s the conclusion? “It is difficult for active fund managers to consistently outperform their peers and remain in the top quartile of performance over long periods of time. There is no evidence that an active fund manager that outperforms in one period, or even over several consecutive periods, has any greater likelihood than other active fund managers of outperforming in the future.”

Active manager out-performance is so inconsistent that it makes it effectively impossible to distinguish luck from skill.

This seems to bolster the case for index-fund investing. After all, if a fund manager with a great year can’t be counted on to outperform other fund managers later, it’s reasonable to ask: Why bother trying to beat the market at all.

You can read the NY Times article by clicking this link.