Why You Don’t Want a Big Tax Refund

The world of financial planning is so incredibly diverse. And so it is with financial professionals, as well. The challenge that most people have is that by not being familiar with the various types of advisors; styles, approaches, licenses, abilities, qualifications, etc., it makes it hard to know what questions to ask in order to formulate an opinion as to whom to work with. People tend to go with their “gut feelings” about someone. And while that certainly can be an indicator as to what kind of working relationship one might have with a particular financial professional, it is equally, if not more, important to have objective information at hand for that decision-making time, as well.

There are a few questions that advisors rarely get asked, but should be asked. Sometimes these questions get avoided because the person asking might not even realize these questions are important. Past experiences drive many of the questions people ask. But if the goal is to be as informed as possible, it’s important not to forget to ask these three questions:

Question #1: Are you a fiduciary? And how do you get paid?

Not all financial professionals are fiduciaries. There are various types of securities registrations a financial professional can acquire; some are simply registrations to sell certain products, some are registrations to give advice (as opposed to just suitable recommendations for product sales). In other words, some financial professionals are “Registered Representatives (RR)” who are affiliated with a broker/dealer, with some securities registrations that allow them to sell products. While some financial professionals are “Investment Advisor Representatives (IAR)” who are affiliated with a Registered Investment Advisory firm, who have a few more/different registrations that allow them to be fiduciaries within the advisory services they offer their clients. Some professionals are both a Registered Representative and an Investment Advisor Representative. Others are not. Many consumers don’t know the differences. Below is a very basic breakdown.

Responsibilities to Client:

IARs – Fiduciaries. Are legally bound to do what is in the best interest of their clients…above all else.

RRs – Are responsible for making sure the products they sell to their clients are suitable.

Primary Responsibility/Function:

IARs – Primary responsibility is as an advisor to their clients

RRs – Sell securities and handle sales transactions for their clients

Compensation:

IARs – Generally charge a flat % fee for advice surrounding assets under management (AUM)

RRs – Tend to be commission based. They get paid commissions for products they sell.

Compliance and Regulations:

IARs – Are associated with Registered Investment Advisory (RIA) firms that are regulated by the SEC and/or state regulatory agencies.

RRs – Are regulated by FINRA (Financial Industry Regulatory Authority), along with the SEC and other state regulatory agencies.

Question #2: What is your particular expertise?

Not all financial professionals have niche markets….or only specific types of clients that they work with. But it’s important to know if they do. Understanding what kind of experience and typical clients the advisor has is important to understanding what to expect from them in regards to knowledge and experience that is relatable. Knowing what kind of team they have, and what kind of experience the team as a whole has is important. What do they specialize in? What resources do they have access to?

Here are some examples:

Tax efficiency with investments

Protection Planning – Estate planning collaboration

Small business owners

Multi-generational planning

Etc.

Question #3: What is your ongoing service model?

Taking the initial steps to get things organized and onboard with a financial advisor can be activity-filled and very important. But equally important is the clear communication about expectations for moving forward. Understanding what to expect between the advisor and client is critical to insuring that communication and expectations are being managed positively for the relationship, from both sides.

How often does the advisor reach out to clients?

Is there a team to support clients? Or just one individual?

What can be expected in regards to calls? Meetings? Paperwork? Statements?

What method of communication is used? Phone calls, meetings, email, video conferencing, etc.?

How accessible is the advisor if the client has a question?

These are just a few questions that might prove important to ask when interviewing financial professionals. There is no generic right or wrong answer. At the end of the day, it’s all about understanding what the relationship would be, the expectations for the relationship for both the client and the advisor, and communication. Being logical with interviewing an advisor is critical…look for proof and conviction between what they say they do vs. what they can prove they do.

Our financial well-being is critical for empowering our lives….we work hard for the life we want. And there are almost always some form of financial element to all we do. So please, don’t be afraid to ask the intrusive questions of the advisors you are considering working with. It could mean a great deal to how life gets funded….now and through all ages.

Created during the Great Depression as a retirement safety net, Social Security now covers an estimated 96% of Americans. These days, a record high of around 167 million people are working and paying into the system that provides benefits for over 63 million people. In fact, the majority of retirees get more than half of their income from Social Security. Security can be complicated to navigate at times, but since it’s so vital to your retirement income plan, it’s important to make wise decisions and create strategies first.

Delay Benefits

Social Security benefits are calculated using complex actuarial equations based on life expectancy and estimated rates of return. Deciding the best time for you to claim your benefits depends upon how you compare to the averages. As of today, a man turning 65 is expected to live until age 84.3 and a woman of 65 until age 86.6.

If based on your health and your family history of longevity, you believe you will live much longer than that, your overall lifetime benefit will be greater if you delay claiming your benefits to increase your benefit amount. If the opposite is true and you see little chance of making it into your mid 80’s, you would receive a greater lifetime benefit by taking it sooner, even though it is a smaller monthly payment.

Several helpful calculators are available on the Social Security Administration website. With the Retirement Estimator at www.socialsecurity.gov/estimator, most people can receive an estimate of their benefit based on their actual earnings record and manipulate the numbers to reflect different strategies. They also have Social Security Benefits Calculators that can be used to calculate future retirement benefits.

Research Investment Opportunities?

While it will differ for everyone, research from Fidelity shows that most people need to replace between 55% and 80% of their pre-retirement, pre-tax income after they stop If you are in a position where you will not be reliant on Social Security to cover your basic needs in retirement, you may be better off claiming early and investing your benefit amount in an effort to earn better rates of return. In this way, although you’d start with a smaller monthly payment, you may end up with more money than if you had waited to receive the Social Security Administration’s increased payment due to the growth from your investments.

Which Coordinate with Your Spouse

If you are married, you have the choice to receive your own benefit or a spousal benefit of50% of your spouse’s benefit. By coordinating properly, married couples can increase their total monthly benefits.

The Society of Actuaries recommends that the lower-earning spouse begins collecting benefits early while the higher-earning spouse waits as long as possible. That way, you can make use of the lower benefit while maximizing the higher benefit. In most situations, it is the husband with the greater benefit and the wife with the lower one. Women also tend to live longer than men. By following this strategy, you not only maximize the husband’s retirement benefit for use while he is alive, but it also maximizes the wife’s survivor benefit when he passes away.

Consider the Effect of Additional Income on YourBenefitsSubmit

Once you reach full retirement age (FRA), having earned income will have no effect on yourSocial Security benefit payments. However, if you begin receiving benefit payments before FRA, your earnings will decrease your payments.

Income Earned the Year You Reach FRA

The income restrictions change in the year in which you reach FRA. That year there is a higher limit; $45,360 for 2018. Once your income exceeds that limit, your Social Security benefit will be reduced by $1 for every $3 you earn. For example, if between January 1 and your birthday you earn $48,360, you have earned $3,000 more than the limit. That $3,000 excess will reduce your Social Security payments by $1,000. As soon as you have your birthday and reach FRA, though, there are no more limits. You can earn as much as you want and it has no effect on your Social Security retirement benefits.

Continuing to work into retirement may be beneficial even if your current benefits are reduced. If your income is within the top 35 years of your earnings, you will increase your aim, which is the average used to calculate your benefit. By continuing to pay into SocialSecurity as a worker, you can increase your retirement benefit even after you have begun collecting it.

Work with an Experienced Professional

A 2015 Voya Retire Ready Study found that those who consult a financial professional are more than twice as likely to have calculated how much income they need to live a rich life in retirement. Working with an experienced professional can help you navigate your SocialSecurity options and optimize your total lifetime benefit. If you have any questions or would like to see how Social Security will impact your retirement plan, I am here to help. Take the first step by reaching out to me for a complimentary consultation by calling (949) 221-8105 x 2128 or emailing michael.loo@trilogyfs.com.