Tag Archives: Retirement Plan

The End of the 4 Percent Rule?

retirement plan1Untitled-logoThe “4 percent rule” was a retirement spending approach that became mainstream in the 1990s. The rule suggested that a retiree with an average portfolio distributed between stocks and bonds (approximately 60-40) should withdraw 4 percent of his or her retirement funds each year (adjusting each year for inflation). If the retiree could stay limited to that 4 percent, he or she would be able to fund retirement for at least 30 years.

The simplicity of the 4 percent rule made it a hugely popular with investors. The method made planning easy and was projected to leave the vast majority of retirees with surpluses late in life. Many quickly adopted the method and the approach became a staple of retirement budgeting.

Modern Problems

Recently, the 4 percent rule has begun to fall out of favor with financial planners and investors. The rule, which was designed in the bull market of the mid-90s, relies heavily on regular, high returns from stocks. However, since that time, low economic growth and a major slump [in] the market has made equities look much less attractive. Few retirees will want to take on the risk of holding over half their portfolio in potentially volatile stocks.

The market is simply not what it was once thought to be. Retirees who are trying to reduce the risk of significant loss are less willing to put faith in perpetual stock growth. In addition to smaller gains, the average lifespan is on the rise and people are living longer in retirement. Strategies have become more conservative to deal with these concerns, and individuals planning for retirement must consider changes to saving and investing.

Ideal Rates in Retirement

The changes in the market do not indicate that the 4 percent rule can never work for retirees, just that it causes problematic exposures. The 4 percent rule works when yearly withdrawals are matched by yearly growth. Even if a portfolio averages 4 percent real growth, it could still underperform a target goal because it suffered severe losses early on.

So is there a better rule to follow? A 3 percent rule, perhaps? Unfortunately, there are no fixed guidelines when it comes to retirement income planning. A retiree must adjust his or her plans regularly to match both changing needs and market performance. The 4 percent rule might be a great place for investors to get a rough estimate when planning, but they should always be prepared to adjust their annual withdrawals lower if necessary.

What Can Investors Do to Make Retirement Work?

Since investors cannot control market performance and the rate of return, they often try to increase allowable withdrawals by increasing total portfolio value. By starting with more money in their retirement plan, a smaller rate of withdrawal will still be worth a solid dollar amount.

To sustain larger dollar withdrawals, retirees must either invest more money or delay retirement by a couple of years. Though neither option may seem pleasant, retirement planning is full of these give-and-take situations; an investor must find a way to make retirement income sustainable.

As another option, some retirees might look to an annuity to lock in an income. Annuities do not provide the flexibility or adjustable withdrawals of direct portfolio management, but they are guaranteed to pay out for the rest of the retirees’ lives—always providing them with some level of income.

Changing Rates

There may be many reasons to change withdrawal rates during retirement, but retirees must always keep one eye on the market and the other on the future. A profitable year might entice higher withdrawals, but a retiree could benefit far more if the extra earnings were reinvested for later expenses. On the other hand, if withdrawals are greatly restricted early on, people might miss their opportunity to travel and enjoy active life in retirement.

There are no simple answers when it comes to the chaos of the market and the unknown developments of the future. Investors should prepare themselves for changes and be ready to adjust their portfolios as things come into focus. No matter what hap- pens, it is important to plan with trusted financial advice. If you have concerns about your retirement strategy or want to better understand your financial options, contact Stock Yards Bank & Trust Company with all your questions.

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This article was written by Advicent Solutions, an entity unrelated to Stock Yards Bank & Trust Company. The information contained in this article is not intend- ed to be tax, investment, or legal advice, and it may not be relied on for the purpose of avoiding any tax penalties. Stock Yards Bank & Trust Company does not provide tax or legal advice. You are encouraged to consult with your tax advisor or attorney regarding specific tax issues. © 2013 Advicent Solutions. All rights reserved

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Your Rollover Options

ira rollover 3Untitled-logoLeaving your job can be hectic, whether you’re retired, laid off or moving to a new company.  It may not cross your mind to take care of your previous employer-sponsored retirement plan, but this is an important box to check during your transition.


You have four options when it comes to your retirement assets: leave them with your former employer, roll them over into your new employer’s retirement plan, roll them over into an IRA or cash out. As with most financial decisions, there are pros and cons to each choice, and your specific circumstances may make one choice more appealing than the others.

Leave assets in your former employer’s plan

You can choose to leave your investments where they are when you leave your job, though you will not be eligible to continue making contributions. This is the default option if you choose to do nothing. However, if simplifying your retirement savings is your goal, this is probably not the route for you. If you leave your investments behind at each company, you’ll have various accounts to keep track of throughout your career and distributions to take from each during retirement. Keeping in touch withCapture roll.JPG former employers can be difficult. Your old plan may also have high fees, limited flexibility or poor allocation options when compared with an IRA or your new employer’s plan. If your retirement account has less than $5,000, your former employer has the option of cashing you out of the plan, incurring taxes and penalties. Avoid getting cashed out by rolling the money over when you leave the company.

There are some advantages to leaving your money with your former employer. For instance, some large companies have access to lower-cost institutional funds that your new employer might not offer. In this case, it would be cheaper for you to stay with the old plan than to roll over into a new plan or IRA. Additionally, if you’re 55 or older when you leave your job, you may be eligible for penalty-free withdrawals (though income tax would still apply), so keeping your investment in your former plan could give you access to money sooner.

Rollover into new employer’s plan

A rollover is moving assets from one account to another while avoiding taxes and penalties. You can move your assets from your old employer’s plan to your new employer’s plan seamlessly without losing any money. Choosing this option is advantageous because your assets will continue to grow in a tax-advantaged account, and you won’t have to start over at each new company. You can rollover assets from a Roth 401(k) to a traditional 401(k) and vice versa, as long as both plans allow for it. If your new company has a better selection of investments or lower prices than your previous employer, it makes more sense to do a rollover. This way, you can also avoid having to keep track of old accounts with former employers.

Rollover into an IRA

In general, an IRA will offer you the most versatility and flexibility, so if you’re unhappy with either your former or current employer’s plans, an IRA may be a better bet. An IRA can also be more convenient, because you won’t have to worry about rolling it over again if you leave your job in the future. One feature unique to IRAs is the ability to take penalty-free distributions early (before the age of 59 ½) in order to pay for your first home or qualified higher education expenses. You’ll still pay income tax on the distributions, but you’ll avoid the fees that you’d accrue if you cashed out of an employer plan. An IRA can also be a great vehicle for your heirs, who have the option of stretching out required minimum distributions with a traditional IRA, or avoiding them altogether with a Roth IRA.

There are two types of rollovers, whether you’re rolling your money into a new employer plan or an IRA. A direct rollover is from plan to plan. No taxes are withheld, no penalties are owed and no money crosses your hands. For an indirect rollover, your previous plan administrator writes a check to you, withholding 20 percent for taxes. You’ll have 60 days to transfer it to your new plan or IRA. If you exceed 60 days, you won’t get the 20 percent in taxes back when you file a return, and you’ll owe an additional 10 percent penalty for early withdrawals. A direct rollover is a simpler, safer route, but you’ll have to make sure you have an IRA or new employer plan established first.

Cash out

This is the option least likely to be recommended to you, but it can be useful in certain circumstances. It’s important to know that cashing out a retirement plan incurs a 20 percent tax and a 10 percent penalty for early withdrawal, so you won’t actually get the amount listed in your account. If you’re truly strapped for cash, or if you’re over age 55 when you leave your employer (thus avoiding the early withdrawal penalty), you may want to consider cashing out. However, cashing out is generally not advisable. In addition to the taxes and penalties, your money will lose its tax-advantaged growth, and you may be damaging your future financial security. Cashing out in order to reinvest in a new employer plan or IRA is a costly mistake many workers make each year.

Now that you know your options, you can make an informed decision about your retirement assets. Leaving your job for any reason can be stressful, but jeopardizing your retirement security would be even worse.

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This article was written byAdvicent Solutions, an entity unrelated to Stock Yards Bank & Trust Company.  The information contained in this article is not intended to be tax, investment, or legal advice, and it may not be relied on for the purpose of avoiding any tax penalties.  Stock Yards Bank & Trust Company does not provide tax or legal advice. You are encouraged to consult with your tax advisor or attorney regarding specific tax issues. © 2013 Advicent Solutions. All rights reserved.

 

Playing by the IRA Rules

ira rulesUntitled-logoIndividual Retirement Accounts (IRAs) offer favorable tax-deferral benefits to individuals who are saving for retirement. But with those benefits, there are certain rules about when distributions may be taken to avoid penalty taxes. Contributions to a traditional IRA, depending on your income and participation in employer-sponsored plans, may entitle you to certain current income tax deductions. Further, because your funds are not taxed until distributions begin, your savings have the potential for tax-deferred growth.

Generally, IRAs are designed to work as long-term savings vehicles, but you may be able to withdraw funds early and without penalty, provided your situation qualifies as an exception.

The Age 59½ Rule

The age 59½ rule provides that, if you take distributions from your traditional IRA before you reach the age of 59½, you may be subject to a 10% Federal penalty tax in addition to regular income tax. However, you may not have to pay the penalty tax if your early distribution meets certain requirements.

Exceptions

You may be eligible for penalty-free qualified distributions, if one of the following exceptions applies:

  1. You are taking distributions as the beneficiary of a deceased IRA owner. Generally, if you inherit an IRA, you are required to take required minimum distributions (RMDs) over a period no longer than your life expectancy. For non-spousal beneficiaries, RMDs must begin in the year following the year in which the IRA owner died.  Spousal beneficiaries may have additional time to begin taking RMDs, depending on certain factors, including whether they opt to treat an inherited IRA as their own. This penalty tax exception does not apply to spousal beneficiaries who opt to treat the account as their own IRA.
  2. You are paying for certain first-time home buyer expenses, generally referred to as qualified acquisition costs, such as buying, building, or renovating a first home. Distributions, which may not exceed $10,000, may be used to cover qualified costs for you, your spouse, your children, or your grandchildren.
  3. You, your spouse, or dependents have un-reimbursed medical expenses that total more than 10% of your adjusted gross income (AGI) (7.5% if you are age 65 or older, but only through 2016). If a medical expense for you, your spouse, or a dependent qualifies as an itemized deduction on your income tax return, it will generally qualify for this penalty tax
  4. The distributions are part of a series of substantially equal periodic payments (SEPPs) made at least annually that meet certain additional requirements. The Internal Revenue Service (IRS) currently recognizes three methods for calculating SEPPS: the required minimum distribution method, the fixed amortization method, and the fixed annuitization method.
  5. Once SEPPs begin, they must be made for five years or until you reach age 59½, whichever is later.
  6. You qualify with certain physical and/or mental conditions as being disabled, determined by a physician and if the disability can be expected to result in death or continue for an indefinite duration.
  7. You are paying medical insurance premiums due to unemployment. If you lost your job, and received unemployment compensation for 12 consecutive weeks, you may take distributions from your IRA account, penalty tax-free, during the year in which you received unemployment compensation, or in the following year, but no later than 60 days after you have been re-employed.
  8. You are paying for higher education expenses, such as tuition, fees, and books at an eligible educational institution (generally all accredited postsecondary institutions). The distributions may not exceed your qualified education expenses, or those of your spouse, your children, or your grandchildren.
  9. The distribution is attributable to an IRS levy of the IRA.
  10. Reservists qualify while serving on active duty for at least 180 days.

IRAs are strictly regulated to ensure that they are used as vehicles for retirement savings. Therefore, they generally work best as long-term savings vehicles. However, if you do need income from your IRA before you reach age 59½, it is important to know if your situation excuses you from the penalty tax levied on early distributions before making a withdrawal. Playing by the rules may save you money and help preserve your savings for retirement. Be sure to consult your tax advisor to determine whether your individual situation will qualify as an exception.

Please visit https://syb.com/wealth-management-and-trust/how-we-serve-our-clients/ira-retirement-rollovers/.  for more information.

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Easing Into Retirement

easing into retirement- pic

Untitled-logoFor many people, crossing the bridge into retirement is a big step. If you’re approaching retirement, it’s time to develop a strategy to facilitate a smooth transition from the more structured world of work to one of leisure.

After spending years building your professional career, you’ve accumulated assets along the way.

While retirement planning usually focuses on preparing for your financial future, nonfinancial matters may also need to be addressed. When retirees feel dissatisfied, it’s often the lifestyle changes that accompany retirement living that tend to create difficulties with self-esteem and identity associated with ending one’s profession.

Staying Active

One possible solution for managing these challenges may be to ease into retirement. Some individuals may welcome the opportunity to continue some form of work, such as consulting, job-sharing, mentoring, or back-up management. Mentoring, in particular, enables you to transfer a lifetime of learning and experience to a friend, relative, or younger colleague. Phased-in retirement provides an “anchor,” allowing new retirees to explore other activities while also maintaining their role at work.

Since some people may have more of an emotional reaction to the separation and disengagement from working than they expected, taking between two to five years to “decompress” may be an appropriate option.

Maintaining a Healthy Perspective

While “retirement” suggests the end of your working life, a more positive perspective to take could be that it’s the beginning of a new phase of life—when you can do all the things you never seemed able to find the time for while you were working. For example, volunteer work can allow you to make a valuable contribution to a charitable cause and meet new people. Taking courses in subjects that interest you can sharpen your intellect and help maintain your cognitive abilities. If chosen thoughtfully, these activities can be enjoyable and fulfilling.

Obviously, it’s a lot easier for a retiree to consider other pursuits if financial considerations are secondary. People may think that it costs less to live in retirement. However, it’s actually common for retirees to increase, rather than decrease, their expenditures, especially in the first few years of transition. Without working full-time, retirees may have more energy and time to enjoy entertainment, dining out, travel, and recreation.

On Spending and Inflation

During the working years, it’s common to take a certain lifestyle for granted. In retirement, however, you may need to change your priorities or consider budgeting depending on your circumstances. On the other hand, you may find that you no longer need or want to do some of the things that seemed so important when you were working.

Additionally, be sure to keep an eye on the effects of inflation after retirement. For example, an item costing $100 when you are age 65 will cost $180 at age 80, assuming a 4% inflation rate compounded annually. Therefore, it’s important that your retirement plan be not only a plan “at” retirement, but also a plan continuing “through” retirement, which may require revision on a regular basis.

If you view retirement as your opportunity for growth and exploration, you can make this transition exciting and enjoyable. Your horizons are limited only by your imagination. After all of your hard work, you’ve earned this opportunity—enjoy the freedom!

Please visit https://syb.com/wealth-management-and-trust/how-we-serve-our-clients/ira-retirement-rollovers/.  for more information.

Resource information provided by Financial Media Exchange

 

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INVESTMENT INSIGHTS

by Joan Schade

Stock Yards Bank Wealth Management & Trust


We all like to plan and dream about how we’ll spend our retirement years. What does your plan look like? Will you travel, play golf, garden, or visit with friends and family? Maybe you’re planning to move, or perhaps you’d simply like to spend some time relaxing and enjoying some well-earned rest. Sometimes, however, unplanned events arise that leave us stunned and thinking, “What just happened?” Fortunately, if we have the right type of insurance in place it can make dealing with the unexpected a whole lot easier.

When you start to plan for your retirement years it is always a good idea to review the insurance you already have in place. Consider if your needs or objectives have changed since you made the original purchase. For example, was your term policy to insure that your children’s education would be covered or that your house would be paid off should something happen to the main bread winner? If your children are grown and there are only a few payments left on the mortgage, your current policy may not be the right type of protection needed at this stage in your life.

Purchasing insurance to provide some income for a surviving spouse is common, but you may also want to look at a long-term care policy. Without the right kind of insurance, you could be forced to use all of your hard-earned savings, including your retirement savings to pay for care. The cost of such needs continues to grow by leaps and bounds. Long Term Care Insurance policy options have grown as well in the last decade. As opposed to the “use it or lose it” options in years past, many policies now offer a wide array of hybrid products that will allow you and/or your spouse to use what you need and pass any remaining dollars on to your beneficiaries tax-free.

Insuring for the right purpose today could protect the quality of your retirement years. Wouldn’t we all like our retirement dreams to come true?

For more information about Investment Plans, please contact our Wealth Management and Trust Department.

 

The Basics of Creating a Life Plan

by Claudette W. Patton, J.D.

Stock Yards Bank Wealth Management & Trust


Preparing a Life Plan is all about living and making good choices about your legacy. Most people avoid planning because they think it’s morbid to think about death, but a Life Plan – estate planning – isn’t about dying at all. It’s simply providing direction for your legacy and determining how you want to be remembered by your community, family, charities, and personal causes. It is a chronicle of your life’s work with a plan to continue the fruits of your work for the benefit of others.

The most important question remains: “Do you want to control your personal life legacy?” A well written and thought out Life Plan keeps you in control of your life even after you’re gone. The list of those who do not plan is replete with examples of unintended ex- spouses, estranged siblings, children with addictions, and others being granted inheritances by state intestacy law (lawyer lingo for “without a will”). A recent example of a man who did not control his legacy is the music legend, Prince. According to court documents filed in a Minnesota probate court, Prince Roger Nelson left no instructions to divide his belongings. As a result, state law could divide his vast estate equally among 8 siblings. It is reported Prince has one surviving full sister, five surviving half siblings, and two deceased half siblings (with surviving children). Some of these heirs had not spoken with Prince in over twenty years. However, Minnesota state law does not distinguish between full and half siblings, plus any personal relationship to Prince is irrelevant. Would Prince have approved of this distribution? Would you?

The following is a Life Plan “Control Checklist” to assist in protecting and directing your legacy:

Control Who Inherits Your Legacy and Designate The Amount For Each Heir

Many people assume everything in an estate automatically goes to the spouse. Please be aware not every state law automatically passes the entire estate to a spouse! I repeat. A spouse may not automatically inherit everything without a Will. Some states only allow a spouse 1/3 of an estate due to parental inheritance distribution laws. According to Kentucky intestacy law, a spouse may be fourth in the line of distribution. Also, state laws typically divide assets equally to the state designated heirs without consideration of a spendthrift relative, or someone with special medical needs. Children born out of wedlock may not be recognized in some states. Charitable giving may not occur. Additionally, if no living descendants are located the estate may “escheat” (go to) to the state coffers.

Control Who Will Take Care Of Your Minor Children

Preparing a Will and naming a guardian for your children places you in control of the person(s) you desire to meet the needs of your children and reflect your values. Without a Will the court may select a guardian from any family member, regardless if you were estranged during your life. If no family member agrees to guardianship or is deemed appropriate, the court may choose a state appointed guardian such as foster care.

Control Estate Taxes

Controlling taxes is a continuous event during our lifetime. An estate plan continues the control in minimizing estate taxes. A spouse may not take an inheritance tax free. Now is the time to put a plan in place to ensure the maximum of your legacy goes to your heirs rather than for taxes. Let’s revisit the example of music legend Prince. Without a Will or other estate planning, roughly one half of Prince’s estate could go to Federal and state taxes.

Control Probate

Having an estate plan helps speed the probate process, reduces probate costs, or in some circumstances, avoids probate completely.

Control Who Does Not Inherit

Earlier we discussed a plan to choose the exact people who receive your legacy. Now, we draw attention to controlling who will not inherit from your estate. An estate plan is your personal outline and direction of exactly how you want your personal legacy to be distributed. The estate plan allows you to be as detailed as possible and gives you the opportunity to exclude heirs making your intention of distribution clear. For example, perhaps some family members are financially established and you want to distribute assets based upon need, perhaps a family member may be incapable or irresponsible with money management needing small distributions of money over time using a trust, or perhaps a family member participates in lifestyle choices you may not wish to support.

Control Family Feuding

Estate planning may reduce the fighting and conflict among family members. Executing a well drafted estate plan places you in control of potential conflicts. Family members may not view your clear directions of dividing assets in a favorable manner, but your intentions will be clear to the court. Further, some states allow forfeiture/no contest clauses, indicating if an heir contests your estate plan then the heir may forfeit any gift made under the Will.

Control Charitable Legacy

An estate plan allows your legacy to live on by personally choosing charitable giving reflective of your values, interests, and social concerns.

Control Financial and Medical Care

Through estate planning with a Durable Power of Attorney, you control your financial and medical care in the event of a disability.

You can take control of your Life Plan now by engaging an experienced estate planning attorney to assist with the personal legacy you want to create. An estate plan expresses your values and outlines how you desire your assets to be preserved and protected. Who is in control of your legacy?

For more information about Life Plans, please contact our Wealth Management and Trust department.

Betting, Hoping and Planning

by Neil Byrne, JD, LLM, CPA Stock Yards Bank Wealth Management & Trust


It is almost Derby time. So what better topic to discuss than betting?

According to the dictionary, a bet is defined as “an act of risking a sum of money on the outcome of a future event.” Hope is defined as “a feeling of expectation and desire for a certain thing to happen.” Finally, a plan is defined as “a detailed proposal for doing or achieving something.”

All of these concepts are wonderful in their own right, and can bring joy to individuals in the right context. It is fun to bet on the Derby, or to hope your tournament bracket wins your office pool. Unfortunately, too many people are unnecessarily making a bet on retirement security by simply hoping their savings, Social Security, and other resources will be enough.

Most people choose their career, their college major, and their home, not to mention their spouse, among various other important items in their life. What about retirement? How many people are hoping to be able to retire “one day” but haven’t put together a detailed plan for actually retiring? If you have not put together a plan, then you likely are not planning for retirement, but rather, are betting on retiring – one day.

Below are a couple of items to consider when putting together a retirement plan. While things like investment returns, basis, and tax rates are unquestionably important, for a moment, we suggest that you think “bigger picture,” and ponder how some more basic considerations can affect your successful retirement plan.

Your Needs and Wants
Even the age at which you retire is up for consideration. After all, setting a uniform retirement age is said to have been started in Germany by Chancellor Otto Von Bismarck, at least partially as a way for him to force troublesome government employees into retirement. Germany initially set it at 70, and then lowered it to 65*. Of course, whether that is true or not, neither Chancellor Von Bismarck, nor anyone else should really dictate when you retire. Naturally, taking retirement benefits that are only available at certain ages into account is an important part of the plan. But, with a little foresight, you can retire when it is appropriate for you.

After all, retirement is about you. To ensure that you are making the best decisions, you will want to have a good handle on your family dynamics, as well as your budget, assets, and liabilities. Do you have robust savings that can withstand unforeseen expenses? Have you considered what your wants and needs truly are? It may be appropriate to “bet” or “hope” for a dream item down the road, but we want you to plan for your true needs and wants in retirement.

Your Biases
Personal biases can have long-term consequences, and so, many people have a critical need for objective retirement advice. A 2008 book by Professor Dan Ariely, Predictably Irrational, explains many of our biases and how they affect several facets of modern life. Two sections of the book, however, are especially relevant here.

First, people like to procrastinate – big surprise. But, it is true, and it can harm your retirement readiness.

Second, people like to keep all their options open for as long as possible, even when inaction produces a negative outcome. Undoubtedly, financial planning can be complicated. Moreover, retirement planning forces you to make an avalanche of choices – when should I draw Social Security? When should I stop working? Is Long Term Care Insurance for me? And on and on . . .

These two biases can work together to turn a plan into a bet before you even realize it. Betting may be fun on the first Saturday in May, but leave the betting for the track, and the hoping for your tournament bracket. Let’s plan for your retirement.

*See: https://www.ssa.gov/history/age65.html AND http://mentalfloss.com/article/31014/why-retirement-age-65