Kitces.com - Advancing Knowledge in Financial Planning

Roth vs Traditional IRA: The Four Factors That Determine Which Is Best

March 27, 2012 01:04 pm 36 Comments CATEGORY: Taxes

To Roth or not to Roth. It is a question that planners and their clients commonly face, whether making the decision regarding an annual contribution, or about converting (or not) an existing retirement account.

Yet while the appeal for lifetime tax-free growth from a Roth may be appealing, the reality is that the Roth is not always the winning choice, and there are many myths and misunderstands about Roth accounts that make it difficult to know which is best.

The reality is that there are four (and only four!) fundamental factors that determine whether a Roth will or not will be more effective than a traditional pre-tax retirement account. Some factors are always in favor of the Roth account, but others can work against the Roth account; in fact, blindly choosing a Roth and ignoring the relevant factors can actually lead to wealth destruction! By knowing the four factors and avoiding the Roth myths, though, planners and clients can be assured of making an effective wealth-building decision.Read More...

Monitoring A Financial Plan in the Digital Age

March 26, 2012 01:03 pm 4 Comments CATEGORY: General Planning

Historically, the update of a financial plan has been a somewhat arduous process, as new data is gathered manually from the client, entered into financial planning software, analyzed for problems or opportunities, and then finally delivered to the client. Perhaps even more challenging is the fact that it's never quite clear when or how often to do the plan update; annual updates are proactive but often produce a lot of work when nothing has actually changed, yet waiting for the client to request an update can be too reactive. In the digital age, though, monitoring a financial plan will be very different. As integrated technology allows plan details to updated automatically and continuously, we will reach the point where you don't notify the client that it's time for a plan update; the planning software will notify you!Read More...

Weekend Reading for Financial Planners (Mar 24-25)

March 23, 2012 06:24 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition highlights some recent activity regarding fiduciary, from an surprising alignment between NAPFA, the FPA, and FSI against the latest Department of Labor proposals on fiduciary, to an article exploring how wirehouses may already be shifting their brokers towards fiduciary, and a profile of a former broker who suggests that the wirehouse model (at least in its current form) will be dead by the end of the decade. From there, we look at a review by Bill Winterberg of the latest iPad, along with how mobile apps are evolving in the RIA marketplace. On the investment front, there's an interesting new type of annuity that may be coming soon, which would allow advisors to attach an income guarantee to an investment account without tying up the entire account itself inside the annuity, an interesting article by Larry Swedroe suggesting that "buy what you know" is actually not a good investment strategy, and a striking look at the Wall Street meltdown in the financial crisis suggesting that the SEC's change in net capital limits for broker/dealers in 2004 may not have actually been to blame. We wrap up with a warning from Hussman that an army of angry Aunt Minnies may be signaling a market peak and the onset of a new bear market, and a much lighter piece pointing out that you can lose so much productivity by working long weeks that you'd be better off cutting back to 40 hours. Enjoy the reading!

3 Reasons Financial Planning Firms Might Consider a Blog

March 22, 2012 01:16 pm 9 Comments CATEGORY: Marketing

As financial planning firms increasingly incorporate the internet and their websites into their marketing, more and more practices are considering the use of a blog. Yet many are doing so without a clear understanding of why the blog is being done in the first place, beyond "everyone else seems to be doing it, so I guess I should, too!" In practice, it seems there are three primary reasons that most financial planning firms consider a blog: drip marketing for prospects, a communication tool for existing clients, or Search Engine Optimization (SEO) enhancement for your overall website. Fortunately, once you know which of these reasons matches the purpose for your blog, you can figure out what kind of content to create for it, to whom the blog updates should be distributed, and whether having a blog even makes sense for your firm in the first place! Read More...

In Defense Of The 70% Replacement Ratio In Retirement

March 21, 2012 01:19 pm 12 Comments CATEGORY: Retirement Planning

As prospective retirees struggle to figure out how much money they need to accumulate in order to retire, a key assumption is what anticipated spending will be in retirement. After all, the more spending that must be supported, the more assets that may be necessary (in addition to other income sources) to support that spending.

Historically, a popular "rule of thumb" was to assume a replacement ratio of 70% to 80% in retirement, although in recent years this guidance has been lambasted by planners who suggest that client lifestyles tend to remain steady in retirement (or even increase in some cases), not decrease.

Yet in reality, it appears that planners have been mis-applying the replacement ratio research, which is based on a percentage of pre-retirement income, not pre-retirement spending! As a result, it turns out the 70% replacement ratio for moderately affluent clients may be remarkably accurate, and in fact could be too high for some wealth clients! Read More...

What’s Your Longevity Assumption – Are Planners Being Too Conservative?

March 20, 2012 03:34 am 16 Comments CATEGORY: Retirement Planning

Monte Carlo analysis has become a fairly widespread tool for financial planners to use to understand the implications of market volatility and return uncertainty on the ability of clients to achieve their goals.

Yet the uncertainty in retirement isn't just about the returns that will be earned on investments that are necessary to support spending, but also how long that spending must last. Notwithstanding the uncertainty of mortality, though, most financial planners select a fixed - albeit conservative - time horizon for the portfolio, such as 30 years for a 65-year-old couple. But can this strategy make the plan too conservative? After all, a 90% probability of success - which corresponds to a 10% chance of failure - is actually only a 1.8% probability of failure when it assumes the couple will live until age 95 (given the low likelihood of a client actually surviving that long), and in turn means the client may be saving more, spending less, or retiring later than is really necessary!

Which raises the question - are we being too conservative with our mortality/longevity assumptions? Read More...