Displaying items by tag: retirement

The financial advice industry is going to go through major changes over the next decade due to demographics and an evolving culture. The average financial advisor is 65 years old and thinking about retirement and succession planning rather than growing their practice. For younger advisors, it presents a unique opportunity to advance their careers.

David Wood, the founder and chief visionary officer of Gateway Financial Partners, remarked that “There’s an overwhelming need for advisors to pick up some of these practices from retiring advisors.” Gateway Financial is a hybrid RIA with more than 170 advisors collectively managing $6.5 billion. Lately, the firm has been focusing on helping its independent advisors grow their practices through acquisitions. 

Wood believes that this is “the best time ever to be in the financial services space”. He believes that the demand for financial advice has never been higher, while a third of advisors will be retiring over the next decade, creating a vacuum for younger advisors. 

He also believes the culture is changing which will open up more opportunities for female advisors to thrive. Specifically, the industry is evolving from a focus on selling products to forming relationships and financial planning. Currently, women account for 30% of advisors, he expects that this number will increase over the next decade due these changes and the retirement wave of older, predominantly male advisors. 

Finsum: There are two major changes in the financial advice industry. One is that a third of advisors will retire over the next decade. The second is that the industry is evolving from selling products to building relationships and financial planning. Here’s why this is creating an opportunity for younger and female advisors.

Having a steady source of income during retirement is a universal goal. According to a new research paper from Wharton, investors should consider a deferred income annuity product in their retirement accounts as this has shown to improve welfare for all groups when accounting for sex and education level.

Optimally, Americans would wait until they turn 70 before starting to receive Social Security payments, as it would lead to the biggest monthly check. Yet, most don’t for various reasons including a need for additional income, not wanting to work till this advanced age, and failure to plan properly. 

One potential solution is a deferred income annuity which would allow prospective retirees to bridge the gap and create extra income in their 60s. This would increase the chances that they would be able to not claim benefits till age 70 and maximize income from Social Security. 

These findings are especially relevant following the passage of the SECURE 2.0 Act in December 2022 which was created so employers would offer some sort of lifetime income payment option in 401(k) plans. The paper adds that options should also include a variable deferred income annuity with equity exposure in addition to fixed annuities. 

Finsum: Ideally, retirees would be able to put off receiving Social Security payments until they are 70. One way to increase the odds of this are to include annuities in retirement plans to create income during interim years. 

Retirees have many options when it comes to generating income from their portfolios. Each approach comes with its own tradeoffs in terms of yields, risk, and liquidity. In recent years, fixed indexed annuities have become increasingly popular as they generate higher returns than traditional investments, while offering protection during periods of poor market performance.

Fixed indexed annuities are issued by insurance companies. It provides a guaranteed return while also earning additional interest based on the performance of a specific index such as the S&P 500. Like most annuities, they also allow for tax-free compounding. 

One of the major advantages of a fixed indexed annuity is that it reduces the downside risk of a decline in markets which can be more damaging to retirees. Research shows that these products deliver strong returns over long periods of time, although they do underperform during booms. 

If an investors’ goals are to generate more income while reducing the overall risk in the portfolio, then a fixed indexed annuity is a prudent option. When determining whether a fixed indexed annuity is the right choice, a major factor is what it will be replacing in the portfolio. 

Finsum: A fixed indexed annuity can help investors generate more income from their portfolios while also reducing risk. Downsides are less liquidity and underperformance during periods of strong market performance. 

When it comes to investing for retirement, most think of IRAs and 401(k)s due to the unique tax advantages. However, there is a tradeoff as these accounts tend to be less flexible. According to Christine Benz, Morningstar’s director of personal finance and retirement planning, there are some upsides to investing for retirement in taxable accounts.

These advantages include the ability to save and invest as much money as available, withdraw funds with no penalty or limitations, and no constraints on investment choices. Using taxable accounts for retirement investing is also necessary for ‘super-savers’ who have maxed out contributions to tax-advantaged retirement accounts. 

Benz notes that with the right selection of investments, the taxable account can become as tax efficient as an IRA or 401(k). Additionally, it can help with financial goals of a short or intermediate nature like a down payment for a house, a remodeling project, or a vacation home. 

She notes that model portfolios are well-suited for tax-efficient investing in taxable accounts. She recommends structuring these model portfolios into 3 components. One is a liquidity basket for short-term spending needs, a high-quality municipal bond fund basket that is geared for withdrawals between 5 to 8 years, and the rest invested in a globally diversified basket of equities. 

Finsum: For retirement investing, there is still a place for taxable accounts especially for specific purposes. Here’s how to use model portfolios to achieve these goals.  

According to a report released this month by the Investment Company Institute, only 2.5% of defined contribution plan participants stopped contributing to their plans last year. This suggests that despite market volatility, Americans are still exhibiting disciplined savings habits. The report, titled “Defined Contribution Plan Participants’ Activities, 2022,” examined participant-directed changes in DC plans by tracking activity through recordkeeper surveys and comparing it to data going back to 2008. Based on the results, DC plan participants remained committed to making contributions like they had in previous years. For instance, only 2.2% of participants stopped contributing in 2021, 2.3% in 2020, 2.3% in 2019, and 3.4% in 2009. In fact, the withdrawal activity of defined contribution plan participants was 4.1% in 2022, the same as in 2021. In prior years, the percentage of plan participants who took withdrawals was 3.8% in 2020, 3.9% in 2019, and 3.1% in 2009. While levels of hardship withdrawal activity increased slightly last year, they were still low in absolute terms. This indicated that despite a challenging market environment, Americans are set on protecting their retirement savings, which was the conclusion of the ICI report.

Finsum:According to the results of a recent ICI report, only 2.5% of defined contribution plan participants stopped contributing to their plans last year despite a challenging market environment.