INSIGHT ON: Personal Financial Planning – Rest assured

Posted on Jan 1, 2014 :: Insight On , Pesonal Financial Planning
Posted by , Insight on Business Staff Writer


Financial planners are not miracle workers. For a 62-year-old client who wants to retire for health reasons but has only $10,000 in savings, they can’t do a lot. Nor can they predict whether this bull market in U.S. stocks will continue to run for another six months, for a year or turn out to be a bubble.

What most can offer is better sleep.

With the turmoil in the market, people want to know if they are on track and if they can retire when they want to, says Andrew Hermsen at Navigator Planning Group in Green Bay. Not much is changing in taxation for 2014, except for a medical surtax on higher incomes, he says.

Is the market in a bubble?

“We don’t have a crystal ball here. I tell people we don’t make predictions. What people should do is master the things they can control – have the best asset allocation, the best diversification, and pay the lowest costs in fees on their investments,” Hermsen says.

Grace Rossman, a financial associate at Thrivent Financial for Lutherans based in Sturgeon Bay, is accustomed to counseling couples facing retirement issues. They’d like to retire, but can they afford to?

“By the time some people come to my office with those questions they have spent sleepless nights.” Rossman says. “You can use a planner to cut through the rubble and the weeds, give you an objective look at the numbers and talk about the situation impartially. Financial planning is about finance, but it also is a lot about emotion. A good planner understands the family well enough that they can have that conversation, including big, gnarly issues.”

Hermsen asks clients to rate their ability to handle risk on a scale from 1 to 10. In general, men have a higher risk appetite – around 7 is not unusual – while most women are below 5. But he did recently talk to a woman who plans to retire in a few months. She rated her risk tolerance at 3 and was 70 percent invested in equities.

“People sometimes don’t know how much risk they have in their portfolios,” Hermsen says.

Planners advise individuals to move some assets to less volatile investments than stocks as they approach retirement. The recommended ratios vary by firm and have been moving to include a higher percentage of stocks to catch market growth and provide protection against inflation.

A good planner will ask clients a lot of questions about themselves, their dreams and feelings, Rossman says.

“If they seem to have a strategy without knowing anything about you, that is an issue and it comes up a lot with clients who are bouncing from a broker relationship or a property and casualty insurance office.”

Individuals can also waste a lot of money with lawyers who claim to offer financial planning, she says.

“We get clients who have been to an attorney and paid $5,000 for a revocable trust when all they needed was a simple will.”

She also sees individuals who have done all their financial planning online, “and they had no idea there was this whole plan and strategy for their entire lifetime that they could be doing.”

Norbert West, a financial planner in Appleton who specializes in serving small business owners and their employees, thinks people are nervous about the economy and their jobs. He tells clients about the important age steps for making increased IRA investments (59), taking early, reduce retirement from Social Security (62), Medicare (65), full Social Security benefits (67) and a requirement to draw down retirement funds at 701/2.

“A good financial planner is always looking at not only how you accumulate but also making sure when you pull it out you are not bumping yourself into a new tax bracket,” West says.

Hermsen notes that since most people will earn more while working than they will have in retirement, it makes sense to take a standard IRA deduction rather than pay into a Roth IRA, which offers no immediate tax break, but whose earnings are untaxed when withdrawn.


Unexpected early retirement

West has seen formerly paternal companies in the Fox Valley lay off employees around age 55.

“What do you live on if you lose your job? You could eat up your company retirement fund before you are 60, and pay a lot of it in fees, taxes and penalties.”

Like Rossman, he believes every plan has to be customized to the individual. “There are similarities, but everybody is unique. If they are in a poor position with inappropriate investments, I tell them to take their time in correcting it so they can avoid fees and taxes.”

He finds small business owners often have risky portfolios, which he tries to correct.

“Their business is already high risk.”

Tax Changes

Andrew Hermsen says for the most part, only high-income filers will see tax changes in 2014. According to Broadridge, a global provider of investor information to financial firms, the rates go up for individuals reporting more than $400,000 as individuals or $450,000 when filing jointly; they also pay 20 percent, rather than 15 percent, on long-term capital gains.

While tax planners often advise high income filers to push deductions into the next year, that isn’t the advice this year. Broadridge says that individuals with adjusted gross income of $250,000 (or $300,000 for married couples filing jointly) could be subject to some dependency exemptions and limits on itemized deductions, so it makes sense to take them this year. Higher income brackets will also be subject to some additional Medicare taxes and will pay more tax on investment income.