Also known as a SMA (“Separately Managed Account”), is a single investment account comprised of individual stocks, bonds, cash or other securities, tailored to achieve specific investment objectives.
The Pension Protection Act of 2006 (PPA) is long and hard to read, but it played a crucial role in establishing cash balance plans as a viable and legally recognized retirement savings option. Before 2006, cash balance plans faced frequent legal challenges. Those bringing the suits argued that cash balance plans violated established rules for benefit accrual and discriminated against older workers. The rulings on these cases were inconsistent, and many business owners were reluctant to risk establishing a plan that just didn’t have firm legal footing.
The Pension Protection Act ended this uncertainty about the legality of cash balance plans. The legislation set specific requirements for cash balance plans, including:
- A vesting requirement: Any employee who has worked for their company for at least three years must be 100% vested in their accrued benefits from employer contributions.
- A change in the calculation of lump sum payments: Participants in a cash balance plan can usually choose to receive a lump sum upon retirement or upon the termination of employment instead of receiving their money as a lifetime annuity. Before 2006, some plans used one interest rate to calculate out the anticipated account balance upon retirement, but, when participants opted to receive an earlier lump sum, the plan called for using a different interest rate to discount the anticipated retirement balance back to the date of the lump sum payment. This could lead to discrepancies between the hypothetical balance of the account (as determined by employer contributions and accumulated interest credits) and the actual lump sum payout, an effect known as “whipsaw”. The PPA eliminated the whipsaw effect by allowing the lump sum payout to simply equal the hypothetical account balance.
- Clarification on age discrimination claims: A cash balance plan does not violate age discrimination legislation if the account balance of an older employee is compared with that of a similarly situated younger employee (i.e. with the same length of employment, pay, job title, date of hire, and work history), and the older employee’s balance is equal to or greater than the younger employee’s.
There are, of course, many other points included in this lengthy piece of legislation, but the takeaway is this: the Pension Protection Act of 2006 removed the legal uncertainty surrounding cash balance plans and made them a much more appealing option for small business owners. The number of cash balance plans in America more than tripled after the implementation of the PPA. Additional regulations in 2010 and 2014 made these hybrid plans an even better option, and we anticipate that their popularity will continue to grow. There are thousands of high-earning business owners out there who can reap huge, tax-crushing benefits from implementing cash balance plan – they just have to know about them first.
The Advantages of Investing in ETFs
Exchange Traded Funds (ETFs) are popular investment options available to the discerning investor. They are similar to mutual funds and index funds but with some distinct advantages. If you are looking for retirement investment options, ETFs are a great choice. Here are just a few of the advantages that ETFs have to offer:
- Low Commission Fees – With a tight economy and increased cost of living, every penny that can be saved should be saved. Let’s face it, the less you pay out in investment fees and commissions, the more money that goes towards your retirement fund. And that’s the ultimate goal, right? Compared to index funds, ETFs have relatively low trading costs.
- Allows for Speculation Through Intraday Trading – ETFs may be traded just like stocks. As a result, their value (price) fluctuates throughout any given day. As an investor, you are able to take advantage of the daily movements of an ETF and reap profits on a daily basis. Bear in mind however, that the possibility of losses still exists. Nevertheless, ETFs provide the ability to trade the entire market as if it were a stock.
- Diversification – We all know that one of the keys to successful investing is diversification. With ETFs, you have the opportunity to diversify your investments by index type, equity market sector, geography (whether international or regional), industry, niche, asset class and more. Asset allocation is what will make the difference between a successful investment and one that fails to deliver the desired returns. With ETFs, investors have the opportunity to build a profitable asset-allocation model.
Whether you are saving towards retirement, or simply looking for great investment options, carefully consider the benefits of trading in ETFs.
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Bloomberg Barclays US Aggregate has a duration of over 6 (orange line) and a yield of just 2.5% (white line). If we see more corporate refinancing on the longer end (while rates are still low) and at some point a 50 or 100 year US treasury makes its way into the index (https://lnkd.in/gFvUF5g), this could be very problematic.
Add to that a higher duration of Agency MBS if rates increase and prepayments slow (extension risk).
This all looks like a huge amount of interest rate risk for investors with very little upside. The solution: talk to your Portfolio Manager.
Saving and Investing for Retirement
As you age, saving and investing for retirement should take on increasing significance and should rank higher on your list of priorities. This is especially true if you lost out on the opportunity to maximize your retirement savings by starting to save from your early twenties or thirties. Nevertheless, with self-discipline and a fool proof plan of action, you can still manage to set aside a nice nest egg for your retirement if you act immediately.
Swift action is particularly important for the self-employed and other professionals. This is because these individuals may not automatically fall under the umbrella of a structured retirement savings and investment plan such as a 401(k). The implications are that deliberate efforts must be made to save and invest for retirement purposes and the onus is on the individual to create and execute a viable retirement plan. However, you should not allow yourself to be forced into investing in a plan that offers high levels of returns without ascertaining for yourself what the risks are.
There are several individual retirement account (IRA) options that are available for the self-employed. The key is to choose one that will work based on your particular retirement goals, risk tolerance and timeline. It may be a good idea to discuss your retirement goals with an experienced Certified Financial Planner or advisor. The closer you get to retirement, the less of your investment dollars you should allocate to riskier investment vehicles such as stocks. Once you hit 45 years, your retirement portfolio should ideally be concentrated on fixed income instruments such as treasury bills and government bonds. The trade-off is that the income is essentially guaranteed but the returns are likely to be lower. It is better to have a smaller return on your capital than to lose your retirement capital.
How Much Money Do You Need to Quit and Sail Away? No, Seriously.
You wake up. Go to work. Get home. Repeat. For many, it feels like being stuck in a hamster wheel. What if you decided to call it quits and retire early? For those who have ever lay in bed wondering what it’d be like to walk away from the rat race… this article is for you.
Whether you want to retire and sail away, or just want to retire and pursue hobbies—that part is up to you. But let’s explore what it takes to make an early retirement a reality. And since the idea of sailing away has a certain ring to it, we’ll use that as our goal.
Will you work part-time?
The first big question is, will you earn an income in retirement? Some people continue to work in a limited capacity by freelance writing, doing graphic design, or consulting, etc. Others just live off their investments. Let’s assume you’re going to quit everything and just live off investments. It’s more fun to imagine that scenario anyway, right?
Save, save, save
Before you cut the cord, you’ll need to earn as much as possible for as long as possible. At the same time, you’ll need to cut your spending. Cutting expenses is a quick win. Earning more can be difficult and take longer to achieve. For example, a $1,000 cut in expenses is like a $1,330 raise assuming the 25% tax bracket. So, gym memberships, fancy cars, eating out, expensive phones, lawn service—goodbye.
The 4% rule
Saving enough money so you never have to work again is a tall order, especially if you’re in your 50s with a long life ahead of you. A common benchmark is the 4% rule. Though debatable1, it’s a rule of thumb used to determine how much to withdraw from a retirement account each year. The 4% rate is considered a “safe” rate, with the withdrawals consisting primarily of interest and dividends.
What will you spend each month?
You’ll need to figure out your monthly living costs. The good news about a boat is, you have limited expenses. Sure, you’ll have to buy the boat. But you can get a used 40-foot sailboat for about $60K. Cheaper than a house.
Even though you’re living in 150 square feet, you’ll still have to pony up cash each month for marina fees/docking, boat insurance, food, health insurance, and more. Based on sailing blogs, the monthly cost for a couple living on their boat in the Caribbean is about $2000-$35002 a month.
Ok, gimme a number
There are a lot of variables when it comes to determining how much cash you’ll need to save in order to retire. They include your age, health issues, Social Security savings, etc. It’s hard to provide an accurate number without knowing more details. But for simple math, a couple would need to sock away at least $800K3 into investments in order to live off $3,000 a month. Again, this is very rough math, you’ll need to work these numbers out carefully on your own—or better yet, with a financial advisor.
Whether you dream of leaving it all behind and hitting the high seas, or making model train sets, you’ll want to go through a rigorous retirement-income planning process first. But it can happen. If you’re feeling like a hamster, there are ways of getting off of that wheel forever. It just requires crunching some numbers and dreaming big.
3. This amount is for illustration purposes only, please consult with your financial specialist to help you understand the how much you would need to retire
This information is provided to you as a resource for informational purposes only. It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal. is information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions. Or reach out to us and we can discuss a more tailored assessment.