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What You Need to Know About RMDs
by Polly Aites
What is a Required Distribution?
A Required Minimum Distribution is a specific amount of money that needs to be distributed from a retirement account. The amount of the distribution is determined using an IRS prescribed formula. If a required distribution is not taken by the deadline, the client could be subject to a penalty of 50% of the amount not distributed.
What is the Deadline for Taking the Distribution?
Generally, a retirement plan participant MUST start receiving distributions from their IRA by April 1st of the year following the year in which they reach age 70-1/2.
Example: If you turned 70-1/2 in 2010, you could have taken your RMD by December 31, 2010. If you didn’t, you must take your first RMD by April 1, 2011. If you delayed your first distribution until April 1, 2011, you must take two distributions in 2011, one for 2010 and one for 2011.
Or
Example: If you turn 70-1/2 in 2011, you may take your RMD by December 31, 2011, or delay your first RMD until April 1, 2012. Again, if you delay your first distribution until April 1, 2012, you must take two distributions in 2012, one for 2011 and one for 2012.
Who Needs to Take A Distribution?
Anyone reaching the prescribed age and owning:
(1) Traditional, SEP, and SIMPLE IRA participants who have reached age 70-1/2;
(2) Qualified retirement participants and 403(b) participants who have terminated employment with the employer maintaining the plan and have reached age 70-1/2;
(3) Beneficiaries who inherit an IRA.
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LPL Conference Wrap-Up!
Every year LPL Financial offers it’s independent advisors the opportunity to attend a week-long conference that enables them to expand their knowledge of the industry and learn new initiatives being used. ?It was especially productive this year, during a time of market volatility, to speak with other LPL advisors from across the country.
Bob Fragasso, Debbie Graver, Andrei Voicu, Bryan Hoover, and Shelli Bowers attended this year. Some of the highlights that they mentioned included:
• Major enhancements will be coming to Wealth Vision early next year including the ability for clients to track expenses vs. budget.
• LPL will soon be offering a new educational opportunity for staff through Admin U. Employees can take courses that will provide them with additional training in client service, office management, technology, and sales and marketing. The goal of the program is to help make the office run more efficiently and effectively. Look for more information on this exciting program in our January newsletter!
We find attending conference such as these are very beneficial since we are always looking for new ways to help increase our knowledge to better serve our clients.
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Fragasso Named to Top 100 Independent Broker/Dealer Advisors
Robert Fragasso, Chairman and Chief Executive Officer of Fragasso Financial Advisors, was named to Registered Rep Magazine’s 2011 list of the Top 100 Independent Broker/Dealer Advisors. Fragasso ranked at #13 out of 100 nationally recognized advisors and #2 out of advisors from Pennsylvania. The list is compiled based on assets under management.
Fragasso is proud to be ranked among the list of top broker/dealers throughout the U.S. |
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Congratulations!
Join us in congratulating Bryan Hoover on his marriage to Brittany. The couple wed on July 16, 2011 at St. Margaret of Scotland in Greentree. Bryan is a Financial Advisor.
Baby News!
Congratulations to Ray and Paula Amelio on welcoming their 3rd granddaughter, Carolina Elizabeth Amelio, shown here with big sister Aurora. Carolina was born on August 20, 2011 and weighed in at 9lbs 2oz. Ray is our Chief Marketing Officer.
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FEATURED
Retirement Security
by Bob Fragasso, CFP
It seems a fragile goal given today’s economic circumstances. And the shift from traditional retirement income sources, like defined benefit pension plans, seems to make that goal even harder to achieve. Well, maybe the textbooks can help us. After all, there is a reason why information finds its way into such resources and that is because it’s been proven to work.
The first step is to articulate the goal with as many particulars as possible. This then leads us to fashion a cost estimate based on life style, geographic location, family responsibilities and desired activities. We then add in the historic norm for inflation. (No, this time is not different and the average over time becomes a fairly solid planning number.)
Next, we take an inventory of current assets and ability to save over time in retirement plans and personal portfolios. We evaluate the efficiency of the portfolio’s management and adjust to try to improve the risk/reward relationship. Plotting this against the numerical picture of the goal, which we then call the objective, giving us a clear idea of the potential shortfall. We can then adjust the variables in the retirement equation. And that looks like this:
Assets + additions + earnings = Objective x inflation x life span
If it comes out even, then you, as we cavalierly say, "Run out of money and breath at the same time." But we don’t leave it at that. We factor in a possible longer life as a safety factor as well as any estate, gifting and charitable objectives. The final conclusion becomes very workable and is contingent on you and us fulfilling our roles to save and invest wisely.
Finally, we continue to manage those investment assets, monitor the results and make appropriate adjustments over time. This not only works well in the textbooks but it also has proven to be the correct methodology in the laboratory of our experience for over 39 years of assisting clients to reach their retirement dreams. While history is no guarantee of the future, it has proven to be the best indicator of the principles that should be employed on your behalf. And that’s exactly what we do for our clients.
As you think about this, doesn’t all of that make sense? What better plan have you seen? We suggest that your conclusion is to have us assist you in your quest for your retirement dream of financial adequacy, security and comfort. Call us now to discuss your dream.
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Downturns and Recoveries:
Investment Portfolio Construction
by Andrei Voicu, CFP
Downturns and Recoveries
Flashes of the 2008 financial crisis are still fresh in everyone’s memory. This summer, markets have once again tested investors’ resolve.
Our clients’ investment portfolios are allocated based on an extensive analysis of the unique objectives and risk profiles of every individual circumstance. Being fully aware that difficult markets will always be part of the mix, we seek to design portfolios with the highest likelihood to withstand the test of time.
One key common ingredient is diversification. Properly diversified portfolios tend to lose less in periods of market decline than the popular stock indexes flashing on the TV screen. Losing less when markets head south offers the opportunity for a speedier recovery.
Let’s examine the impact of the two most severe stock market declines in recent memory on two hypothetical portfolios.
Portfolio 1 is invested in the S&P 500 Index – the most commonly used proxy for the US stock market
Portfolio 2 is more broadly diversified and includes a combination of 60% stocks and 40% bonds, a relatively common mix for a moderate risk profile investor
Dot.Com Crash - February 2000 through March 2002
Portfolio 1 (the S&P 500 index) experienced a 25 month long decline during which it lost 45% of its value. The S&P 500 Index recovered all of its losses by April 2006; 49 months after the market bottomed.
Portfolio 2 (the more broadly diversified 60/40 mix) lost only 16% of its value during the 25 month long market decline. 12 months after the stock market bottomed, the 60/40 portfolio in our example was already up to pre-crash levels.
By April 2006 (over 4 years later), when the S&P 500 finally recovered all of its losses, the 60/40 diversified mix in the example, was up another 44% from where it started before the crash.
Subprime Mortgage Crisis – November 2007 through February 2009
Portfolio 1 (the S&P 500 index) experienced a 16 month long decline during which it lost 51% of its value. 29 months passed since the market bottomed in March of 2009. The S&P 500 Index had yet to recover all of its losses experienced during the crash.
Portfolio 2 (the diversified 60/40 mix) lost 30% of its value during the 16 month long market decline. 14 months after the market bottomed the 60/40 portfolio was already back to pre-crash levels.
As of July 31, 2011 (29 months after the market bottomed) the 60/40 diversified mix was up 16% from where it started before the crash.
It is important to know that our clients’ investments are positioned with the goal of losing less and recovering more quickly. Such knowledge makes investors resist the urge to rush to cash in a panic. In our experience selling in moments of panic has never served anyone well in the long run. Missing out on the gains of a recovery all but insures that the losses incurred on paper become permanent.
Fragasso Financial Advisors stands ready to evaluate the impact current events may have on your long term goals and whether or not you are still on the right path. For a stress test evaluation of your portfolios, please contact us to schedule an appointment.
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Social Security Update
by Karen Lapina
Social Security and Medicare are often the first things that come to mind for those approaching retirement. With the media’s attention to the debt crisis and on-going budget proposals, it is something few of us can avoid hearing about, even if retirement is years away. Regardless of your opinion or ideas on what should become of both or either system, there is a very good possibility that changes are coming that will affect your retirement benefits.
Currently, those who have worked long enough to earn enough “credits” under the current Social Security system have the option of choosing to take their retirement benefits starting as early as age 62, with the full benefit given if you wait until your full retirement age (65 to 67 depending on the year in which you were born). The benefits you receive are based on your annual earnings history and subject to a cap, currently $106,800. Non-working spouses and widows can also collect benefits on their working spouse’s benefit record. Benefit amounts and the annual earnings cap are tied to the Consumer Price Index (CPI) and thus subject to cost-of-living adjustments.
In terms of its taxability, a portion of your benefit may be subject to federal income tax depending on how much your adjusted gross income, or AGI, is for a given year. For instance, if you are married and file a joint return, and your AGI is $44,000 or more, 85% of your Social Security benefits will be taxed at whatever your marginal federal tax rate is for that year.
For the average retiree, these benefits will only provide a small portion of their income needs, especially for those who have come to enjoy a comfortable lifestyle. And these benefits are likely to be reduced or constricted further in the near future, given our nation’s burgeoning deficit.
With company pension plans quickly becoming extinct, the only other source of retirement “income” is your savings pool. This includes your company’s retirement plan, IRAs, personal investments, and savings accounts, etc. Systematic savings into these accounts combined with a prudent investment plan is crucial in determining whether or not you will have enough to retire comfortably. Starting early and saving as much as possible into a properly allocated portfolio is the best way to take a proactive stance toward reaching your goals.
One of the many benefits our clients receive at our firm is having detailed projections run, at least annually, to help ensure they are on track to achieve their life’s goals. Taking a holistic stance to financial planning, we can review your portfolio (for outside assets), tell you how much you should be saving and help you determine if your time frame is realistic.
Talk to your financial advisor for further details.
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Client Profile: Nancy Thompson
This quarter’s client profile was written by Melissa Richey,CFP® Vice President.
Nancy Thompson has lived in Pittsburgh for many years but still carries her thick New England accent. Her thirst for education and the arts started at a young age. Her mother was the Director of Development at Radcliff College, so education was always a priority in her household. Her father was an architect who owned his own business. When her parents divorced, her mom was determined to put Nancy and her two older sisters through school. Her mom worked two jobs to make ends meet so Nancy’s care fell to her sisters a lot of the time.
Nancy attended Milton Academy, a private prep school in Boston. She credits that environment with changing the way that she viewed education. Up to that point, Nancy admits that she was not the best student and wasn’t always the best behaved, but the private school had a great structure which allowed her to thrive. She recalls the teachers spending a lot of time with their students and treated them all like kids of their own. Nancy said that she remembers every teacher’s name to this day.
Nancy attended Skidmore College in Sarasota Springs, New York but left after two years to begin working as a secretary. She said that she was rather bored with the job so she enrolled in George Washington University and graduated with a degree in Political Science. She then took a job on Capitol Hill working for a Congressman. While working in Washington, D.C., she recalls a great moment in which she briefly met a famous politician. Nancy was doing filing at the time and remembers being on the floor with papers scattered everywhere. A gentleman approached her from behind and said that he was happy to be in the presence of someone from his area – New England. Nancy turned around and realized that Jack Kennedy had spoken those words to her. She remembers not even being able to move and just being mesmerized by him. To this day, she feels badly that she did not stand up to shake his hand. Nancy said that she was just a little too star-struck to move but she remembers him being very nice.
Nancy left Washington, D.C. and joined C.A.R.E., which is a leading humanitarian organization focused on providing relief to poverty stricken areas. Nancy raised money for the organization. She then joined the Peace Corp and lived in Columbia `and other parts of South America for two years. They needed a woman on staff to get a juicy contract from the government so Nancy was chosen. She was fascinated by how other cultures live and she states that those two years were the best experiences of her life.
After two years in the Peace Corp, Nancy was accepted at the University of Pittsburgh. She received a Masters Degree in Counselor Education. At that time, approximately 75% of the Pitt students were international. Nancy can speak French and Spanish and this allowed her to help a lot of students find their way at Pitt. As the years went on, her job didn’t allow as much student interaction so she left to work at Allegheny East Mental Health Center where she helped with community programs for young mothers and children.
Nancy married a physician but later got divorced. While married, Nancy stated that she really didn’t pay attention to the finances but when she got divorced, she said that she “woke up about money and felt that she had no choice but to pay attention.” She attended a financial workshop in which Bob Fragasso was the teacher. She entrusted him with her divorce settlement and has been a client ever since. Nancy feels that we have guided her through many market cycles and life changes.
Nancy retired in 1994 at the age of 65 from Family Services. She admits that the first year of retirement was hard and she “didn’t know what to do with herself and her time.” But now she is anything but bored. She has been singing with the Bach choir for 34 years. In addition, she regularly takes painting classes. At the age of 82, she discovered literature and attends regular classes. She also played tennis in a league for many years. Nancy lives in Regent Square with her 6 year old cat Whiskey, whom she adopted from the Humane Society. All of her previous animals have been named after food or drinks. Nancy admits that she doesn’t drink whiskey at all but loves the name for her cat.
Nancy says that it is exciting to see young people interested in the arts and feels that all kids should be exposed – the earlier the better. She finds the arts to be a great outlet for emotion, friendship, and creativity.
As a client, Nancy looks forward to her annual meetings. Now happily retired for almost 20 years, Nancy is continuing to pursue her artistic and educational journey.
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The Changing Retirement Lifestyle
by Ray Amelio
It is no surprise that just as the baby boomers have changed things at each stage of their lives, so it is as they begin approaching retirement. Due to the impact of the recent economic downturns, this cohort of Americans will experience a different retirement lifestyle than those who preceded them.3
William Novelli, a former chief executive of the American Association of Retired People (AARP) states “It’s not really the end of retirement, it’s the reinvention of retirement and work is an increasing part of the so-called retirement years.” For many people who are of retirement age, working into their retirement years is part of their plan because they want to retain a clear sense of purpose.3 Now whether an individual plans on continuing to work at the office or factory, or taking a job either part time or full time, baby boomers are expected to stay in the workforce well into their retirement years.
For some folks staying in the workforce may be a necessity, in other cases folks just aren’t ready to stop working as they find working fulfilling and enjoyable.
But let’s step back for a moment and look at retirement from a historical perspective. We’ll look at why retirement started in the first place, the original purpose, and then we’ll move forward to see how it has changed to where it is today. We’ll also look at where it appears to be headed based on an aging U.S. population, the near disappearance of traditional retirement income and medical plans, and related topics.
With changes in Social Security and Medicare it is inevitable that the retirement landscape will continue to evolve. These programs allowed for the early retirement of many in the previous generation and have contributed to our current perceptions and expectations about retirement.5
Up to the last decades of the 19th century the country was comprised mostly of farmers and merchants who remained in one place most of their lives and who worked well into old age, turning over their farms and stores to their children and living out their lives with these children. Moving into the 20th century, the economy changed dramatically and people moved from the farm to cities and the factories that were rapidly being built, changed the country forever. People took jobs in those factories, and in government as these sectors were rapidly growing during this transformation. Folks started working for someone else giving up control and performing repetitious and physically demanding jobs. Work weeks were long and for many the work was not very challenging. People found themselves feeling disconnected from their interests and, due to this stress, found working unfulfilling.
After working for a lifetime in such jobs people were worn out both emotionally and physically and companies saw them as no longer productive, discarding them for younger replacements. Also occurring during this time, birth rates declined and people started living longer. The percentage of older people and the issues they faced gained the attention of both business and governmental leaders. In response to this situation, pension plans evolved and the age of 65 was selected as the normal age to retire. This particular age was chosen because most people did not live much past 65, providing a necessity of only a few years of income during retirement.2
Social Security was passed in 1935 as a way to increase employment. The idea was to move older workers out to make room for younger people who needed work and who were raising families.
After World War II retirement changed significantly as unions pushed for enhanced benefits and increased income for retirement. The thought was that as people approach their late fifties and sixties they are no longer productive enough to be in the workplace. Then in 60’s and 70’s advertising, primarily promoted by banks and insurance companies, began talking about retirement as the Golden Years, changing it from a few years waiting to die with dignity to a period of time where a person could enjoy life after a lifetime of work. At this point retirement was viewed as a right, an entitlement. Additionally, during this period medical insurance for retirees came into vogue, medical coverage that would last for a retiree’s lifetime. Social Security was also enhanced during this period and Medicare was introduced.
With these enhanced benefits older workers left companies in large numbers. Statistics show how dramatic this change was. In 1900 66% of all males sixty years and older worked, by 1970 the number had dropped to 40% and by 1990 it dropped further to 27%.2,4 During the 1980’s things began to change in the business landscape and these changes are continuing today. Business became more competitive and companies experienced pressure to operate more efficiently both within the country and globally as well. Because of this, employers were getting backed into a corner having to cut costs to remain competitive and one of the casualties was pension plans which were cut back or totally eliminated. Government regulation of pension plans increased to the point where employers could no longer afford to pay for all of the requirements that were being mandated. At this time, as well, 401k (defined contribution plans) were introduced. These plans were popular with younger employees, were easier to operate and understand, and less expensive than traditional pension plans. This accelerated the movement away from defined pension plans as the employer’s first choice.2
During the 70’s and 80’s the nature of work was starting to change and the country was moving from a manufacturing economy to a service economy and the work became much less demanding. Workers, therefore, were not declining as fast physically as in previous generations and the idea that older workers could continue to be productive and make significant contributions to companies and to society as a whole was realized. This is a fortunate circumstance as the generation following the baby boomers is smaller and the need for workers to stay in the workforce is growing.
So where are we today? There are some key issues to consider; defined pension plans and retiree medical have been eliminated or cut back, Social Security and Medicare benefits will be adjusted to accommodate the large cohort of baby boomers who will be retiring over the next 20 years, we are living longer and projections are that more and more people will lead vigorous and vibrant lives well into their nineties. This longevity is one of the primary factors of why the whole concept of retirement is changing, our society is beginning to realize that older workers can still make contributions both inside and outside of the workplace.
So to conclude, there are people who want to retire in their later 50’s and 60’s but realize they don’t have the means to do so. Additionally, employers need older workers and seek them out. For these, and related reasons, retirement will most likely occur later for this generation than the previous one and that is not so bad and might actually be healthy. Most people working today can’t retire like their parents as the retirement benefits those retirees had aren’t available today. But if we accept these circumstances it can be the first step to creating a realistic and positive future. This is where Fragasso Financial Advisors can help. We can help you to realistically assess your situation, understand the goals that you have established for your future, and put into place a plan that will help you to achieve these goals in the world we are living in today and into the future.
1. Preparing to Retire, The Vanguard Group, 2006
2. Trends – The Past and Future of Retirement, 2010
3. Baby Boomers Will Create New Retirement Lifestyles, AARP Global Network, 2011
4. Retirement Trends and Policies to Encourage Work Among Older Americans, Burtless and Quinn, 2000
5. Older Workers Employment and Retirement Purcell, Congressional Research Service, 2009
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