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Target-Date Funds After Retirement?

If you worked for a large company and participated in their 401(k), 403(b) or 457 retirement plans, they may have put you in one of their Target-Date Funds. This type of fund uses your projected retirement date as a "target," and works backwards. When you are young and many years away from retirement, the asset allocation is more growth-oriented. Every few years, as you get closer to retirement, the fund adjusts its asset allocation to gradually become more conservative (i.e., a greater proportion of bonds to stocks). The reasoning is that as retirement approaches, you want a more defensive stance in case the market goes down just when you're about to retire. For this reason, target-date funds have become a popular choice when you're in the accumulation phase of your life. About half of all 401(k) participants now use target-date funds, according to the Investment Company Institute. But is leaving your retirement nest egg in target-date funds the best choice after you leave your job?

A strategy for accumulating money for retirement can be very different from the one you use once you're in retirement. A target-date fund can be very appropriate for accumulation because it runs by itself and you don't have to think about it -- it's like being on auto-pilot.

However, once you retire, everyone has different goals -- some people want to catch up on travel and need a lot of income in the first several years of retirement; some people retire early and need to maintain the growth of their retirement nest egg in order to fund 25 to 30 years of retirement; some are fortunate to have more than enough income and assets, and can put all the retirement money in the bank.

Target-date funds, on the other hand, are one-size-fits-all. The target-date fund picks an allocation that it thinks is "right" for the average person. One of the largest target-date funds holds only 38% in stocks at the retirement date. This might be too conservative for those employees who retire early, or whose families are very long-lived, because they need the money to keep growing in order to not run out of money in retirement.

Most employees don't look "under the hood" at their target-date fund to see what mutual funds and asset classes are actually in the portfolio. They might be surprised if they did. There are over 15 different asset classes that make up a broad, globally-diversified portfolio. We have seen many target-date funds that are quite skimpy, and completely exclude U.S. small companies or international investments. In a year like 2016 when the Russell 2000 small cap index went up 19.5%¹, the omission of an asset class can significantly hurt performance.

There are also conflicts of interest in target-date funds. The brokers who sell 401(k)s to companies often fill up the target-date fund with mutual funds that offer more compensation to the broker, or make more money for the investment management firm that puts together the 401(k) plan. The investor has no discretion over the choice of those funds.

What may be one of the most important deficiencies of target-date funds is their inability to enhance growth through quarterly rebalancing. In a globally-diversified portfolio, not all of the asset classes go up at the same time -- they tend to take turns. You can take advantage of this characteristic by reviewing the performance quarterly, and selling a little of what made the most gains, and putting the proceeds from the sale into another part of your allocation that represents a bargain at the time. By doing this, you are buying low and selling high every 3 months. Just doing regular rebalancing can make a big difference in long-term performance.

The problem is that target-date funds are locked into a particular allocation. Any withdrawals are made proportionately across all of the fund's assets. You cannot buy or sell just a particular component within a target date fund. Consequently, quarterly rebalancing is not possible.

The limitations of target-date funds exist not because of bad design, but because target-date funds were meant for the accumulation phase of your life. They weren't intended for efficient withdrawals and growth after you retire. They expected that when employees retire, they would move their assets from their 401(k), 403(b) or 457 plan to an Individual Retirement Account (IRA). Not only would the transfer be tax-free, but the tax-deferred growth would continue. The retiree would then benefit from more investment choices than were available in the employer-sponsored plan, greater control and customization, and potentially better performance through lower investment costs.

Once you're retired, you can work with a fiduciary, like a Certified Financial Planner or CPA, who is required to act in your best interests. They can help you create an IRA tailored to accomplish your particular goals. Having the right IRA will help your retirement assets grow to keep pace with inflation, provide income for your lifetime, and pass remaining assets to your children and grandchildren through Inherited IRAs.

¹ Morningstar

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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So You're Turning 70...

If you're turning age 70 this year, you have a lot of company. You will be joining 2.5 million Baby Boomers, including Elton John, Glenn Close, and David Letterman. Turning 70 is not only a milestone to celebrate, it can also have financial consequences that you should be aware of.

Age 70 is an important marker in terms of your Social Security benefits. Although you can claim Social Security benefits as early as age 62, your benefits will be lower for your lifetime. The rule of thumb is that for every year that you wait to trigger Social Security, your benefits will increase by about 8% per year. However, once you turn 70 your benefits max out, so there's no advantage to wait any longer -- you'll just be passing up money you're entitled to. Contact your Social Security office a few months before you turn 70.

A closely-associated milestone is age 70 ½. This is the age at which you must begin taking annual Required Minimum Distributions (RMDs) from your retirement accounts, like Individual Retirement Accounts (IRAs), 401(k)s, 403(b)s, and 457 Deferred Compensation accounts. The IRS has many penalties for not complying with their rules, but the one governing RMDs is one of the most severe -- if you don't take your RMD like you're supposed to, the IRS can penalize you 50% on what you should have taken out. For instance, if you fail to take your Required Minimum Distribution of $10,000, the IRS can fine you $5,000.

The way to calculate your RMD is straightforward. For example, if you're turning 70 ½ this year, take the value of your retirement account on December 31, 2016 and divide it by 27.4. Therefore, at age 70 ½, your RMD will be about 4%. If your IRA was worth $500,000 on 12/31/2016, and you're turning 70 ½ this year, your RMD would be $18,248.

Each year, the amount will be different because your retirement account may have grown, and the denominator changes based on your age. Your Certified Financial Planner should be able to calculate your RMD for you each year, and make sure you receive it on time.

The very first year you take an RMD, the rules offer a little flexibility. You can delay taking your first RMD to April 1 of the year following the one in which you turned 70 ½ . However, it also means in that year, you will have to take two RMDs. This sometimes makes sense. When you retire, some companies pay out all your accrued vacation and sick time. This, combined with receiving your RMD, could push you into a higher tax bracket. Even if you have to take two RMDs next year, it could help to even out your tax liability.

Many people think that once they turn 70 ½ and they have to start taking RMDs, the value of their retirement accounts will fall every year and eventually go to zero. However, this doesn't have to happen. If you have your retirement accounts in a globally-diversified, balanced portfolio, it's not unusual to have the average growth of your account exceed 4 or 5% per year. Even after you start taking RMDs, your accounts can continue to grow. Consequently, you can not only enjoy some money from your IRAs each year, but also pass on what's left to children and grandchildren in Inherited IRAs after you're gone.

By the time you get to age 70, you may have accumulated a number of retirement accounts over a lifetime of work. When you turn 70 ½ you can take the correct RMD from each one of these accounts, but as long as the total RMD amount is correct, you can take it from any of your retirement accounts -- the IRS doesn't care. Therefore, it makes sense to take the total RMD from the retirement account that is growing the slowest, preserving the retirement account that is growing really well.

Some people have Required Minimum Distributions so large that they need to plan ahead regarding tax withholding. The assets in your retirement accounts represent money that has never been taxed before, so any distribution you take is taxed at ordinary income rates, just like you had extra working income that year. Federal and State tax withholding is optional on Required Minimum Distributions. However, if you are paying Quarterly Estimated Taxes and then receive a substantial RMD at the end of the year without any tax withholding, you could face an underpayment penalty from the IRS. You can avoid surprises at the end of the year by having the taxes withheld.

There's one important exception to the Required Minimum Distribution rule. If you're still working after age 70 ½ (and you don't own 5% or more of the company), and you have a 401(k) at the firm, you don't have to take an RMD from the 401(k) until the year you stop working. You will still need to take RMDs from your other retirement accounts.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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Millennials: On Investing And Retirement

Move over Baby Boomers. These days all eyes are on Millennials, those young adults between the ages of 18 and 34 who are now America's largest living generation.1 According to the U.S. Census Bureau, Millennials in the United States number more than 75 million -- and the group continues to expand as young immigrants enter the country.1

Due to its size alone, this generation of consumers will undoubtedly have a significant impact on the U.S. economy. When it comes to investing, however, the story may be quite different. One new study found that 59% of Millennials are uncomfortable about investing.2 Another study revealed that just one in three Millennials own stock, compared with nearly half of Generation-Xers and Baby Boomers.3

On the Retirement Front

How might this discomfort with investing manifest itself when it comes to saving for retirement -- a goal for which time is on Millennials' side?  According to new research into the financial outlook and behaviors of this demographic group, 59% have started saving for retirement, yet nearly two-thirds (64%) of working Millennials say they will not accumulate $1 million in their lifetime.  Research showed that the Millennials with the more negative view of the future earn a median income of $27,900 a year.Just over a third of this group are putting away more than 5% of their income in a retirement savings account. 

As for the optimistic minority who do expect to save $1 million over time, they enjoy a median personal income that is about twice that -- $53,000 -- of the naysayers. Two-thirds are deferring more than 5% of their income and 28% are saving more than 10%.2

So despite their protestations, their reluctance to embrace the investment world, and a challenging student loan debt burden, Millennials are still charting a slow and steady course toward funding their retirement.2

For the Record

Here are some interesting facts about Millennials and retirement:

  • The vast majority (85%) of Millennials view saving for retirement as a key passage into becoming a "financial adult."

  • A similar percentage (82%) said that seeing people living out a comfortable retirement today encourages them to want to save for their own retirement.

  • Those who have started saving for retirement said the ideal age to start saving is 23.

  • Those who are not yet saving for retirement say they will start by age 32.

  • Of those who are currently saving for retirement, 69% do so through an employer-sponsored plan.

  • Three out of four said they do not believe that Social Security will be there for them when they retire.

  • Most would like to retire at age 59 – much earlier than the actual retirement age of the generation before them.

Perhaps what Millennials are forgetting is that time is their greatest weapon in the battle for a successful retirement.  The earlier they start saving, the longer their investment will benefit from tax-deferred growth and the greater the ability for long term compound growth to take effect.  A challenging entrance into the job market during the Great Recession coupled with immense and looming education loans certainly explain the pessimism of this generation.  Couple that with a volatile stock market and insurmountable hurdles to purchase a home, and it becomes clear why some Millennials are reluctant to save for retirement at all! 

However, the longer and broader their retirement savings years, the more these initial setbacks will become just a blip in the radar.  Encourage the Millennials in your life to start saving early, utilize those around them as a financial sounding board, and construct a retirement savings plan early that they can build off for years to come.  By saving now, they may be able to attain that goal of retirement at age 59 after all!

Source/Disclaimer:

1Pew Research Center, "Millennials overtake Baby Boomers as America's largest generation," April 25, 2016.

2Wells Fargo & Company, news release, "Wells Fargo Survey: Majority of Millennials Say They Won't Ever Accumulate $1 Million," August 3, 2016.

3The Street.com, "Only 1 in 3 Millennials Invest in the Stock Market," July 10 2016.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

 

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How To Survive Retirement

For our parents, retirement may have been less of a challenge than it is today. People didn't live as long as they do now, and tended to work longer. Consequently, they didn't have to fund so many years of retirement. In addition, many companies in those days had defined benefit pension plans for their employees. You didn't even have to contribute to the plan as an employee, and the plan guaranteed income for life! For some people, retirement planning was simple -- they put all their retirement savings in the bank, and drew from it until they passed away.

Today, it's common to spend 20 to 30 years in retirement. Here are some pointers on how to survive retirement in today's more demanding environment.

Don't be afraid of the market

It's understandable why a retiree would be leery of putting money into the stock market. There are no FDIC guarantees, and sometimes, the roller coaster ride can make you lose sleep at night. Last year was a good example. January kicked off the year with a loss of 5%. Then, there was a 5% drop in June when Britain elected to exit from Eurozone. Nevertheless, by the end of the year, the Standard and Poors index of the 500 largest U.S. companies was up 9.8%. If you count dividends, the total return was about 12.25%.

It would be nice if you could get a fairly consistent, good return while reducing some of the volatility of the market. The good news is, there is. There are 15 different asset classes in the market. They don't all go up and down at the same time, which is a good thing. You can structure your portfolio so that all the asset classes are represented, and balance those asset classes to give you the most consistent performance. This is the opposite of "putting all your eggs in one basket." This strategy has been proven to reduce market volatility and provide better downside protection when the market goes through a correction.

Have a plan

Depending on your financial circumstances, and how much you were able to save for retirement, you might be able to spend freely in retirement, or you might have to make some adjustments to stretch the money farther. How can you tell? Have your Certified Financial Planner™, CPA, or Registered Investment Advisory firm create a Comprehensive Financial Plan for you. This is especially useful just before you give notice to your employer that you're retiring. It's a financial roadmap that lets you know if all your retirement goals can be accomplished successfully. If there are gaps, your financial advisor can give you recommendations on how to fill them. Typically, the plan is updated every few years to make sure you're still on track.

Tap into your assets in the right order

Over the course of a lifetime, you probably have assets in many different places and types of investments: stocks, bonds, mutual funds, IRAs, 401(k) accounts, annuities, and pensions. Retirement is a good opportunity to consolidate these accounts, and devise a smart withdrawal strategy.

There's no one size that fits all, so your financial advisor can give you suggestions based on your unique circumstances. However, there are some general guidelines that make sense for many people --

▪  If you have bonds or CDs that have matured, they may no longer be earning interest. Since they are already liquid, this would be a good place to begin your withdrawals.

▪  Annuities are effective vehicles for accumulating money for retirement. They grow without getting taxed each year, so you have good compounding working for you. However, they are not great for passing on to the next generation. Any taxes that were due to you would also have to be paid by your beneficiaries. Therefore, it's often good to spend down annuities during your lifetime.

▪  When you turn 70 ½, you have to start taking annual Required Minimum Distributions from your retirement accounts, like Individual Retirement Accounts (IRAs), and employer-sponsored retirement plans like the 401(k), 403(b) or 457. At age 70 ½ the annual distribution is 4%. It goes up gradually. By the time you're 80, the distribution is about 5%. If your retirement account is invested in the market, it's very possible for the account to keep growing, even as you're taking out the RMDs.

▪  Finally, take withdrawals from taxable accounts. You only have to pay tax on the amount that the accounts grew, not on the principal. The capital gains tax is 15% for most people. For many retirees, it can be even better. People in the lowest two income tax brackets pay no capital gains tax at all.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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No Fiduciary Rule to Protect Consumers

This was the month that the Department of Labor's "Fiduciary Rule" was supposed to be implemented. It was intended to require all financial advisers who work with retirees to always work in their best interests, and disclose any conflicts of interest.

This was before President Trump issued a memorandum in February to delay implementation until June 9. His excuse was that "it could hurt investors' ability to access financial advice." However, from an investor's point of view, why would anyone want the advice of an adviser who isn't working in their best interest? What it means for consumers is that the Fiduciary Rule will likely be watered down until it's ineffective, or scrapped altogether.

At the same time, Trump is repealing the Dodd-Frank regulations that were designed to prevent a replay of the Great Recession of 2008 and 2009. That recession was caused by banks' greed in selling subprime mortgages, and then packaging those mortgages as A-rated investments. When the house of cards collapsed, hundreds of thousands of Americans lost their homes, but not one banker went to jail. Trump is also dismantling the Consumer Financial Protection Bureau, a government agency that makes sure that banks, lenders and other financial companies treat you fairly. It's clear that more than ever, investors have to do their own due diligence when seeking financial advice and investment management.

It's important to note that all of the following refer to themselves as "financial advisers," although they operate under different standards --

* A bank employee who is instructed to sell annuities that are expensive, and tie up an investor's money for a long time.

* A wire house employee who only sells mutual funds from a particular company that their firm wants him to use, because they are particularly profitable for the firm.

* A registered representative for a broker dealer who makes recommendations to clients based on what compensates him the most, even though there are comparable investments that are lower-cost, and have a better performance history.

In anticipation of the Fiduciary Rule being implemented, some mutual fund companies have made changes to clean up their act. One fund company came out with "clean" funds. Compared to their old (I assume "dirty") funds, the broker's commission is not built-in to the fund, but tacked on as a separate item, making it easier for investors to know how much they're paying for the fund, and how much the broker is making for selling the fund.

Another mutual fund company came out with T-shares, which carry a maximum 2.5% sales charge, which is about half the cost of their traditional funds. Even at this reduced price, they are still quite expensive.

The problem is that with the likely revocation of the Fiduciary Rule, there is little incentive for non-fiduciary financial advisers to recommend these new offerings. If you have a financial adviser, you can protect yourself by probing for conflicts of interest, and asking him or her the following questions --

* How are you paid?

* What is your criteria for recommending one investment over another?

* Are you committed to putting my interests first?

* Can I see your Form ADV? (This report discloses any regulatory problems as well as services and fees.)

If you want your adviser to make a solid commitment to act in your best interests, you can ask him or her to sign a fiduciary oath. The Committee for the Fiduciary Standard has prepared an oath that you can download at: http://www.thefiduciarystandard.org/fiduciary-oath/

If you're looking for a new financial adviser, seek one out who will act in your best interests. Registered Investment Adviser firms are held to a fiduciary standard. You can find them listed at the Security and Exchange Commission's Investment Adviser Public Disclosure website: www.adviserinfo.sec.gov.

 

Certified Financial Planners must also be fiduciaries in order to retain their credentials. You can find them listed at the Certified Financial Planner Board of Standards: http://www.cfp.net

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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EDUCATIONAL WORKSHOPS

2019 TENTATIVE SCHEDULE 

YOUR 2019 INVESTMENT STRATEGY

Saturday, March 16, 2019

10:00 a.m. - 12:00 p.m.

La Canada Flintridge Library**

4545 North Oakwood Ave.

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YOUR 2019 INVESTMENT STRATEGY

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Phone: (626) 449-7783
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