Archives for April 2021

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Investing Blog Roundup: Morningstar Podcast Guest

Christine Benz and Jeff Ptak of Morningstar recently hosted me as a guest on their podcast, The Long View. We discussed a range of topics, from Social Security planning, to tax planning, to asset allocation. You can listen at the link below. I hope you enjoy it.

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A Basic Financial Planning Checklist

A realization that has only very slowly occurred to me, over 15 years in the world of financial planning, is that the most common financial planning mistake that I see people make is not so much a particular bad decision, but rather completely ignoring certain parts of financial planning.

In many cases, that shows up in the form of focusing too much on the investing part of the picture, while having some other critical financial planning need that is going unaddressed.

And that’s not terribly surprising. Investing involves thinking about upside — how your assets will grow (and how they could grow, if you make a high-risk bet and get lucky). That can be fun.

In contrast, many critical financial planning tasks involve thinking about downside. (What if you become disabled or die earlier than anticipated?) That’s less fun.

In addition, a lot of critical financial planning tasks look suspiciously like work.

What follows is just a brief checklist of financial planning topics, all of which should probably be addressed before spending much time thinking about exactly what is the correct allocation to international bonds or whether index funds are preferable to ETFs.

Insurance planning:

  • Do you have health insurance? (And if it’s open enrollment season, have you checked to see whether there’s a different plan that might be a better fit for your household?)
  • If anybody is financially dependent upon you, do you have sufficient life insurance? (Alternatively, have you canceled any coverage that is no longer necessary?)
  • If you are still working, do you have sufficient disability insurance? (And does the policy check all the necessary boxes? For instance, is it “own occupation” if such is important in your case?)
  • Do you have sufficient homeowners/renters insurance?
  • Do you have sufficient liability coverage on your auto policy?
  • Do you have an umbrella policy?

Cash flow planning:

  • Do you know how much you spend each month (or over the course of a year)?
  • Do you have a sufficient emergency fund? (Of note: a retirement portfolio can often serve as an emergency fund, once it is of sufficient size.)
  • Are you saving enough each month to meet your goals? (Or if retired, are you confident that the amount you are spending per year is sustainable?)

Estate planning:

  • Have you checked the beneficiaries (including contingent beneficiaries) of your retirement accounts and life insurance policies recently?
  • Do you have a will in place?
  • Do you have a durable power of attorney for finances?
  • Do you have a healthcare power of attorney?
  • When was the last time the above documents were updated?
  • Have you considered whether a trust of any sort would help you to achieve any postmortem goals for your assets?

Tax planning:

  • Are you confident that you are contributing to (or withdrawing from) the right types of accounts each year? (For example, should you be making Roth contributions instead of tax-deferred contributions?)
  • Have you considered whether Roth conversions would be useful now or in the near-term future? (Most often, this is helpful during years of retirement prior to RMDs and prior to Social Security.)
  • Do you know whether you are in or near the phaseout ranges (or other thresholds) for any tax credits or other significant tax provisions?

Basic investment planning:

  • Is your portfolio reasonably diversified, as opposed to having a large portion allocated to one stock (e.g., an employer or former employer)?
  • Is the basic allocation (i.e., the stock/fixed-income allocation) roughly appropriate for your risk tolerance?
  • Are you using funds with reasonably low expense ratios?

Basic retirement planning:

  • Do you have a plan for when you intend to retire? (And have you thought through the potential ramifications of being forced into retirement somewhat earlier than the intended date, due to illness, job loss, etc.?)
  • If nearing age 62 (or 60 if you’re a widow/widower), do you have a plan for when you will claim Social Security benefits?

In my opinion, most people should just be using a very simple portfolio (e.g., a basic three-fund portfolio or even a simple all-in-one fund if the portfolio is entirely in retirement accounts) until they’ve taken care of the above items. Using a basic portfolio frees up time and mental energy to focus on other things that matter quite a bit more.

And even for people who have taken care of these other financial planning to-do items, there’s still no need to spend time thinking about particularly advanced asset allocation questions. In nearly all cases, it’s perfectly fine to stick with the three-fund portfolio (or, again, a low-cost all-in-one fund if your portfolio does not include taxable accounts).

To be clear, the above list is not absolutely-super-duper-all-inclusive. For some people there will be additional points in one category or another that should be addressed. Also, the order of priority will vary from one person to another. For example, if you’re unmarried and have no kids, estate planning would be a lower priority than it would be for somebody with children. And estate planning would be an especially high priority for a married couple who each have children from a prior marriage.

Investing Blog Roundup: Tracking Roth IRA Basis — Save Your Form 5498!

Recently I’ve received emails from a few different readers on the topic of tracking basis in a Roth IRA. That is, with a Roth IRA, you can remove contributions tax-free and penalty-free at any time, but how do you know (and how can you prove to the IRS) how much you have contributed over the years?

The easiest answer is to keep the Form 5498 that the brokerage firm sends you every year. It reports all the contributions and conversions for the year in question.

Recommended Reading

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Does a 401(k) Rollover Count as a Pension for the Social Security Windfall Elimination Provision (WEP)?

A reader wrote in recently with the following story/question:

For the last several years of my wife’s work before retiring, she had worked for a government agency and no SS had been collected. However, she did have a 401(k) which she contributed to. I knew that she fell under the WEP/GPO provisions.

Subsequent to my wife retiring but before she applied for SS, we rolled her account into an IRA. Two different representatives from SSA told me that if we had not rolled it over, we would NOT have been subject to the WEP. We were allowed by my wife’s plan to keep our funds there and they actually had some very good investment choices. If I had known that and if it was true, I would never have moved the account. And if I understand correctly, the WEP would not come into play and we could have had a considerably higher benefit over the years until we had started to use it.

I had read that the WEP only comes into play when you receive a pension or a lump-sum retirement distribution from a job that was not covered by Social Security. I had taken “distribution” to mean cashing out the 401(k), not rolling it over into an IRA, but I am guessing from what the SSA is saying, that is not the case.

If we had known that we could “let it ride” in the 401(k) and delaying being subject to the WEP, I would have jumped at the chance. This would seem to be another way to significantly increase your benefit if you were in the right circumstances.

So I would appreciate your view of this. I am assuming I can’t do anything for myself, but hopefully for others.

The SSA employees are correct that a rollover does count as a payment/withdrawal from the plan. Therefore, if:

  1. The plan itself counts as a pension, and
  2. The payment counts as a pension payment from that plan…

…then the rollover would trigger the WEP.

And, you are correct that in some cases the effect of the WEP can be delayed as a result of delaying a rollover (and also delaying any other payments, including payments from a defined benefit plan, if any).

So those are the two questions we have to answer:

  1. Does the plan count as a pension at all?
  2. Does this particular payment count as a pension payment? (Sometimes the plan can count as a pension, but this individual payment does not count.)

Does the Plan Count as a Pension?

To determine whether the plan counts as a pension for the sake of triggering the windfall elimination provision, we first have to know whether the worker paid Social Security tax at the job in question. If so, then the plan will not trigger the WEP.

If the worker did not pay Social Security tax (i.e., the job was “noncovered employment”), then we need to know whether the plan includes employer contributions. If it does, then it’s a pension. If it does not include employer contributions, then it’s only a pension if it is the primary retirement plan.

Does the Payment Count as a Pension Payment?

A withdrawal of the employee’s contributions + interest will not count as a pension payment if the employee is not yet eligible to receive a pension and the employee forfeits all rights to the pension.

If the employee is already eligible for the pension, any payment from the plan will count as a pension. Or, if the payment included any amounts that were employer contributions, the payment will count as a pension — regardless of whether the employee is eligible to receive a pension.

What does it mean to be “eligible” for a pension? An individual becomes eligible for a pension the first month he or she meets all requirements for payment except stopping work and applying for the payment. The pension-paying agency, not the SSA, determines pension eligibility and entitlement.

So just to summarize/reiterate the key points here: in some cases a distribution (including a rollover) from a defined contribution plan such as a 401(k) can trigger the windfall elimination provision. And in such cases, delaying taking any distributions (including rollovers) might allow you to delay applicability of the WEP, thereby allowing you to receive a larger Social Security benefit for a period of time.

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Investing Blog Roundup: “Cookie Cutter Retirement Plan” Presentation

As I mentioned a couple of weeks ago, I recently gave a presentation for the Detroit and Minnesota Bogleheads groups about the “Cookie-Cutter Retirement Plan” concept.

Here is the link to the Zoom recording.

The organizer accidentally forgot to start recording until a few minutes into the presentation. (She had a lot going on, as she was also in charge of admitting people into the meeting from the waiting room, as well as administering a poll regarding the makeup of the audience.) But none of the important information was cut off.

Essentially all you miss is me explaining that I hope you can use the material either as:

  1. A sort of rough-draft plan for your own retirement planning — with adjustments then made as needed based on your personal circumstances, or
  2. As material to draw from whenever friends or family ask for input about any of the topics covered.

Other Recommended Reading

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