Kimberley Robinson, VP Senior Portfolio Manager, gave us a few minutes to discuss some of the biggest no-nos and yes-yeses of IRAs.
What is one of the mistakes that too many people make when it comes to an Individual Retirement Account (IRA)?
People don’t necessarily set the right level of risk for where they are in their retirement planning. We certainly understand that risk is a four-letter word, but we believe risk should be managed, not feared. If you’re younger or have at least ten years for your investments to grow, you really need to be in some level of allocation to equities. Too many people make the claim that they are planning for the future (“I’m saving for my retirement!”), but really all they are doing is making a bank deposit without really researching their options. A good balanced portfolio should be earning at minimum 6-8% a year.
Personally, I am not risk averse, and I’m 95% in equities. My return since 2015 has been better than 15% a year. That level of risk isn’t for everybody, and everyone’s individual comfort level and financial planning are unique, but it illustrates how important it is to understand risk and then make informed decisions. Our job at Mascoma Wealth Management is to educate our clients on the best possible methods to get them to the best possible result they’re seeking for their own future. As a general rule, the more our clients know, the easier they handle the downward turns that are always part of the market. When you are allocated in the right risk categories for your appetite (and sleep number), you can take the swings in stride because you are confident in your overall long-term plan.
Can you talk a little about about why selecting beneficiaries is so important?
One of the things we work on with all of our clients is to make certain they have selected and updated the intended beneficiaries with the correct allocations on an annual basis. It can seem trivial, but it is some of the most important planning we do. For IRAs, people do not revisit and review their beneficiaries frequently enough. It’s especially important to revisit these choices after major life events: marriage, divorce, children. I’ve seen parents of three children name the oldest as their beneficiary, trusting that the oldest sibling “will know how to split it up evenly” among the other children. Setting aside the potential for family discord and raw emotions in that situation, there are also major tax considerations for the beneficiary(or beneficiaries). It’s a classic unforced error, and one that can be avoided with a simple 15-minute annual review of your beneficiaries with a financial professional.
What are other areas where IRA participants can avoid those “unforced errors”?
Too frequently, people focus on a sum of money as their objective. In reality, the end goal is not a number. It’s a combination of when you plan to retire, what your retirement life looks like, what you want to do with your time. Every situation is unique; there is no formula that fits all.
Another big no-no is taking money out before you are 59 ½. The tax ramifications are significant. If there are funds that you think that you might need, we can discuss either contributing to or reallocating into a Roth IRA, which can be advantageous for paying for things like college tuition without the same tax penalties.
Another thing we see is a non-working spouse who is not taking advantage of the contributions they could be making. A non-working spouse can make contributions and get a potential tax deduction for it, and not enough families understand that. As usual, talking to a financial professional can help you to understand all the different scenarios and make the best decision for you and your situation.