Michael Morrow | Financial Planner

Wealth Management Blog

Tag: wealth management

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Business Strategy: Transferring Risk

Whether you are an independent investor or are overseeing the investment portfolio of a company, risk will always be a factor that you will be faced with.

According to its definition, risk involves the chance of an investment’s actual return will differ from its expected return. In other words, risk includes the possibility of losing some — or even all — of the original investment.

It is important to note that investment risks come in many shapes and sizes, with some of the most common being as follows:

Inflationary risk: Also known as purchasing power risk, inflationary risk is the chance that inflation will undermine the performance of one’s investments. Ultimately, this form of risk has a direct impact on one’s real return.

Market risk: Also known as systematic risk, market risk is inherent to the entire system, as its severity is entirely dependent on the natural fluctuations of the market itself. The factors that impact market risk cannot be mitigated nor predicted.

Political risk: Another somewhat unpredictable trend, political risk is defined as the risk an investment’s returns could be thwarted as a result of political changes and instability, as well as the possibility of nationalization.

Although it seems as though these risks are inevitable and impossible to combat, there is a rather successful method of not only protecting one’s current investments, but one’s livelihood as well.

Similar to how one would insure their home or car in the event of a disaster or accident, one can self-insure their investments as well. This is known as transferring risk, or employing risk management strategies.

Transferring risk occurs when an investor purchases low-risk investment vehicles — such as indexed annuities or indexed life insurance policies — to ensure they are able to remain in the market while protecting a percentage of their portfolio in case a market correction or downturn arises.

This is often the wisest course of action, as it places the risk of a market downturn on a third party that is both trusted and well-equipped to do so. By placing your assets in their care,  accountability will be lifted from your shoulders and you will be more resistant to losing a sizable amount of your investments and retirement funds.

If this method sounds as though it would be beneficial to you and your financial future — as it should — it is recommended that you speak to your financial advisor as soon as possible. After all, the sooner you are insured against an economic disaster, the better.

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The Best Annuities for Retirement

When it comes to planning for retirement, one can never be too diligent. After all, failing to plan for a secure financial future is equivalent to planning to fail. Therefore, one should familiarize themselves with the various financial tools available in order to optimize their savings as much as possible before retirement.

One of the best means to achieving this seemingly insurmountable feat is investing in an annuity. Regardless of the various misconceptions surrounding this investment tool, annuities are one of the few methods that will provide a regular infusion of cash with little to no additional fees.

With that in mind, let us delve deeper into the topic and discover the best annuities for retirement:

Immediate annuity

As you approach the end of your time in the workforce, you hopefully have a decent amount of money stowed away in your savings or in other investment accounts. It is at this time that you should consider withdrawing that money and investing in an immediate annuity, which would not only guarantee you an instant retirement income, but some peace of mind as well.

This form of annuity is rather straightforward. All the account owner must do is put down a lump sum in exchange for monthly checks that incur little to no fees. Of course, the worth of said checks is entirely dependent on how much the lump sum is. However, this payment in conjunction with any Social Security or pension plans, could be an excellent way of ensuring you will retire comfortably.

Deferred annuity

Also known as a longevity annuity, this method is excellent for older workers whose current savings may not carry them through the rest of their days. Therefore, payments to the owner of the account do not begin until they have reached a set age — which is typically around 80 years old — thus giving the money an opportunity to grow.

Alternatively, this account can be established by young workers who have already earned a considerable amount of money and do not intend to retire for some time. However, the only downside is that this money no longer grows with the owner of the account. Additionally, said owner will have to pay a larger sum of money to open such an account so early, along with any fees that may come with the account itself.

Regardless of which form of annuity one decides to purchase — or when they choose to purchase it — they should always meet with a certified financial planner first. After all, it is much better to be safe than sorry, especially in regards to one’s life savings.

5 Reasons for Life Insurance

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Despite popular belief, life insurance policies do not serve a singular purpose. While they are primarily used to provide vital funds to families whose loved ones have passed away, these policies can also serve as an excellent addition to a personal financial portfolio, collateral for a personal or business loan, and so on.

Here are five reasons you should consider opening a life insurance policy as soon as possible:

They are guaranteed to grow. Similar to a traditional IRA, a life insurance policy’s cash value is guaranteed to grow on a tax-deferred basis and never decrease in value, no matter how dismal the economy may appear. This is because the growth of a policy’s cash value is dependent on the payments the owner makes. Therefore, a life insurance policy is an investment that can act as a safety net for your financial security.

They can be leveraged to meet greater financial goals. If you are hoping to start your own business or even foresee some financial trouble later on in life, a life insurance policy can be used to cushion the blow of — or entirely cover — either expense.

There are some stipulations to this process, however. While you may borrow against your policy without entirely cashing it in, you are held responsible for repaying that amount before the end of your lifetime. If that requirement is not met, the overall value of your policy will be decreased, leaving your family with fewer financial benefits in the event of your death.

They can aid you in paying for college tuition. Borrowing against your life insurance policy is also an excellent option for financing your child’s college education. Similar to traditional federal and private loans, you will be required to pay interest on the amount of money you borrowed. If interest goes unpaid, you run the risk of compounding your loan — or paying interest on your accrued interest. Therefore, you should ensure that you are financially secure enough to handle such payments prior to making a decision.

They are an investment, not an expense. Although starting a life insurance policy may certainly sound like an expense, seeing as you are required to make monthly payments to keep the policy, the overall benefits greatly outweigh the costs — which, frankly, may not be that high to begin with, depending on one’s coverage, provider, and physical health.

The sooner you buy, the more insurable you will be. One of the last things the majority of young individuals want to think about — let alone discuss — is preparing for anything related to the end of life. However, purchasing a life insurance policy does not need to be viewed as morbid, but as a safety net that could greatly benefit its owner in the future.

With that in mind, it would be wise of more people to purchase life insurance policies as soon as they are financially able, as they would not only have a higher likelihood of being approved, but would have the ability to lock in lower premium rates as well. This also gives them great flexibility if they decide to expand their coverage to a spouse or invest in additional benefits down the line.

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Preparing for Retirement

Saving enough money for your retirement is one of the most important things you can do for your financial future. Unfortunately, many Americans do not save enough money to support themselves during their golden years. Not only that, but a lot of people also make the mistake of leaving too much money on the table when they retire because they don’t know how to coordinate the retirement process. With the right retirement strategy, you can maximize your savings and live comfortably during retirement. Keep reading to learn more.

Social Security

There are three pillars to a successful retirement strategy: Social Security, pensions, and assets that supplement the first two pillars. In total there are 567 different ways that a married couple can claim their social security benefits. For example, if your spouse is older than you are then she might claim her social security benefits at a different time than you. On the other hand, you might choose to claim benefits during the same year even if you aren’t the same age. It all depends on your particular situation, and you should take the time to think through different scenarios before claiming your benefits.

Pensions

If you have a pension, you will have to factor in how that money will affect your retirement. Some people mistakenly think that all they need to retire is their pension plan. However, even if you have a good pension plan, you could leave money on the table if you don’t consider all of your available options. To learn more about what a pension is, take a look at this article. It does a good job of answering the most popular pension questions.

Assets

During retirement, you should take advantage of assets that are appropriate for your situation. Having access to different assets will help you avoid sequence of return risk. This article I wrote in April outlines what sequence of return risk is and how you can avoid it. It’s important to avoid excessive risk during retirement. The Rule of 100 is a good rule of thumb to use. If you are 65 years old, then you should only 35 percent of your investments should be risky. The rest of your investments should be safe assets. It’s not always easy to find safe investments on your own, though, which is why you should look into using the services of a money manager. If you want to learn more about choosing a money manager, I encourage to read this post I wrote.

When it comes to securing a healthy financial situation for your retirement, there are many different factors to consider. The above paragraphs are only three pieces of the puzzle. Take the time to think carefully about your retirement strategy and reach out to a money manager who can assist you with crafting a strategy.

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Tips for Choosing a Money Manager

Preparing for retirement on your own can be difficult. Even if you’re confident in your financial IQ, there’s a possibility that you could overlook some of the possible ways to secure more money for your retirement. One of the most difficult parts of retirement is selecting assets that are safe. It’s not enough to just employ a buy and hold strategy during retirement. If the market experiences a downturn you might have a difficult time recovering. A skilled market manager can help you navigate the pitfalls of selecting the right investments for your situation. Below are some guidelines on selecting a money manager to help you make retirement decisions.

Track Record

A money manager’s track record may be the most important factor you need to consider before you work with him or her. In general, the Great Recession hurt just about everyone. However, some money managers did better than others as a result of their managing skills. You want to make sure that you select a money manager who successfully navigated through the Great Recession. A money manager should be able to tell you how much money they started with and how much that money has grown over the years. If they are unable or unwilling to provide hard numbers, then you should think twice about employing them.

Clear Process

You should only work with a money manager who keeps things simple. Some money managers use complexity and jargon to obfuscate customers. However, if you don’t have a good grasp on what’s really going on with your money, you might end up losing it. Skilled money managers take the time to make sure you understand their process, and they don’t keep anything hidden from you. They also take the time to answer all of your questions because they understand how important your money is to you, and they want you to feel comfortable with their service.

Knowledgeable

It’s important to select a money manager who specializes in retirement savings. The money manager should know which assets will benefit you the most during your golden years. At the same time, the money manager should help you avoid unnecessary risk, including sequence of return risk. Social Security plays an important role in your retirement, so any money manager that you work with should be knowledgeable about those benefits.   

Reputation

This may be the most obvious factor when it comes to selecting a money manager, but it’s still important. Only work with a money manager who has a solid reputation. Sometimes it’s possible to speak with previous or current customers to learn more about a money manager. These testimonials can help you in making a decision. If you select a money manager who has a good reputation you will likely not be disappointed with your financial future.

MIchael Morrow: 4 Benefits of a Reverse Mortgage

4 Benefits of a Reverse Mortgage

An increasing number of baby boomers are beginning to retire. Some estimates claim that up to 10,000 individuals retire each day in the United States. If you are close to retiring, you should consider the benefits of reverse mortgages. Keep reading to learn what reverse mortgages are and how they can help improve your retirement.

Reverse Mortgages

A reverse mortgage gives homeowners the opportunity to borrow money on the value of their property. While the mortgage doesn’t have to be repaid until the property is sold or the homeowner dies, homeowners still pay property taxes and insurance. The amount of the loan is never greater than the home’s value—even if the value declines over time.

Spending and Your Portfolio

Many retirees withdraw from their investment portfolios after they retire. However, if you retire when the stock market is down then you have to deal with shrinking investments. Retirees may even find it necessary to sell investments early in order to cover living expenses. A reverse mortgage can help cover your living expenses so that you don’t have to sell your investments at the wrong time. Some reverse mortgages offer a standby line of credit. If the stock market is performing badly, you can use the credit until the market improves.

Delay Social Security Benefits

In general, retirees should try to delay their social security benefits for as long as they can. The earliest age that a person can claim benefits is 62. However, the benefits increase for each year that a retiree waits to collect the funds. The percentage increase depends on your date of birth, and after age 70 the increases stop. A reverse mortgage can help retirees delay their benefits for as long as possible.

Help Pay IRA Conversions

Retirees with traditional IRAs may want to roll over their accounts to Roth IRAs once they retire. A reverse mortgage can be used to pay the taxes associated with this type of conversion. Converting to a Roth IRA is an appealing option to some since it can help save taxes in the long run. However, when you withdraw funds from a traditional IRA, you will owe taxes on the amount you withdraw. This is where the funds from a reverse mortgage can help you out.

Preparing for the Worst

A reverse mortgage can help you deal with unexpected expenses related to health or assisting family members who face a financial hardship. Long-term care can be very expensive, and a reverse mortgage is a great option for covering the expenses.

Michael Morrow Real Estate

Real Estate

Real estate is a popular investment for many people. However, it’s important to recognize that investing as an owner is different than investing as a lender. Furthermore, the investment changes depending on whether you are a majority or minority owner. The type of investment that you make depends on your financial goals and investment mindset. This post looks at the liquidity, safety, expenses, rate of return, and tax efficiency of real estate investments.

Liquidity

Liquidity might be a problem for minority owners since they can’t control when the property is sold or refinanced. For example, if you invest your money in a property and expect it to be sold quickly, but it doesn’t sell quickly, then you will have trouble accessing your money. Liquidity can be better for majority owners since they decide when to sell and access their cash. Lenders are similar to minority owners in terms of liquidity. A lender can’t force an owner to sell the property when he or she needs cash.

Safety

Minority owners have the least amount of safety since they have the least amount of control. They can lose money if the property is mismanaged. Since Majority owners have more control they have more safety than minority owners. On average real estate has proven to be a safe investment over time for majority owners. Compared to minority and majority ownership, real estate lending may be the safest investment. Lenders control the amount of risk they are willing to take based on the required down payment. When lenders want to assume less risk, they can increase the amount of the down payment that they require.

Expenses

Due to the expenses associated with real estate, it is generally considered a long-term asset. One exception may be when a property is purchased at a discount so that it can be flipped to make a profit despite the expenses. Minority and majority owners face more expenses than lenders.  The former group has purchase expenses, management expenses, and disposition expenses which are associated with selling the property. Lenders don’t face these expenses. They just lend the money to the people buying real estate—the people who face all of the expenses.

Rate of Return

The rate of return tends to be high for both majority and minority owners. Over time both groups may even see double digit returns. In general, the rate of return that lenders see depends on the size of the property. Lending to someone who purchases a single family home is different than lending to someone who purchases a large commercial real estate project, and the rates of return can vary greatly.

Tax Efficiency

Real estate owners face a better tax situation than real estate lenders. Depreciation gives owners the ability to shift their tax burden to the future. When it’s time to pay the depreciation recapture tax, owners can usually pay the tax with the proceeds from selling the property. Still, the capital gains tax rate that owners pay is better than paying ordinary income tax rates. Lenders, though, have to pay ordinary income taxes on their gains, so their tax situation is not as favorable as owners.

Michael Morrow Qualified Plans

Qualified Plans

Qualified plans are any kind of employer-sponsored retirement plan or individual retirement plan. The most common employer-sponsored retirement plan is a 401(k). Both 401(k)s and IRAs are wrappers for different kinds of assets. Mutual funds tend to be the most common asset held in qualified plans. This post looks at five elements of qualified plans: liquidity, safety, expenses, rate of return, and tax efficiency.

Liquidity

As long as you remain with your employer, 401(k) plans are usually not liquid. However, in many cases, you can borrow up to $50,000 from your plan. Yet borrowing comes with strict repayment terms. On the other hand, IRAs are completely liquid. When you withdraw money, though, you will be taxed immediately, and if you’re under 59 ½ years old you’ll have to pay a 10% penalty.

Safety

The safety of qualified plans is not very high. With 401(k) plans, you don’t have unlimited access to any asset you want. The plan administrator decides which assets will be available to employees. IRA plans may be safer than 401(k) plans, but it depends on the type of assets that you choose.

Expenses

In general, 401(k) plans tend to be expensive. The plan administrator decides which funds will be available, and they’re not always the least expensive funds. You also have to pay administrative fees for 401(k) plans. Most people don’t know what the fees are because they’re typically hidden in the fine print. The expenses for IRAs tend to be lower—there aren’t any administrative fees if the plan is self-directed. However, the expenses of the assets themselves will still be present.

Rate of Return

The rate of return for 401(k) plans depends on the underlying assets that your employer makes available. Yet, since many employers provide employee matching the rate of return can be high. Employers who offer employee matching will usually match 2-6% of your funds. The average tends to be around 3%. There is no employee matching with an IRA plan, so the rate of return depends on the underlying assets in the account. Therefore, the rate can vary wildly from plan to plan.

Tax Efficiency

The tax efficiency depends on whether you have a Roth 401(k) or IRA or you have a regular 401(k) or IRA. When you withdraw money from regular plans, you pay ordinary income taxes. When you withdraw money from a Roth plan, though, you don’t have to pay taxes. With both plans, your money will grow tax-free. Many people find Roth plans attractive since they expect taxes to increase in the future. However, if you earn more than $200,000 you’re ineligible to participate in a Roth IRA. IUL plans are a popular alternative for investors who make more than $200,000.

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