Here is a summary of your four options for this money:
1. Leave the money in the old employer’s plan.
401(k)s [and 403(b) plans for nonprofits] almost always have limited investment choices and often both investment and advisor expenses. You can access the fee disclosures, but most never do. If your old plan is under an insurance company, those fees are likely to be higher, as employers typically don’t subsidize fees under these providers.
If you reached age 55 in your last year with the company, you’re eligible to access funds without early withdrawal penalties. Consider leaving an amount you might need to withdraw before age 59 ½, which is the penalty-free age for IRA’s.
2. Move the balance to a current employer plan.
This is usually not the most beneficial move, as you are likely to still have double fees and limited investment choices. However, it could enable you to take a loan from the new plan. If this is something that you want to consider, ask your employer for the details.
3. Take a taxable distribution.
This option may only net you about 55% after taxes and penalties. Remember that retirement plan distributions are taxed as ordinary income, which means it is treated the same as payroll earnings for that year. Unless you need all of it, you’re much better off moving it to an IRA, with the goals of growing it for retirement and the ability to take distributions gradually over years.
4. “Rollover” the money to an Individual Retirement Account (IRA)
This is usually your best option. It’s not a taxable event; you’re likely to have much broader investment flexibility, and you could have lower overall fees. Like most discount brokerage firms, look for IRA account “custodians” without annual fees or trading commissions. Plus, if you have multiple former employer plans, you can consolidate them into one or more Rollover IRAs.
Remember, if you’re between 55 & 59 ½, to leave an amount you might use, as penalties on IRA’s are incurred prior to 59 ½.
Required Minimum Distributions (RMDs) take effect the year an IRA owner turns 73, so the government can start collecting taxes. This is payback for making tax-deductible retirement contributions while working. A few years ago, Congress enabled retirees to give any portion of RMDs tax-free charitably!
The Qualified Charitable Distribution option allows for gifting to recognized charities, which counts towards satisfying the RMD. This avoids income tax regardless of whether you are eligible to itemize.
For example, if you typically give $10,000 a year to your favorite charities, you’re probably paying taxes on this money first. So, it costs you $12,200 or more, including taxes. If you make gifts straight from your IRA, you keep more than $2,000 (plus any state tax) in your bank account!
The recipient must be a recognized 501(c)(3) charity (which is typical of religious, education, or community service organizations). Your IRA custodian may have a minimum amount per gift and will have their own paperwork to complete. You can gift as much or to as many charities as you wish, up to the total amount of your RMD.
This is just one of the tax management strategies we employ at Integras Partners. For ideas on how we might help you invest intelligently, nurture your communities, and enjoy financial peace, schedule a call with us!
So, enjoy today and tomorrow, and let us do the worrying!
In an ongoing University of Michigan survey, older Americans recently expressed less confidence about having a comfortable retirement.[1]
Inflation is the likely driver of this worry (both inflation itself and the affect it has had on the stock market). To top it off, the inflation that retirees actually experience is typically higher than the headline numbers. This is because retirees spend more on services, such as healthcare and housing, which tend to have a higher inflation rate than goods.
Integras Partners developed investment strategies with retirees in mind. Investment risks needed for growth are limited to longer timeframes. So, money for short-term needs is shielded from market risk. Each client’s unique portfolio allocation is driven by our financial planning process, which accounts for anticipated spending and ongoing inflation.
The big question for investors now is where to be invested going forward. With the overall market trading at 20x earnings and first half gains concentrated into only a select few stocks, most of the market has been left behind. With the valuations of the high-fliers now in excessive territory, the rest of the market looks much more attractive. Value stocks and cyclicals such as financials, energy, materials and consumer staples are a relative bargain and beginning to see some traction. We have maintained value exposure in all of our strategies, seeing better risk/reward near-term than in large growth. Yet the best longer-term risk/reward is in areas not much investor attention has been paid to in several years.
We see potential in sectors and industries left behind in this tech-centric advance. The relative weaker performance of small cap companies to large caps appears to have begun unwinding. We have meaningfully added to small caps in recent months. Today, foreign markets are most attractive as they are generally at lower P/E ratios, and with virtually all regions (except Europe and Japan) growing faster, they offer better value. Plus, when the Fed stops hiking rates, the U.S. Dollar should weaken relative to foreign currencies, which enhances foreign markets’ performance in dollar terms.
We stay focused on what we can control and seek the best longer-term opportunities for growth. The impact and mistakes made during and after the pandemic continue working themselves out. This is a perfect example of the cyclical dangers we work to avoid with our time-appropriate strategies. For our clients with current income needs, we maintain a sufficient level of conservative assets to withstand periods of market weakness until the tide ultimately turns higher. With shorter-term needs funded, longer-term capital can remain invested for growth, and fund future goals. This is part of each client’s personalized investment structure. We like to tell our clients to go live and enjoy life, because we’ve got their backs!
There is a flawed assumption that 4% portfolio distributions are sustainable throughout retirement. Unfortunately, this has proven to be unreliable for too many retirees. The problem doesn’t lie in the math of a withdrawal rate but with the structure of the portfolio.
Retirement portfolios are often assigned a 60/40 allocation (60% stocks with 40% bonds and cash) with monthly distributions drawn proportionately across all assets, regardless of market direction.
In down markets, this strategy forces the sale of more shares to generate cash. The worrisome decision now facing the retiree is whether to increase the pressure on the portfolio by taking the same distributions or to decrease income. Neither is desirable.
Integras Partners takes a healthier approach to retirement income planning.
We layer our clients’ portfolios with designed strategies matching the timeframes of withdrawals.
By isolating more stable assets for short-term spending, we insulate early distributions from random market performance. Assets we don’t need until later have appropriate time to capture growth.
Our clients comfortably spend during market declines without being forced to choose between taking less income or the fear of possibly running out of money.
Several years ago, a client couple referred their neighbors. Let’s call them Jim and Kate. They had been married almost 20 years and had established careers and two younger children. After recently purchasing their dream home, they came to us to help consolidate multiple investments and build a financial plan for their retirement. We started by solidifying their college savings, reviewed existing life policies, and started managing their accumulated retirement accounts.
Jim was an early employee of his firm and was working with leadership to design his exit strategy. He wanted to spend more time with family, and was starting his own business. A few years later Jim got sick, and we sat with them at the attorney’s office to draft wills and healthcare directives. Fortunately, his life insurance was already in place, as insurance companies won’t issue a policy once a serious healthcare issue arises.
Jim recently lost his battle with a debilitating illness. Through the waves of emotions that followed, we were able to provide Kate with peace of mind around her financial future, so that she could focus on her family and their grieving. When she was ready, we helped her reregister accounts, file insurance claims, update her will, and refine college planning. Thankfully, the life insurance benefits more than covered expenses while she took a leave of absence from work and prepared their oldest child for college.
Kate has told us many times how grateful she is to be able to lean on us. A year after losing her husband, we helped her dismantle her inherited business and work through the pros and cons of strategies to help restart her life, including selling their family home and securing financial freedom.
Partnering with a trusted Financial Advisor now could be one of the most important moves you make. Life is unpredictable. When you find yourself faced with stressful life changes, having built strong advisor relationship will prove to be invaluable.
Article 5 of 5: Real Estate As An Investment Option
This is the final installment in a series of five blogs on how Owning Real Estate Complements Stock Risks. The series addresses the attributes and differentiating factors of real estate that pair nicely with traded stocks. The third & fourth segments review public real estate securities and the advantages of private real estate offerings.
Our previous blog in this series outlined the Advantages of Owning Private Real Estate. In summary, investors in private offerings will likely capture higher yields, realize less volatility, and have greater diversification benefits than public securities.
Private real estate can be accessed through a variety of investment vehicles. Below we discuss four categories.
Interval Funds are structured to trade like mutual funds but with limited liquidity. They are typically a “fund-of-funds”, meaning they invest in other real estate funds – large institutional funds that an individual investor would otherwise be unable to access. Interval funds keep some public stock and debt in their portfolio for liquidity. Since the underlying institutional funds have limited liquidity, interval funds also impose redemption limits. Typically, investors can only redeem 5% of the fund’s value per quarter. The interval fund may also have a one-year hold required to avoid a short-term redemption fee.
NAV REITS are perpetual-life REITs that directly own properties. NAV stands for net asset value, which is the value of the REIT’s assets minus its liabilities. These REITs are named for the way that their shares are priced, at their NAV per share rather than a price determined by trading forces. They are generally diversified portfolios focused on core property sectors. Liquidity limitations are similar to interval funds, but NAV REITs have more discretion than interval funds and can shut down redemptions during periods of portfolio stress. Federally, investors are required to meet moderate income and/or asset thresholds to invest in NAV REITs. Many states have additional requirements or limitations.
Private Placements are relatively small, narrowly focused, and riskier investments. They may be for new development, renovation projects or even rehabilitating distressed properties. Utmost care must be taken to evaluate the managers, strategy and track records. There are no liquidity windows and in some cases no income distributions. They bring the higher Accredited Investor standard, which is for millionaires or exceptionally high earners.
Delaware Statutory Trusts (or DSTs) are designed to accept 1031 Tax-free Property Exchange proceeds. Current tax law allows real estate sellers to defer capital gains by reinvesting all proceeds into a replacement property, or DST that owns replacement properties. DSTs may be illiquid for 10 years or more. They are also only available to Accredited Investors.
1 Registered Representatives that work through Broker/Dealers are entitled to charge these commissions, which are usually in the 6% – 7% range. Investment Advisors, who are held to a Fiduciary Standard, do not charge commissions for investments.
Article 4 of 5: Real Estate As An Investment Option
This is the fourth in a series of five pieces to help investors understand the benefits of owning commercial real estate, then differentiate the dynamics and variety of ownership channels.
Our first blog in this series explains how commercial real estate investments enhance traditional stock and bond portfolios.
Briefly, real estate generates most of its returns from rental income, can diversify a traditional stock and bond portfolio, and typically holds value during inflationary periods.
Indirectly holding real estate through stocks and mutual funds often dilutes these benefits, as they are subject to market volatility. Real estate stocks offer attractive dividends, but as demand raises the stock price, their yield goes down. Real estate funds can reflect a broad (indexed) composite of the market, but this washes out the opportunities of manager selection.
Owning private commercial real estate means investing through a pooled investment vehicle that is not listed on a stock exchange. Non-traded real estate portfolios often pay higher yields and better retain value.
Since private real estate is not publicly traded, it is not subject to the market volatility responsible for much of the fluctuations of traded REIT or mutual fund prices. Non-traded funds typically are priced at their Net Asset Value (the value of their assets minus liabilities).
Mutual fund managers must sell their holdings at lower prices during periods of high redemptions. Non-traded funds avoid these pitfalls by limiting redemptions, so they are not appropriate for short-term investors.
Private real estate investment managers look to increase profits by focusing on opportunities.
When you buy stock in a traded REIT, you’re buying it from someone who wants to sell their shares, but the real estate portfolio itself isn’t changing. Investors in private offerings are adding new money to a portfolio, allowing managers to be strategic in putting that money to work, looking at real estate dynamics for today’s opportunities. To see how Integras Partners incorporates real estate and other “Real Assets” click below.
Article 3 of 5: Real Estate As An Investment Option
This is the third in a series of five pieces to help investors understand the benefits of owning commercial real estate, then differentiate the dynamics and variety of ownership channels.
Many investors get started in real estate by owning one or more individual properties.
They may elect to rent a former home, acquire a property that already has a tenant, or inherit a property that they decide to rent. In this case, the owner must choose to engage a property manager or become the landlord. In addition to dealing with tenants, repairs, and maintenance, there are periodic costs for roofs, painting and prepping between tenants.
Rather than become a landlord, an investor may choose to get exposure through real estate securities, in the form of mutual funds, exchange-traded index funds or a host of public REIT stocks. These allow investors to own a slice of a professionally managed real estate portfolio, made up of hundreds or thousands of properties.
Public real estate securities trade on major stock exchanges, so they can be easily bought and sold.
Because they are publicly traded, they are priced based on market supply and demand, and are more correlated to corporate stock than private, or non-traded, real estate investments.
Non-traded REITs give investors the advantage of owning private real estate while avoiding the fluctuations of public markets. Click below to learn more about private real estate investments.
Article 2 of 5: Real Estate As An Investment Option
This is the second in a series of five pieces to help investors understand the benefits of owning commercial real estate, then differentiate the dynamics and variety of ownership channels.
Two investors that each own Amazon stock own the same investment; however, two investors that each own warehouses leased to Amazon do not. All commercial real estate (CRE) is different and can be categorized and analyzed in many different ways.
CRE Sectors
The heart of every major city is the Central Business District, which is home to the “core” sectors of Office, Industrial, Multi-Family, and Retail which make up the bulk of CRE, and are typically the most expensive buildings. They are often owned by large institutions i.e., insurance companies or pension funds as portfolio diversifiers. Satellite sectors include hotels, regional malls, self-storage, data centers & even cell towers. Each sector has unique demand drivers and sensitivity to economic factors. Many investors diversify their real estate holdings across multiple sectors.
Geography and Demographics
The most valuable domestic markets are the “Gateway Cities” of Boston, New York, Miami, Seattle, San Francisco & Los Angeles. Industrial warehouses are more valuable closer to the ports of Houston, Savannah, and Long Beach, CA because of their import traffic. CRE gets more affordable in smaller markets. Every geographic center can then divided by “sub-markets”, which might be identified by average household income or education level, proximity to transportation, or other magnets like schools and shopping. The size and characteristics of a market’s population have a major influence on real estate. Demand for apartments, for example, is higher near universities, military bases, hospitals, or other major employers.
There is an expression that All Real Estate is Local, which speaks to the need for knowledgeable community members when evaluating the merits of owning a particular property.
Risk / Return Characteristics
Real estate investments can also be categorized by their risk/return characteristics. The spectrum can be categorized as Core, Core Plus, Value-Add, and Distressed. Core properties generally have high occupancy and stable tenants. The steady income stream and predictable cash flows put core properties on the more conservative end of the real estate spectrum.
As you move down the spectrum from core-plus to distressed, properties have greater cash flow uncertainty and capital improvement needs. Investors may choose properties with greater risk for the possibility of greater capital appreciation.
Additional metrics in determining a building’s category can include age, design characteristics, and remaining lease terms.
As you learn more, it becomes readily apparent that investors need to rely on experts to determine the best buildings for any portfolio.
