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Retirement Plans

Bouncing Back after a Hurricane

If you sustained financial and personal losses from a hurricane, one of the most difficult challenges you face is to get your life back to normal. Storms destroy thousands and thousands of homes. Businesses are upended. Sometimes it even takes lives. Even thinking about the losses can make the strongest person melt down and cry. If you are facing this situation, you deserve a time to come to grips with the magnitude of the situation.

But after a while, you have to face the reality of the situation and make plans to continue your life, your job, your family, and if you own a business, you must get on with that too. Before discussing financial and business plans, it is important to talk about people that have a family with young children living at home. It is so important to be their guiding light. Help your kids to feel safe and understand that the future is bright.  If you do not believe this, dig deep within yourself and put on a brave face. Find someone to talk to about turning your life around. You might need to find a family member, a minister, a social worker or a mental health professional. Do not feel bad about asking for help or needing to talk to someone. Recovering from a natural disaster can be as difficult mentally as a loved one’s death. If you did lose a loved one in a natural disaster, my heart goes out to you. You too should work to live life to its fullest. There are people that care for you and want to help.

There is no perfect step-by-step method to getting your life back in order. With that thought in mind, the following information is in an outline form. Use it as a guide. It is up to you to fill in the details that best fit your personal and financial recovery. The first step in any disaster recovery is to assess your financial situation.

Where do you have available cash?

Savings

If you have CD’s and you need to access them, ask if your bank or credit union will waive their early withdrawal fee.

Mutual funds, stocks, and bonds.

If you have any funds that are losing, this may be time to take the tax loss and use the cash value. Tax loss harvesting can be a complicated matter. Ask a financial adviser or accountant if you need more detailed help. The key to this aspect is keeping track of your losses and gains so it can be reported when you file your income taxes.

Life insurance cash value

If you have a whole life insurance policy, see if you have a dividend cash value. This may be cashed in without a loan. Note that loans on life insurance policies do have interest and some life insurance companies pay lower dividends to customers that take loans.

Retirement accounts

Many retirement accounts do have special hardship provisions. Although remember that if you do take retirement cash values, it may seriously affect your future retirement. If you must take money out, by all means, do take it. Just be aware of the consequences. If you would like more information on retirement plan loans and hardship withdrawals, read my blog post “Don’t let Harvey take a bite out of your retirement.”

What insurance do you have and what will it cover. What is your deductible?

a.     Liability insurance

b.    Flood insurance

c.     Wind damage insurance

What are your expenses right now?

a.  Current expected living expenses

b.  Can you live in your home?

c.  Do you need to make arrangements to live with a relative or rent a home? How will you pay for those expenses?

d.  Food budget – this can be one of your biggest expenses. Eating out may have been a necessity after the hurricane, however, make a food budget and stick to it. Your family will be healthier, and you will save money.

e.  Transportation – Does your vehicle need repair? Did your vehicle sit in water that came to the bottom of the door? When water is high, it can seep into vital working components and cause expensive damage. Your vehicle needs to be inspected by a mechanic even if it appears to be running well. Do you have insurance and what is the deductible? Do you need a rental car or can you borrow a car?

f.  Child expenses – Do you have education expenses or child care expenses? After a natural disaster, you may need to find different child care if your previous child care business is not operating. What are your children’s extracurricular activity expenses and will they continue?

What do you owe?

a.  This must be one of the hardest aspects of rebuilding after a hurricane. If your home has major damage and you have a mortgage on it, you still must pay the mortgage.

b.  Make a list of what you owe along with the contact numbers of the creditors.

c.   If you can continue to pay payments, do so. If you need an extension, contact your creditor first. Do not wait for them to call you. Creditors that have customers in disaster areas know people are hurting financially and most will be willing to work with you. Perhaps you can work out a lower payment or a delay in payment.

d.  If you can continue making payments to your creditor, do it. Many student loan creditors have already contacted student loan holders to let them know that they have an automatic grace period on paying back their loan. However, one important point is not mentioned. The interest continues to add up. Do not take an automatic extension if you do not need it.

Do not forget your taxes. 

Property taxes still must be paid. If you pay quarterly income taxes, you can adjust your payments based on your expected income. If you can foresee that you will need an extension, take what is available. However, as with most creditors, do not use the hurricane as an excuse to put off what must be done. Interest will continue to grow on what you owe.

Do not overlook taking personal and business casualty tax losses. The floor for personal liability losses is 10% of your adjusted gross income. There is no limit for business losses. If you are not sure how to take tax losses, it is important to talk to a tax professional.

One item often overlooked for personal losses is clothing. Most garments that are damaged from flood water need to be thrown out because they will become contaminated with mold. Document every item, it all has a value. If you are not sure what value to use, refer to the IRS’s clothing valuation for donations. That may give you some idea as to what valuation to use for a loss.

Detail everything that is a loss of from your home and business. Taking pictures of every item may be labor intensive however it may save you a lot when it comes time to file your taxes. You must be able to prove any loss you claim.

Getting back to work.

After you have accessed your readily available assets, you should consider your employment status. Is your employer open and is your job continuing? If you are a small business owner and you are rebuilding, this may seem like a crazy idea. However, ask yourself, is it time to get another job while you rebuild your business? If you can get a second source of income going, this is the time to do it. An additional job does not have to be in your current line of work. One of the most readily available jobs will be sales, even if it is telemarketing. Just make sure it is not straight commission (unless you consider yourself a selling wiz). This is supposed to be a second income, not a head and heart ache. Every job or career has something to do with sales, so a second job in sales may help you get your small business back on track.

Make a budget

If you had a budget, it probably needs a lot of revision. If you do not have a budget now is the time to start. Trying to pay off debt and rebuild your finances after a disaster without a budget is like running east and looking for a sunset. You will work yourself to death and never know if what you are doing is working.

Creating a budget is easy. The simplest budget tool I have found is an app called Mint, and it is at the right price, it is free. If you are electronically challenged, I would still suggest you try Mint. You have nothing to lose but a little time. If computer apps are outside of your comfort zone, then make a written budget. It does not need to be complicated. List what you owe and your sources of income. If what you owe is bigger than your income, go back and rework the list of what you owe. Contact the creditors and cut expenses if necessary.

Budgeting is an ongoing process, not a once a year exercise. At least once a month, take the time to review what is working and what is not. Do you need to be more mindful of spending in one area of your life?

As you look for ways to cut expenses, remember that there are some costs that you need to keep. Insurance is one of those areas. If you have more than one vehicle that was damaged by water, will you replace each one immediately? If the answer is no, then suspend the coverage on vehicles that are just sitting. I would not recommend dropping coverage. However many liability carriers will allow you to suspend coverage for vehicles that are not being driven. Contact your insurance agent and ask for help in making this determination.

If you have life and disability insurance, do not drop it if possible. If you have cash value policies, talk to your agent to see if the premiums can be lowered. Universal life policies may allow you to make lower payments and whole life policies may permit you to pay premiums with cash value or policy loans. Do not drop coverage to start a new policy until you have a replacement. Older permanent policies cannot be repurchased at the same rate, and you will more than likely lose some value. If you must make a change, ask your agent if there is a commission to be paid on the new policy. Some life insurance carriers will waive commissions on internal replacements. Although if your new policy is not cheaper than what you can purchase on the open market, they are not doing you any favors. You may need to find a new life insurance carrier. If your income has changed and you need to get a cheaper policy that is a good reason to change policies, however, be comfortable with any changes you make. The same goes for term life insurance. If it is a policy you have had for a long time, there may or may not be something cheaper available. You may need to do some shopping for coverage.  This is an important point that bears repeating, do not if you are applying for new insurance, do not discontinue your existing insurance until the new insurance is delivered and paid.

Everybody’s situation is a little different, so it is impossible to detail every aspect of rebuilding your finances after a big loss like a hurricane. The details of dealing with insurance companies, contractors, and a mortgage company could fill a book. However, good advice is to be patient and persistent. And if you are a God-fearing person, prayer helps a lot too.

Posted by: Van Richards

Van is the founder of Advice4Retirement and Advice4LifeInsurance.

You can contact him at van@advice4retirement.com Follow on Twitter @VanRichards or Facebook at Advice4Retirement or Advice4LifeInsurance

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Set Retirement Plan Expectations

Expectation is the conflict between frustration and reality. The first step to creating a low stress company retirement plan is a common understanding of everyone’s expectations. This includes all the entities involved in the retirement plan process. From the employees’ perspective, they see only the processes listed below in blue. However, the employer must look at a retirement plan from a very different perspective. The process in orange is a typical list of the people involved in the management of a retirement plan.

customer-service

Knowledge of a customer’s needs is where satisfying expectations begins. Knowing the process necessary for a low stress company retirement plan is critical to fulfilling expectations. This is an outline of the operation of a company retirement plan.

  • Develop a retirement plan strategy
  • Design a plan to fit the business
  • Create a method of choosing and monitoring investments
  • Have a plan that is competitive within the company’s industry.
  • Manage the vendors that interact with the retirement plan.
  • Stay compliant with fiduciary standards
  • Provide education to employees that satisfies fiduciary requirements.
  • Manage employee communication.

Developing a strategy that will accomplish this process and be reasonably flexible is important. Businesses change, employee demographics changes, and regulations change so the operation cycle of a retirement plan must be able to change. The result is that customer expectations change too. The next step to fulling customer expectations is developing a retirement plan strategy.

To see the next step, check back for the next post in this series, The Company Retirement Planning Process or visit www.advice4retirement.com

Posted by: Van Richards

Van is the founder of Advice4Retirement and Advice4LifeInsurance you can contact him at van@advice4retirement.com Follow on twitter @VanRichards or Facebook at https://www.facebook.com/Advice4Retirement/ and https://www.facebook.com/advice4lifeinsurance/

 

Overcoming Obstacles to Controlling Money

Having enough money to live and pay debts are important concerns of many people. Managing money is a challenge despite personal income.  Bankruptcy proceedings disclose a lot about peoples’ spending habits.  Recently, Rapper 50 Cent indicated to a Connecticut bankruptcy court that he spends $108,000 per month which includes items such as personal wardrobe, child support, and gardening expenses (Nededog). In a business re-organization in 1990, presidential hopeful, Donald Trump agreed with his creditors to limit his monthly spending to $450,000. The New York Times reported, “Mr. Trump would have to hold his expenses to just $14,516.13 a day” (Eichenwald). On the other end of the income scale the average annual family income is $66,877, and that average family spends $53,495 in expenses to live (USBLS).  Without understanding how to control money, it is easy to see how over spending can happen.

There are four obstacles to controlling money: awareness of how money is spent, the time to learn about managing personal income and having the ability to cut spending or earn beyond current expenditures. There are a lot of famous people and everyday people that are challenged by the ability to manage their finances.  Making a lot of money is not an indicator that a person has the tools to manage their finances well.

People in our society are stretching their time thin and have little ability to make more money. Gallup, Inc. reports that on a weekly basis “half of full-time workers […]work more than 40 hours […] nearly 4 in 10 say they work at least 50 hours”(Saad).  So that brings up the question of how can a person have better control over their finances?

Creating a personal income statement can help develop an awareness of how money is spent. Make a list of all expenses.  There is no need for a complicated system.

This is a list of recognized expenses developed from the United States Justice Department’ Means Test (USDJ):

  • Food
  • Apparel and services
  • Housekeeping supplies
  • Personal care & miscellaneous
  • Healthcare
  • Out of pocket healthcare expenses
  • Health Insurance
  • Disability Insurance
  • Health Savings Account Expense
  • Housing
  • Utilities
  • Non- mortgage expenses
  • Transportation awareness of how money is spent
  • Vehicle Operation/public transportation expense
  • Taxes
  • Life Insurance
  • Court-ordered payments
  • Education for employment or physically or mentally challenged child
  • Childcare
  • Charitable Contributions

To create a personal income statement, transfer the past three months or whatever period is comfortable to an Excel spreadsheet or print a copy. Identify the expenses that occur every month and organize them in a way that is personally understandable. This effort will take some time; however that is a small price to pay for the benefits of better financial control.  50 Cent and Donald Trump probably have an accountant to do this for them however unless expenses and income are complicated that is not necessary.

Developing an expense spreadsheet will help bring out an awareness of exactly where money is being spent.  It should also serve as an indicator of essential items that money should be spent on such as life insurance, health insurance, and disability insurance.  The average family spends $5,726 on personal insurance and retirement plans (USBLS).  Plan for the unexpected events in life because they will happen with or without planning.

Family, work, self and community are challenges that use up the 168 hours a week that represents every person’s life.  Gaining control over personal finances can make that time happier and less stressful. Managing personal finances begins by gaining an awareness of where money is being spent; learn how to control expenditures and plan for the unexpected.

Works Cited

Eichenwald, Kurt. “Quick: Who’d Have Trouble Living on $450,000 a Month?” The New York Times. The New York Times, 25 June 1990. Web. 22 Oct. 2015.

Nededog, Jethro. “50 Cent Admits He Spends $108,000 per Month on Things like Grooming, Gardening and Clothing.” Business Insider. Business Insider, Inc, 4 Aug. 2015. Web. 22 Oct. 2015.

Saad, Lydia. “The “40-Hour” Workweek Is Actually Longer — by Seven Hours.” Gallup.com. 29 Aug. 2014. Web. 23 Oct. 2015.

Skidmore, Gage. “Donald Trump speaking at CPAC in Washington D.C.”. 10 February 2011. Wikimedia Commons.Web. 22 Oct. 2015

Westman, Rickard. “50 Cent @ Globen”. 27 December 2009. Wikimedia Commons. Web. 22 Oct. 2015

United States Department of Justice. “U.S. Trustee Program’s Postion on Legal Issues Arising Under the Chapter 7 Means Test.” Justice.gov. 23 Apr. 2010. Web. 23 Oct. 2015.

United States Bureau of Labor Statistics, “Consumer Expenditures–2014.” U.S. Bureau of Labor Statistics. 3 Sept. 2015. Web. 23 Oct. 2015.

Should you be selling or buying now?

Wall Street a

Years ago I worked with a company that had a cold calling bull pen much like what you see in the in movies.  One of the managers would call clients and say “I have terrible news for you!”  And what followed was an effort to encourage the client to buy or sell.  After a period of time, I recognized that was not the place for me.  I learned a lot about people while at that company.   First, people are moved by fear.  In that time I met with an elderly client that had just lost $10,000 on her investment.  I was young and toting the company line.  I tried to explain why she had lost money and how everything would be OK.  She looked me square in the eyes and said have you ever lost $10,000?  I lived through that meeting to learn that investors have a justified concern to be afraid of investing.  People can and do lose money.  So should investing be avoided?  For some the answer would be yes, some people should not be investing in stock based investments.  But for a great number of people investing in stocks and bonds is still a good idea.

In the past month, stocks and oil have been losing value, so how can I say that investing is still a good idea?    Just as in life, there are no guarantees.  However, history has shown that over many years investing in stocks and bonds can outpace the cost of inflation and yield better results than a fixed account.  To wisely invest takes planning.  You don’t have to be a Wall Street wizard; you just have to employee simple strategies to protect yourself.  Here are five simple ideas that can help you reduce the volatility of investing.

  1. Know why you are investing: retirement, college savings, caring for a disabled child, etc.  My family loved to go to Disney.  We’d spend hours trying how to figure out how we could get the most out of the week we would spend in Orlando.  Most people spend more time planning for a weeklong vacation than they do for retirement that could last more than thirty years.  Make plans and review them every year.
  2.  If you are new to investing, choose a mutual fund.  Avoid single stocks for now.  In a nutshell, mutual funds are pools of stocks or bonds.  Some are professionally managed and some are not such as index funds.  How much you pay for your mutual funds or the fees charged is very important. Generally the level of fees should reflect the level of service you receive.  If you’re new to investing paying a little for advice might not be a bad idea.   If you’re not getting service or don’t need it, lower fees are better. Most mutual funds that are purchased through employer plans will have higher fees.  This does not make them bad.  Employer plans have many more maintenance requirements and sometimes cost more.
  3.  Diversify – don’t put all your eggs on one basket.  If you are going to diversify make certain you are not buying several of the same type of mutual fund.  I once had a client that had 28 different mutual funds.  Yes she was diversified, but half of the funds were similarly invested.  Aggressive individuals will have a larger percentage in stocks.  Conservative investors may have no money in stocks.  Still be cautious not to put all of your money into one type of fund.  If you think that bonds are safe, understand that if interest rates go up, bond values go down.  Determine your investment personality and let that guide you in choosing the percentage of money you invest between conservative and aggressive.  There are funds that will manage the allocation of your investment for you such as lifestyle funds or target funds.  It is your job to review these and see how well the fund is meeting your expectations.
  4.  Dollar cost averaging.  I often am asked “is now the best time to buy?”  I have no idea when the best time to buy is, so I suggest that people buy all the time.  Plans that invest or withdraw money on a monthly basis will give investors a tool that can help them better manage the risk of investing.  Imagine if you bought a stock at $12 and it went down a dollar each month for six months and then back up a dollar a month for the next six months (it ends at $11).  If you invested a hundred dollars a month, did you lose or gain? At the end of the twelve months your $1,200 would be worth $1,529. The average price was $9. This is a simplification, but the idea is you never know when the best time to buy is, so buy all the time.
  5.  Rebalancing is a simple concept that will take some volatility out of investing.  If you make gains over a period of years you will progressively be increasing the risk on your total mix of investments.  By rebalancing you stabilize or lower the risk of investing.  This is very helpful when there are large swings in stock prices over an extended time.

Investing is not a perfect science.  Make a plan and review it every year.  Turn-of-the-century American humorist Will Rogers had a saying that fits here very well.  “Even if you’re on the right track, you’ll get run over if you just sit there.”

The DOL and the IRS offers the equivalent of a “get out of jail free card”.

get-out-of-jail-free-card

 

The DOL and the IRS offers the equivalent of a “get out of jail free card”.  The second quarter of 2014 has been an active month for the Department of Labor.  Large and small retirement plans were the focus of the DOL’s enforcement actions. The DOL received judgment on May 30th for an Antioch, Illinois employer to restore $50,000 to an employee benefit plan for breach of fiduciary duty. On June 3rd the DOL reached a $5.25 million dollar settlement with GreatBanc Trust for breach of fiduciary duty.  Of this agreement, Assistant Secretary of Labor for Employee Benefits Security Phyllis C. Borzi said “Others in the industry would do well to take notice of the protections put in place by this agreement”.

If you have not reviewed your fiduciary duties in some time, now is the time. The DOL has set the precedent of compliance with this month’s settlements. However, the DOL offers the Voluntary Fiduciary Correction Program and the IRS offers theVoluntary Correction Program. These correction programs include any employee benefit plan that files a Form 5500, i.e health insurance plans and retirement plans. This is not a license to violate laws. But the IRS and the DOL do realize that a majority of the employers want to do the right thing. This is their offer to help employers get on the right track and back in compliance.

The IRS has also just published a new series of forms for use in connection with the Voluntary Correction Program: IRS Form 14568 Series (Jan. 2014).   To help you get a start on reviewing your fiduciary obligations we have developed a comprehensive Fiduciary Audit Checklist.  The FAC covers eleven major sections of compliance and will help employers to set up a comprehensive fiduciary audit file.  Having a paper trail of all documents and actions is essential in the event of a DOL or IRS inquiry.   We’d like to invite you to take advantage of this free tool to make sure you are in compliance.  If you have problems, this may be your “get out of jail card”.  So why not take advantage of it?  It just might help you sleep better at night.  To receive your free Fiduciary Audit Checklist (your “get out of jail free card”) click here.  This is not legal or tax advice. If you have your own legal or tax counsel, please consult them.  Advantage Benefit Solutions does provide up to 10 hours of free counsel from an attorney that specializes in ERISA matters for clients that have at least 100 employees participating in a health insurance plan that we service. To find out more about our offer for up to 10 hours of free counsel, please click here.

Follow me on twitter: @VanRichards

Email me at: van@abs-insurance.com

Could the concept of 5-15 Reports work for the investment industry?

5-15 Report

Target Date Funds sometimes known as Lifestyle Funds should be easy to understand.  Due to steep losses in 2009, the Department of Labor is looking for comments to guide them in the regulation of these popular #401k investment options.  When I do retirement plan enrollment meetings, employees tell me that they like the “Target Date” concept because it’s easy to understand.  They can pick one investment that will gradually become more conservatively invested the closer they get to retirement.  That is not what happened in The Great Recession of 2009.  Target Date Funds that were supposed to be conservative dropped between 9% and 41% leaving hopeful retirees wondering how they would ever retire.  My opinion is such a large spread occurred because Target Date Fund Managers invested between 35% and 80% in stocks.  With just a little education anyone can understand why some of the funds fell so much in value.

Here is my basic explanation of investment risk in a 100 words.  There are three basic investment categories, stocks, bonds and money markets.  Stocks are the most risky because they are ownership.  With ownership goes the risk of gaining or losing everything.  Bonds on the other hand are more conservative because they are a loan with two guarantees: the guarantee that the money will be repaid and the guarantee of an interest rate paid.  The risk from bonds comes from how long the bond is for and who is guaranteeing the repayment of the loan (that is how trustworthy is the bond issuer).  But don’t be fooled.  Bonds can lose money too.

After asking for public comments in 2010 on suggested regulations, the Department of Labor came up with several suggestions.  One suggestion from the research committee was based on the theory that investors should be able to determine the suitability of the Target Date Fund based on a rating system that was based on theoretical risk traits.  This is a methodology that does not even exist yet and that was one of the research committee’s best suggestions.  I would assume that is why the DOL has reopened the issue for more public comments.

I don’t think the problem lies with how Target Date Funds are advertised.  Giving investors more material to read will not help the situation.  The problem is in investor education and in how investment companies are allowed to allocate assets. If the DOL wants to spearhead regulation to protect investors, they should consider requiring employers to provide regular required employee education.  Plus the DOL should consider collaborating with the Securities and Exchange Commission in regulating asset allocation standards for mutual funds to be classified as Target Date Funds.  For example a Target Date Fund with an expected retirement date target of less than five years should be 80% in secured debt (bonds with assets to back their loan).

Investing does not have to be complicated.  Too many investment documents are written so that you need a law degree to understand them.  Investment documents should be written with the 5-15 report strategy pioneered by Yvon Chouinard, CEO of clothing retailer Patagonia.  Reports should to take no more than 15 minutes for the author to write and 5 minutes for the reader to complete.

What if you forgot to file a notice?

Businessman begging for help with cardboard sign

Government required notices to employees have the potential to bankrupt a company.  Every business has its primary money making activity.  Oil companies produce oil; car dealers sell cars; shipping companies ship things. You get the picture.  Unless your business is administration, you don’t make money by filing paperwork.  But it’s a necessary evil.

Take the case of Shephard v. O’Quinn in Tennessee.  Shephard, a terminated employee of O’Quinn did not get his COBRA notification.  Courts sanctioned O’Quinn $90,860 in statutory penalties at the $110 per day maximum for not providing an election notice.  O’Quinn later filed for bankruptcy.

Every business has required notices for special events, like COBRA notices at termination of employment.      Then there are the annual notices such as Qualified Default Investment Alternatives or QDIA notices for retirement plans.  This notice has a significant effect on an employer’s effort to reduce the liability of offering a retirement plan.

The Department of Labor recently recognized the burden that all of these notices put on companies and offered a little relief.  401k fee disclosures were due to be distributed to employees on August 30, 2013.  Department of Labor Field Assistance Bulletin No. 2013-02 extends that deadline until February.  This extension was intended to allow employers the opportunity to coordinate the delivery of other notifications.

Employers would be wise to review the list of notices they are required to distribute to employees and distribute as many notices at one time as possible.  The Department of Labor’s requirements for electronic delivery are very narrow and to avoid any potential problems, employers should either hand deliver or mail notifications to employees.  It is very important to gain verifiable proof of delivery, get a signature.

If you’d like help in coordinating the notifications your employees receive, contact me through LinkedIn at www.linkedin.com/in/vanrichards/  or visit our website at www.abs-insurance.com

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