Reports

We hear the term “renewable resource” used often when referring to energy — solar, wind, and even tidal energy. Most agree that the practical use of renewable energy is essential for our future well-being. The same can be said for money, investing, and retirement. By planning ahead, Americans born in or before 1970 — a.k.a. The Income Generation — can help to ensure they do not run out of money in their golden years.

Only decades ago, people were expected to retire and only live for a few years, during which time they could simply spend down their savings. However, as life expectancies continue to increase, many people can expect to enjoy 30 years or more in retirement. That’s why it’s become imperative for anyone over the age of 50 to establish their own renewable streams of income to cover the cost of enjoying more time in retirement.

You might think this means you need a bigger lump sum of money to retire, but at the end of the day, it can take a long time to accumulate more lumpsum dollars. In my experience, the more sensible approach is to try to maximize the amount of interest and dividends that a lump sum can generate.

A More Certain Future
By placing a significant part of their portfolio in fixed-income securities, or what I refer to as the universe of bonds and bond-like instruments, members of The Income Generation can establish a renewable source of income they can count on throughout retirement, while also helping to preserve the value of their original investment.

Investing in income-generating instruments can be like lending your money to the largest U.S. companies that pay you regularly scheduled interest. In the case of individual bonds, at the end of the loan term, they send you the last interest payment along with the return of your original principal. This is, of course, assuming there are no defaults.

Are you working with the wrong financial advisor? Is he still the advisor best qualified to help you meet your retirement goals—and to do so with confidence and peace of mind? It’s a crucial question, so we’ve compiled a list of “10 Signs You Might Be Working with the Wrong Financial Advisor” to help you decide.

1. Your advisor ignores your changing temperament
Have you asked your advisor to make your portfolio more conservative only to have him or her fight you on it? This is a major red flag. Most people want to invest more conservatively as they get older, and understandably so. If your advisor is pushing back, it could be because he isn’t qualified to manage a truly conservative, income-generating portfolio—or it could be because he has a financial incentive to keep your portfolio the way it is.

2. Your advisor isn’t a fiduciary
To expand on the point above, have you ever felt as though your advisor doesn’t put your interests ahead of his own? If so, it might be time to work with a fiduciary. A fiduciary is held to the highest regulatory standards of professionalism and accountability and is legally obligated to always put his clients’ interests first.1 While all advisors are subject to regulatory rules and guidelines, not all are held to the standard of a fiduciary.

3. Your advisor uses prefabricated, or “cookie-cutter” strategies rather than customized portfolios
Many brokers and advisors are compensated on a commission-only basis, which means they make money by selling “prefabricated” financial service products like stock mutual funds or bond mutual funds. These advisors often work for large, well-known companies. Some other advisors might receive a fee for punching your information into a computer to generate a “cookie-cutter” type financial plan for you—one that includes a prefabricated product, for which they will also
collect a commission.

By contrast, an advisor who specializes in retirement income typically has no financial incentive to recommend a prefabricated product, nor does he believe in using computer-generated “cookie-cutter” strategies. His specialty is working with each client to help create a customized portfolio geared toward the client’s situation, goals, and risk tolerance level.

The loss of a parent is difficult enough, but it can be made worse when grief is compounded by worry and confusion over the prospect of dealing with their financial affairs. A recent study from the National Center for Health Statistics suggests:

• Over 30% of retired Americans need assistance in managing their finances and other legal affairs.
• Of that 30%, over half of them will make decisions or seek professional advice without their children present.

Every person’s situation is unique, and some parents make a conscious effort to involve their adult children in financial matters or at least make provisions before they pass away to ensure that the process of organizing their affairs won’t be burdensome. When parents try to get their children informed about their financial situation, it can lead to stronger family ties and help the children develop a better understanding of what they need to do to prepare for their own retirement.

With that in mind, this report provides a checklist that is designed to be used by:

• Parents nearing retirement as a guideline for helping their children better prepare to take over financial matters when the time comes.
• Adult children whose parents have recently passed away, leaving little or no guidance on how to handle their affairs.

Common Issues
There are several common issues to be addressed when any parent passes, and this checklist is designed to cover the broadest possible range, including:

• Important documents
• Funeral arrangements
• Taxes
• Life insurance
• Savings and investment accounts
• Credit debt
• Identity protection
• Social Security

The $1.7 trillion budget bill signed by President Biden on Dec. 29, 2022, included the bipartisan SECURE Act 2.0. The legislation expands on many of the provisions in the original SECURE Act, which was signed into law in 2019. SECURE is an acronym for Setting Every Community Up for Retirement Enhancement, and the combined goal of both pieces of legislation is to remove obstacles and create incentives to help more Americans do a better job of saving for retirement.

In this report, we’ll highlight some of the more than 100 provisions in the SECURE Act 2.0 that could impact your retirement savings and/or savings strategy immediately or in the coming years.

Later Start for RMDs
Like the original bill, the SECURE Act 2.0 further raises the starting age for taking Required Minimum Distributions, which are mandatory withdrawals the IRS makes you take from your retirement accounts starting at a certain age. For years that age was 70½. The first SECURE Act raised it to 72 — and starting in 2023 the age is now 73. That means if you turned 72 in 2022 or before you need to keep taking RMDs as usual. But if you turn 72 in 2023, you can choose to wait until next year before taking your first RMD. The RMD starting age will continue getting higher until it reaches 75 in 2033.

Raising the age is a recognition of the fact that people are living longer and often retiring later. It gives you more time to grow your nest egg tax free. That’s great news, but it doesn’t change the fact that having the right strategy to help satisfy your RMDs will continue to be one of the most important steps in your retirement plan!

Lower RMD Penalties
Another change relating to RMDs is that the penalty for failing to satisfy your distribution in any given year will drop from the current 50% to 25%. The fine drops even further, to 10%, if you miss or underpay a distribution but correct your mistake “in a timely manner.”

Few inventions in recorded history have revolutionized the way we live like the Internet. It has changed the way we communicate and has made thousands of previously slow, complex processes faster and more efficient. Yet, while solving old problems, the Internet — like any invention — has also created new ones. Among the biggest of those problems is the vulnerability of sensitive and/or personal information to a relatively new breed of criminal: cyberthieves.

Most of the country was personally impacted by this problem in September 2017 when Equifax reported a security breach that allowed hackers to access the personal information of 143 million Americans. Equifax is one of three major credit reporting agencies (Experian and TransUnion are the others), and all keep extensive databases of credit-user information that include everything from dates of birth to addresses to Social Security numbers. Once a cyber thief gains access to such information, they can use it to steal your identity and potentially gain access to your credit accounts and personal finances.

Electronic identity theft can ruin a family financially, and unfortunately, it is an issue with no easy solution. According to a 2017 study by Javelin Strategy & Research, between 2011 and 2017, identity thieves stole over $107 billion. In 2016 alone, some $16 billion was stolen from 15.4 million U.S. consumers, up from $15.3 billion stolen from 13.1 million victims a year earlier.1 The increase illustrates that even as cybersecurity measures improve, criminals become increasingly savvy.

Greater Risk for Older Americans
The bottom line is that keeping our identities and finances safe from criminals in the digital age will be an ongoing challenge for both businesses and individuals. That’s especially true for individuals at or near retirement age whose accumulated assets can potentially make them more attractive targets for thieves than younger people who are still in the early process of building their wealth. A top priority for most Americans over age 50 should be “financial defense,” which means they should focus on the use of strategies designed to generate income and protect assets from major losses due to extreme fluctuations in the financial markets. In the digital age, however, another essential component of financial defense is cybersecurity: knowing how to protect your identity as you do everything from online shopping and banking to buying gas.

It seems that tax laws and regulations are constantly changing. That’s why it’s always good to meet with your CPA or financial advisor on an annual basis to talk about potential tax savings strategies as they exist under current tax rules and guidelines. While it’s generally best to have that meeting in November or December to beat all the IRS’s year-end deadlines, a meeting in January or February can also be extremely beneficial and potentially save you thousands of dollars.

The tax savings strategies discussed in this report are primarily geared toward filers in the 12% to 24% income tax brackets and are strategies related to retirement contributions, investments, savings, healthcare expenses, charitable donations, and other key areas. But first, let’s go over some basic tax guidelines as they stand for the tax year 2023.

Deductions & Exemptions: The standard deductions for the tax year 2023 are:

• Singles get $13,850, plus an additional $1,850 if age 65 or over
• Married couples get $27,700, plus $1,500 per spouse if both are 65 or over
• Heads of household get $20,800, plus $1,850 if age 65 or over

Personal exemptions were eliminated with The Tax Cuts and Jobs Act and remain at 0. Most people know how basic tax preparation works: your adjusted gross income minus deductions and exemptions equals your taxable income. Beyond your standard deductions and personal exemptions, you and your advisor may want to explore and possibly implement some of the following additional strategies:

401(k)s and Other Qualified Plans
It is generally a good idea to maximize tax-deferred 401(k) contributions whenever possible. If you feel you can’t afford to put in the maximum amount of money allowed, try to contribute at least the amount that will be matched by employers’ contributions. Contribution limits for 401(k), 403(b), and 457 plans are $22,500, with an additional $7,500 catch-up contribution limit if you are over age 50. You might even consider taking an entire paycheck in December and putting it into your 401(k), if that’s feasible, or taking the equivalent amount from a savings account and putting that into the 401(k) to maximize the contribution.

Everyone understands that the mass media has changed drastically. Not so long ago, we relied on daily newspapers, TV, and radio for all the information we needed to help us make informed decisions and stay abreast of current events. Now, in the age of the internet, we seem to be constantly bombarded with headlines, updates, and “breaking news” from our laptops, desktops, and cell phones—not to mention our TVs and radios!

However, as mass media has become so pervasive in our lives, one thing that hasn’t changed is the existence of “spin.” The explosion of media outlets in recent years has dramatically increased the pervasiveness of spin and made it harder to find truly objective reporting. With fierce competition among media companies, and the line between news, advertising, and “infotainment” growing thinner, modern journalists are under more pressure than ever to cut corners and put
pleasing their bosses ahead of serving the public on their priority lists.

The result, more often than not, is reporting that is “spun” to someone’s liking or advantage, lacking objectivity. I often remind clients of this fact because I’m well aware that, amid this daily bombardment of mass media, it is likely they will come across news and information about annuities that has a negative “spin.” I point out that financial news is particularly susceptible to being “spun” a certain way because of a fundamental flaw in the financial system.

The Need for Optimism
The crux of the problem is that the heads of major financial firms on Wall Street are financially obligated to their shareholders first and to their customers and clients second. They have a legal obligation to maximize shareholder value, in part by keeping customers invested for growth in the stock market as much as possible. People are more likely to invest and stay invested for growth when they’re optimistic about the market and believe it is trending upward. Thus, Wall Street CEOs and the people who work for them have an inherent need to sell optimism and always speak optimistically about the stock market, often regardless of economic realities or how the market might be trending.

When people think of Investing for Income, the first thing that might come to mind is investing in non-stock market investments, like bonds. Yes, bonds and bond-like instruments are an important part of investing for income, but there is also a way for those with the willingness and ability to endure some level of stock market risk to enjoy the benefits of earning a steady income through dividends. That’s exactly what we are going to talk about in this report — investing for income in the stock market.

Keep in mind that stocks are generally considered to be riskier than bonds because they can drop in value, and because dividends can be cut or reduced. Some financial firms might tell you that they have some proprietary formula or advanced algorithm to manage stocks and help protect your investments from downside risk. Well, these algorithms don’t work forever, and eventually, they fail to protect the investor.

However, a dividend-paying value stock strategy can help to mitigate stock market risk. One reason is that you are buying “undervalued” stocks, which means they should have somewhat less downside risk than an “overvalued” stock. Another reason is that your dividend payment is a “bird in the hand.”

The Real Estate Analogy
To illustrate the benefits of a “bird in the hand” strategy, let’s consider two different couples who decide to invest in real estate. The first couple decides to invest in a plot of land — hoping that the value of their land will appreciate by the time they retire so they can sell it for a profit. Then, just as they’re about to retire, the real estate market experiences a downturn and the value of their land drops significantly. This couple would most likely feel the pain of this drop in value.

Now, consider the second couple, who decide to invest in a rental property instead. Each month this couple can collect rent from their tenant. Because of the steady income coming in, this couple wouldn’t be so concerned about a potential drop in value. The steady income they receive would help to soften the blow of a drop in property values. If they had no intention of selling their property anytime soon, it might not even impact their ability to fund their retirement.

Aggressive instruments are those primarily invested in for growth. As the chart shows, they include things such as common stocks, stock mutual funds, commodities, Business Development Companies (BDCs), and speculative real estate. Again, these are typically invested in growth or capital appreciation, not income. They are considered aggressive because, while they can provide large short-term gains, they can also carry a higher risk of sudden losses.

On the left of the chart are investments that are considered conservative because, in theory, they are deemed to have no default risk. These include bank CDs, government bonds, fixed annuities, and insured municipal bonds.

In the middle of the chart are moderate instruments that have some default risk but are generally considered to have a much lower risk of loss than aggressive investments. These moderate options include corporate bonds, indexed annuities, preferred stock, and Real Estate Investment Trusts (REITs).

The instruments on the left and in the middle have two things in common:
1. They’re considered to have less risk of loss than the instruments in the aggressive category.
2. They are instruments that people invest in primarily for income.

In other words, they are not instruments that people typically invest in first for growth — although they do appreciate in value. The interest and dividends that are typically yielded by the vehicles on the left and in the middle represent a way for investors to generate reliable income and grow their money “organically” through the reinvestment of any interest and dividends they may not need for income. This is known as the “bird-in-hand” approach to portfolio growth. You aren’t crossing your fingers and toes and hoping for capital gains to provide you with growth. Instead, you’re building growth strategically through a dependable process.

Most people are aware that charitable contributions to qualified recipients are tax-deductible, provided they are made by December 31 of the tax year for which you are filing. It’s a great benefit for people who feel strongly about supporting various causes and organizations, and it makes for a great year-end tax-saving strategy. Rather than donating cash, some people donate appreciated securities, which can allow them to avoid capital gains tax.

What many people don’t realize, however, is that they can also use charitable contributions strategically in other financially beneficial ways, all while supporting worthwhile groups and programs. This is true now more than ever thanks to the Qualified Charitable Distributions law (QCD), which was made permanent in 2016.

For example, one of the most important areas of retirement planning involves having a sound strategy in place for satisfying your Required Minimum Distributions (RMDs). One benefit of the QCD law is that it provides a great option to cost-effectively satisfy your RMDs if you are charity-minded or have a particular organization you regularly support. But there are other potential benefits as well. That means benefits for you in addition to the obvious good your money
does for your favorite charity!

How it Works
In basic terms, a QCD allows you to transfer a gift of up to $100,000 directly to a qualified charity from an Individual Retirement Account (IRA) without counting it toward your Adjusted Gross Income (AGI) or incurring a tax. The key word there is “directly.” Money transferred from an IRA account to the IRA owner and then gifted does not qualify. By the same token, you cannot use the QCD as a way to reimburse yourself for a charitable gift you’ve already made; the distribution must be a direct transfer from your IRA account to the charity.