A warning to high earners and super savers: That massive 401(k) or traditional IRA that you worked so hard to build may become a big problem in retirement, resulting in huge tax bills and Medicare surcharges. Here’s what you need to know, and what you can do about it.
Conventional wisdom suggests you should save everything you can in tax-deferred retirement accounts to minimize taxes in the current year and benefit from tax-sheltered growth. For many, that may still be good advice. Certainly, you should be saving everything you can for retirement. However, for high earners who save a lot, saving in tax-deferred accounts may prove to be bad advice. Why?
Tax-deferred savings have an associated tax liability that you will have to pay someday. The IRS will only let you avoid taxes for so long. Withdrawals from tax-deferred accounts are taxed as ordinary income. You may take withdrawals without penalty from tax-deferred accounts starting at age 59½, but many investors wait to make withdrawals until they are required to take required minimum distributions at age 72.
Your tax liability continues to grow over time through contributions, employer matches and your investment return. Eventually, this growing tax liability can snowball, but most investors have no idea of the damage it can cause in retirement.
For example, imagine a couple aged 40 who have saved $250,000 combined in pre-tax 401(k) accounts. Presumably, this couple is tracking well for a secure retirement. If they keep maxing out pre-tax 401(k) contributions and each receive a $6,000 employer match, their 401(k) accounts will have grown to an impressive $3.6 million by retirement at age 65. They’re in great shape, right?
The problem is that their pre-tax savings represents a growing tax liability. The couple’s first RMDs (required minimum distributions) will exceed $200,000 at age 72 and are likely to grow as the couple ages, reaching $300,000 at age 80.
Recall that RMDs are taxed as ordinary income. Do you think they may have a tax problem in retirement?
The story doesn’t end there, it gets worse. High RMDs are likely to trigger Medicare means testing (avoidable taxes by a different name) during retirement in the form of higher premiums on Medicare Part B (doctor visits) and Part D (prescription drugs). The couple in our example above is projected to pay large extra charges in Medicare means testing surcharges through age 90.
At death, assets remaining in inherited tax-deferred accounts have never been taxed, so the tax liability passes to your heirs. The 2019 Secure Act eliminated stretch IRA’s, which allowed heirs to stretch out RMDs from inherited IRAs over their projected life expectancy. Under the new law, RMDs for inherited IRAs no longer exist, but the entire account must be depleted within 10 years, and every withdrawal is taxed as ordinary income at the heirs' marginal tax rate. Our example couple is projected to leave millions of of tax-deferred assets (and the associated tax liability) to their heirs at age 90.
These are not tax issues unique to the super-rich. The couple in this example is upper-middle class, and are simply good savers doing exactly what conventional wisdom has suggested they do. But they clearly need a plan that balances the benefits today of saving in tax-deferred accounts against the tax liabilities this creates for them in retirement. Yet most financial advisers and CPAs focus almost exclusively on minimizing taxes in the current year, without regard to the long-term consequences in retirement.
The solution to these issues typically requires implementation of a multifaceted strategy over many years. Some of the strategies I suggest with my clients include the following:
Saving for retirement is a good thing, but how you choose to save your money can be just as important as how much you save. Sometimes conventional wisdom can lead you astray.
Before last week, U.S. stocks had 7 straight weeks of losses.
The record is 8 weeks.
These aren't small losses either.
The S&P 500 is down ~20% from its peak in January. In other words, we're entering "bear market" territory.
You've been reading the headlines. You're likely concerned. And that's normal.
But here's something the headlines aren't telling you.
Since January 1st, 2020, the S&P 500 has returned +25%. If you were overweight growth, even more.
· A global pandemic
· The fastest 30% drop in stocks EVER (22 days)
· 8%+ inflation
· An overseas war
· Multiple interest rate hikes
...U.S. stocks have returned a positive 25%.
The S&P 500 is having its WORST START TO THE YEAR SINCE 1939.
But if you've been sitting on cash waiting for a "correction"...
...you're still buying at a higher price today than 2 years ago. 🤯
Investing is hard. It's also risky.
And that's precisely why the reward (over the long-term) is so great.
With all of the negative news flying around, this slightly longer-term perspective may give you some peace of mind.
As I write to my clients being surprised usually makes things worse. And last weeks Federal reserve meeting was a surprise, indicating that rates would not only go up a half point in May but even more aggressively through out the year. The market felt the blow!
As Seneca, the Roman philosopher, put it, "The unexpected blow lands most heavily."
Seneca endured a decade-long battle with tuberculosis (and two exiles by two different emperors!) because he imagined the worst so he could prepare himself for life's possibilities. In doing so, he engineered his own death, but very calmly it is said.
Vice Admiral James Stockdale survived the POW camps of Vietnam using the same mental exercise, imagine the worst.
Rockefeller turned economic chaos into the biggest business in the world by seeing times of fear as windows of opportunity. Seems Buffett has made a career of this.
There are countless others who have done the same.
What these individuals realized is that in times of significant stress, making rational decisions with a clear mind is the ultimate asset.
The only way to do that is to expect the unexpected and prepare ourselves accordingly.
Because without preparation, our natural reaction is panic.
And panic causes mistakes.
For those of you who have known me for a long time you know I'm optimistic about the future, always, even though anything can happen in the short term.
Today is no different.
Inflation may get worse. The war in Europe may escalate further. The Fed may raise rates too quickly.
Or it may be something totally ... unexpected.
We don't know, and can't know, what will happen next. But thankfully, we don't need to know.
As Howard Marks put it:
"I'm not going to try to control the future. I'm not going to know the future. I'm going to try to prepare for an uncertain future."
Preparing doesn’t mean we should attempt to eliminate all risk from our lives.
As alluring as that may seem, attempting to eliminate all risk is a risk in and of itself.
"…we encounter situations that call for us to assume a reasonable amount of risk to achieve our goals, and if we try to make ourselves 'bulletproof,' we may ultimately collapse under the weight of our gear."
~General Stanley McCrystal
As an example, avoiding risk in investments leads to low returns and a high chance of running out of money in when we need it, the risk has simply shifted from now until later.
As you can imagine, there's a sweet spot between being overly focused on risk and ignoring it completely, which is the land of preparation.
As a planner, my objective is to help you:
1. Prepare for the downside to mitigate surprise
2. Establish a "war chest" to fund near-term needs
3. Take a prudent amount of risk to achieve your specific goals
Having a plan that balances these possibilities is the only way I've found to stay sane during times of unquestionable uncertainty.
At some point, this will all pass and become a footnote in market history. But in the meantime, we will stay vigilant and as prepared as we can be for whatever comes next.
To your financial success.
A few weeks ago, the House overwhelmingly passed the Securing a Strong Retirement Act of 2022, or SECURE Act 2.0.
It seems likely that the Senate will pass their version of SECURE Act 2.0 as well.
Given its strong support and probability of passing in a similar form, I thought you might be interested in hearing what's inside.
Instead of summarizing all 142 pages, I'm sharing the 7 provisions that may impact retirement savers the most.
1.) The Age for Required Minimum Distributions (RMD) Would Change Again
The original SECURE Act from 2019 increased the RMD age from 70½ to 72.
This bill (Secure Act 2.0) would increase the age again, ultimately to age 75.
However, this increase will happen in phases.
As the bill stands, the RMD age would move to age 73 in 2023, then increase to age 74 in 2030, and finally rise to age 75 in 2033.
2.) RMD Penalties to Be Reduced
The steepest penalty that the IRS levies is for missed RMDs which currently stands at 50%.
Under SECURE Act 2.0, the penalty would be reduced to 25%. If the mistake is corrected in a "timely manner," it will be reduced further to 10%.
Given that they are making RMD ages more complicated, it seems reasonable to reduce the penalty.
3.) Catch-Up Contributions Increasing
Under current law, employees 50 and older who participate in their 401(k) or 403(b) plan can contribute an additional $6,500 beyond the standard $20,500.
This will remain the case except for workers ages 62 through 64.
For those investors, the catch-up amount would increase to $10,000 starting in 2024.
SIMPLE IRA catch-up contributions will increase from $3,000 to $5,000 during the same three-year age band, also starting in 2024.
Each of the catch-up provisions noted above will continue to be indexed to inflation. Additionally, for the first time, IRA catch-up contributions (currently $1,000 per person) will also be indexed for inflation.
But there is a significant change that would impact the taxability of employer plan catch-up contributions...
4.) Catch-Up Contributions Will be Subject to Roth Treatment
Here's the big change. All employer-plan catch-up contributions will be subject to Roth treatment.
In other words, the extra contribution amounts won't offer the tax savings we're accustomed to because the contributions will come from after-tax pay.
This provision is one way Congress is seeking to raise revenue to help offset the cost of this bill.
5.) Employer Matching Contributions Can Be Roth Contributions
Under current law, all employer matching contributions must be pre-tax regardless of the funding choice of the employee.
If this bill passes, participants may be given the choice to receive their matching contributions on a Roth basis starting in 2023.
If the employee chooses to do so, it will result in additional taxable income for the employee.
6.) SIMPLE & SEP Roth IRAs
At current, all plans that accept pre-tax employee contributions can accept Roth contributions except for SIMPLE and SEP IRAs.
This exclusion will be removed with SECURE Act 2.0, which is good news for many small business owners and their employees.
7.) The Creation of a "Retirement Savings Lost & Found"
There are many times where I've seen people "find" old 401(k) plans, but this often requires quite a bit of effort.
Under this law, the Department of Labor will create a new online database to help investors find old plans.
The database is supposed to be set up within two years after enactment.
While the bill addresses many other retirement issues, these are the major items.
As I said initially, this is not yet law.
If and when it goes into effect, I'll be sharing how to address the changes from a retirement & tax planning perspective.
To a successful retirement.
In my last blog post we discussed market performance and that to outperform the market you need to be able to underperform the market for some period of time. But we also said that most successful investors recognize that the best portfolio isn’t the one that has the potential to make the most money, but the one that they can stick with for the long term.
Of course, all investors are not astutely aware of their own risk tolerance, or the amount of risk being taken in the portfolio. In fact, often they will misjudge the amount of risk in their portfolio, and not realize the problem until it is too late. And it’s at the moment that the investor realizes that they were taking more risk than they were comfortable with, that they decide to bail out. Said another way, the key issue isn’t gaps between their portfolio and their risk tolerance, per se, but the gap between the perceived risk of their portfolio and risk tolerance. Again, it’s not merely “investing too aggressively” that’s the problem, the problem is that at the moment they realize that they are invested too aggressively, it triggers a behavioral (and often problematic) response. They bail!
So let’s imagine, dear Investor, that your portfolio is experiencing some volatility and the volatility leads you to believe you have made a bad investment decision. Even with an appropriate portfolio, you may misperceive the risk you are taking!
As an example, let’s imagine an investor who is extremely tolerant of risk. They are a successful serial entrepreneur, who has repeatedly taken calculated high risks, and profited from them. Their portfolio is (appropriate to their tolerance) invested 90% in equities.
But suddenly, a major market event occurs, like a war or a financial meltdown, akin to the 2008 financial crisis, and they become convinced that the whole financial system is going to collapse.
As a highly risk-tolerant investor, what would the appropriate action be if you were very tolerant of risk, but convinced the market was going to zero in a financial collapse? You’d sell all your stocks. Even as a highly risk tolerant investor.
But the key point again is that our investor’s risk tolerance isn’t changing in a bull or bear market. They remain highly tolerant of risk. The problem is that their perceptions are changing… and that it’s their misperception that a bear market decline means stocks are going to zero (not just declining before a recovery) that actually causes the “problem behavior”. Because it leads the investor to want to sell out of a portfolio that was appropriately aligned to their risk tolerance in the first place!
Many of us have these behavioral biases and managing them is key to investment success. The key point here is that whether we are conservative or aggressive we can have challenges staying the course in bull and bear markets, even if our risk tolerance remains stable. It comes down to our risk composure through market cycles. If our risk composure is low, we are more likely to misperceive risks – to the upside or the downside – and that could trigger potentially ill-timed buying and selling activity.
The bottom line, though, is simply to recognize and understand that in times of market volatility, what’s fluctuating is not risk tolerance itself but risk perception. The more you can figure out how your risk perceptions are misaligned with reality, or that you have low risk composure and are prone to such misperceptions the better you can identify that you might need help (via a financial advisor, or other interventions) to stay the course!
Nobody minds market volatility when it’s in the upward direction. But recently we’ve gotten plenty of the type of volatility that we don’t like so much as investors, the kind that inspires headlines with words like “plunge” and that end with exclamation points.
It presents an opportunity, therefore, to remind ourselves of one of the central tenets of the art and science of investing: You can’t get outperformance without underperformance.
Indeed, the only reason we have a right to expect a higher rate of return on any given investment is that we’re willing to endure greater risk, and, likely, higher volatility. But just how much volatility?
Let’s look at some of the scariest market moments of the past 50 years, specifically how far the market—in this case, the S&P 500—dropped over a handful of notable time periods:
But let’s be sure to put the word “only” in quotes—because if you saw your retirement nest egg of
$1 million come crashing down to $447,000, my guess is that you were more than a little stressed out. In fact, I think it’s fair to suggest that most investors with “real money” on the line simply couldn’t handle that type of drawdown. Most would bail out. Maybe you did.
That’s why the most successful investors recognize that the best portfolio isn’t the one that has the potential to make the most money, but the one they can stick with for the long term. The goal isn’t squeaking out another percentage point or two of return over your lifetime while white-knuckling your smartphone, sweating over your investing app of choice, every time the reality of investing returns to claim its risk toll.
Instead, consider acknowledging this reality—and your own personal willingness to endure risk. Then offset the growth engine of your portfolio—your exposure to stock—with the stabilizing agent of the most conservative, boring fixed income or bonds. Consider the following gut check test, the goal being to match your maximum tolerable loss with an appropriate maximum equity exposure: At what point will you not be able to sleep or wish to go completely to cash? 10% loss, 20% loss, 30% loss?
To use this simple guide most effectively, don’t try to imagine what a particular percentage loss would feel like; multiply the value of your investment portfolio today by the number on the left and use actual dollars. Even then, hypotheticals can be challenging, rarely drawing out the actual feelings we’re likely to endure in real life.
So if you were invested in any of the crises listed above, ask yourself the question, “How did it feel to lose ___% of my portfolio back then?”
And when in doubt, err on the side of conservatism, because we tend to feel the pain of loss twice as strongly as the joy of gain—and because it feels better to miss out on a little upside than to bail out on an overly aggressive portfolio after losing a lot.
The question most investors have is “Then how should I invest?” Should I own stocks? Bonds? And if both how much of each?
Stay tuned and we will discuss how to structure a portfolio, next week.
There is seldom a time during any year-end tax discussion that I am not answering the questions of “To Roth or not to Roth.” And this is understandable. The amount of confusion around this decision is remarkable. There are all kinds of myths revolving around the real value of using a Roth. (If you need a refresher, the Roth IRA is the retirement account from which contributions are after-tax and distributions are tax-free)
The decision of whether to go Roth boils down to three factors: 1) current versus future tax rates; 2) the impact of required minimum distributions; and 2) the true value of funding an account that is really all yours, versus one where Uncle Sam still has an interest in the form of future taxes.
In this decision, the most impactful factor by far is in comparing current and future tax rates. In comparing these rates, we should focus on marginal tax brackets, or the rates on the last dollars earned.
The most important question: what is the anticipated tax rate at the time of distribution? And how does it compare to the current rate on income? Will that rate be higher or lower? If the tax rate is lower when one retires (or even better, lower for the next generation), the clear winner is the pre-retirement account.
Conversely, great wealth destruction occurs when we get this wrong and save by paying higher rates today to accumulate in Roth accounts, and then defer taking that income at a time when our tax rates are lower.
Should tax rates remain the same, there is no advantage to saving in either type account. That’s because the net effect is the same after tax. A taxpayer who earns $10,000 and pays the tax at a 22% rate to save $7800 in their Roth will have $15,600 10 years later at a 7.2% earnings rate. That same taxpayer could save $10,000 in their pre-tax account, have $20,000 in 10 years, take their distribution at a 22% rate, and net effect is the same, they have $15,600.
Under today’s rules, there is one distinct advantage of a Roth IRA: they’re not subject to required minimum distributions (RMDs) while those RMDs are required in pre-tax savings accounts at age 72. This offers an advantage: the funds could stay in a tax deferred status longer. It’s even possible they can pass on to the next generation. This is a distinct advantage over an IRA that, over time, is forced to self-liquidate. And for larger IRAs, this self-liquidation can result in significant distributions and significant taxes.
But this advantage is not enjoyed by the beneficiaries of these accounts, those receiving the proceeds at the death of the account owner. In fact, beneficiary IRAs, both regular and Roth, must be liquidated, over a 10-year period. So, the benefit of avoiding RMDs is only an advantage while the owner is alive and only applies to IRA owners if they live past age72, otherwise the accounts to beneficiaries look the same, both pre-tax and Roth. So, the advantage of avoiding RMDs is only enjoyed by the owners.
Another factor that favors the Roth IRA is the interaction between the IRA contribution limits and the future tax liability of a pre-tax account. That is that the full value of the account contribution accrues to the account owner rather than having part be theirs and part an IOU to the IRS. So, for account owners trying to maximize their contributions to their accounts this can mean that their contributions are not being crowded out by future tax liabilities.
For example, imagine a client in the 22% tax bracket. If the client has $1,000 in an IRA, the reality is that the client has $780 in the IRA for themselves, and $220 in the IRA that's "on hold" for the IRS and the Federal government in the form of future taxes. If the IRA doubles to $2,000, then the client's share grows to $1,560 and the IRS's share grows to $440; the IRS still has 22% of the account earmarked.
In general, this isn't necessarily a "problem" as the future taxes still grow on the IRS' share before they have to be paid (that's the benefit of tax-deductible contributions). The goal is simply to pay the IRS its share whenever the tax rate is lowest, as noted earlier.
However, if the client wishes to make a maximum $6,000 contribution, now it's a problem. Because the client can't make a full $6,000 contribution; in practice, the client makes a $4,680 contribution for themselves and a $1,320 contribution on behalf of the IRS. On the other hand, if the client makes a Roth contribution, the entire $6,000 amount is held for the client, because the IRS' share is paid with outside investment dollars. So as long as the client intends to contribute the limit, it's better (all else being equal, especially tax rates) to contribute to a Roth and pay the taxes with outside dollars, than contribute to a traditional where the IRS' share crowds out some of the contribution limit, while tax-inefficient dollars are still growing on the side. Notably, the same effect applies for a Roth conversion where the tax liability is paid with outside dollars; just pretend that the current balance of the traditional IRA is effectively the "contribution limit" to a Roth.
Taxes play a big role both before retirement and after. One of the greatest expenses to us as savers, even in retirement, will be the taxes we pay.
Great wealth can be either created or destroyed regarding the decisions we make about when we choose to pay our taxes. Good forward-thinking planning can help us make the right choice.
Want to know more about how to navigate the Roth/non-Roth waters or charting other courses to retirement? Feel free to contact SJ Boyle Wealth Management by visiting our website or asking us a question.
You may have heard about The American Families Plan. It’s a major overhaul to our system in terms of infrastructure and social safety nets. It has been proposed as an “investment in the foundation of middle class prosperity education, health care and child care.” And the proposed price tag is in the trillions of dollars.
Alongside the agenda is proposed tax reform. In many ways, this reform is a reversal of many of the tax giveaways of the 2017 tax law. The hope is that the resulting revenue will pay for the American Families Plan’s investments.
The tax proposal will impact certain American Families. It will be raising their tax liabilities through increases in a) income, b) capital gain and c) transfer taxes. This post is the first in a series of three explaining each of those aspects.
The piece of the American Families Plan that has garnered most attention is the increase in tax rates of those earning more than $400,000. But these tax policies are very nuanced, and attention to the detail is worth the time and effort.
The most startling piece of the bill is the return to the ordinary income tax bracket. It goes back to 39.6% from 37%. And it does so at a significantly reduced income level of $400,000 for single and head of household, and $450,000 for joint filers.
The current 37% top ordinary income tax bracket kicked in for married taxpayers filing jointly at $628,300 taxable income in 2021. The proposed bill would impose the top ordinary income tax rate of 39.6% at “just” $450,000 of taxable income in 2022.
Similarly, the current 37% ordinary income tax bracket does not begin to impact single filers until they have more than $523,600 in 2021. But in 2022, the top rate of 39.6% would be applied to taxable income more than $400,000 for those same filers. To say it another way, the most impact for single filers with taxable income of over $400,000 and joint filers with taxable income of over $450,000 will be a tax rate increase from 35% to 39.6%. That’s a 4.6% increase on incomes from $400,000 to $523,000. Hitting this group the hardest will be the compression of tax brackets.
You might also note that the “marriage penalty” has increased. It allows only $50,000 of joint income over the single taxpayer. In other words, because of the way our tax system and tax brackets work, some married couples who each earn under $400,000 would be subject to a higher tax, as compared to their single counterparts earning the same amount. In this instance, being unmarried and single is better — for tax purposes anyway.
Let’s do the math, assume you have a couple (not married) each making $399,999. These taxpayers would not have reached the highest bracket for an unmarried individual. Each individual would be taxed at the 35% bracket. Using this year’s tax bracket for single filers, this results in approximately $132,989 in federal income taxes. (Or, a total of $265,978 combined for both individuals.)
If instead this couple decides to marry, they will now have a combined income of $799,998. That puts them in the highest tax bracket (39.6%) as married filing jointly. This translates to an estimated $284,412 in federal income tax, which is $18,434 more in taxes (or about 6.9%) than compared to a situation if they were single. The other option of married filing separately will yield the same result.
This will lead to all kinds of new scrutiny for some couples. I expect we’ll see a lot of tax planning around filing status and income threshold management. There will probably be detailed analyses and projections to evaluate the optimal filing status for married couples. They’ll be looking at where certain deductions, tax credits or planning opportunities would be more beneficial if applied to one spouse over the other.
In extreme cases, could this factor into one’s marital decision? In my financial planning circles, there’s been a lot of discussion about this, and about divorce. I don’t believe we should be making life decisions around taxes. But the reality is that taxes hit the bottom line, and that impact is real.
If you’d like to know more about how to navigate the coming changes with an updated wealth planning strategy, feel free to contact SJ Boyle Wealth Management by visiting our website or asking us a question.
Everyone has been on the edge of their seats.
And, after months of anticipation with a “two-track” process of infrastructure and separate tax legislation, it has happened: The American Families Plan is here. And few people saw what was coming.
Democrats on the House Ways and Means Committee defied expectations!
On September 13, 2021, they released their tax proposals. The legislation touches on a wide range of tax issues:
Over the next few weeks, I’ll be discussing the impact of this legislation on a variety of issues.
We’ll be looking at it all with an eye towards what’s most likely to pass. That way, you can consult and anticipate what you might do a) before year end, and b) over the next few years.
Right now, let’s look at what did happen and what could be happening.
Some of the rumored measures didn’t appear.
There are no measures related to equalizing the top ordinary income and capital gains rates. Nor is there anything related to eliminating the step-up in basis.
We could be losing several retirement plan strategies for high-income individuals.
The compression of tax brackets and increased tax rates are a big deal. But the most highly notable and widely effective piece would be the end of several retirement plan strategies.
Most remarkable among these relates to backdoor Roth IRAs and mega backdoor Roth IRA conversions. If enacted, Section 138311 of the proposal would prohibit conversions of after-tax dollars held in retirement accounts.
Limiting conversion of after-tax retirement plan contributions to Roth dollars began during the Obama administration.
Legislation proposed these conversions be banned. It also proposed adding required minimum distributions (RMDs) to Roth accounts. It proposed eliminating stretch IRA’s, which extend tax-deferred IRA benefits inherited by a non-spouse beneficiary. And, there was a proposal for preventing contributions to retirement accounts with balances over $3.4 million.
The Stretch IRA was eliminated in the 2019 SECURE Act.
Instead of the original lifetime schedule, beneficiaries must now complete distributions over a 10-year period. With that historical result in mind, it seems like the backdoor Roth is certainly on the chopping block by the end of 2021.
The remaining proposals provide some indication of what else could be on the chopping block, given the large ticket Infrastructure Bill going through Congress that requires a “revenue offset” to cover its cost.
If enacted, we need to take a fresh look at the convert-or-not decision for savers with after-tax dollars in retirement accounts.
The provision is not in its final form, but it looks like it’s going to be enacted. Many investors, particularly IRA owners, have been waiting for the optimal time to make a conversion. But the choice may soon be now or never, at least with respect to the after-tax dollars in their account.
And section 138311 goes beyond simply banning the conversion of after-tax amounts.
For high-income taxpayers with Adjusted Taxable Income in excess of an applicable threshold, the measure would prohibit Roth conversions altogether.
But this won’t happen right away. If it goes into effect, you may have until 2032 for this decision.
Nuances and obstacles abound.
We’re going to have a lot of strategic examination coming in the very near future. Stay tuned for more analysis of the new regulations and what they’ll mean for your retirement wealth planning.
If you’d like to know more about how to navigate the coming changes with an updated wealth planning strategy, feel free to contact SJ Boyle Wealth Management by visiting our website or asking us a question.
“How does a financial advisor work?” It’s such a simple question with no simple answer.
That’s because throughout the industry, advisor compensation varies.
And without knowing a financial advisor’s compensation model, it’s impossible to know how they benefit you and whether you want to work with them.
Some compensation models can have an impact on your overall return. Some advisors are “fee-only.” Some advisors are “fee-based.”
And what kinds of fees are there? They cover an entire range. There are:
For this relationship to work, you have to be comfortable and clear. Trusting your advisor is key. Your advisor helps you make critical financial decisions impacting important areas of your life. For this reason, it’s important that you feel fully comfortable with the cost of your advisor’s services, and be clear about how you are being charged.
Does your advisor earn commissions? What about a sales load when certain products are purchased? Are there trails in the mutual funds you are invested in?
What are the internal expenses of the funds you hold?
What if your advisor not commissioned, but fee-only? This changes the questions about the relationship. I’m a fee-only financial advisor, so I don’t receive compensation by recommending certain investments over others.
I’m also not associated with any broker dealer or firms that offer proprietary funds.
Nor do I accept commissions or compensation from sales loads.
It’s also important to note that I’m considered “independent.” That means I’m not required to sell the products of a particular firm or those favored by an employer.
This makes me a fiduciary, which comes with certain responsibilities. As you probably know, a fiduciary is someone who manages assets on behalf of another person with good faith and trust.
It requires abiding by a fiduciary duty, which is an ethical obligation to act solely in the best interest of the client.
Is there any downside to working with a fee-only financial advisor?
One downside is that we don’t sell insurance products, which are typically commission-based.
That said, I firmly believe insurance is part of a comprehensive plan. That’s why I maintain relationships with a handful of insurance firms that work exclusively with fee-only advisors. They recommend suitable insurance products, provide you a quote, and ultimately write the policy.
It’s important to note that fee-only advisors like mw do not get compensated for engaging in this process.
At the end of the day, my incentive is to deliver advice that’s in your best interest. Period.
That’s how I make my living, and it’s what keeps my clients coming back.
If you’d like to know more about working with SJ Boyle Wealth Management, feel free to visit our website or ask us a question.
Sally J Boyle
Sally Boyle is committed to being high-net worthy. A certified financial planner, she believes the single most important part of any wealth planning process is her conversation with you.