Nahum Daniels, Author at Integrated Retirement Advisors

Nahum Daniels Joins Jon Dwoskin On His “Think Business” Podcast

 

Nahum Daniels was interviewed recently by Jon Dwoskin on his THINK BUSINESS* podcast. You can listen to the entire podcast here: https://jondwoskin.com/2019/11/jon-dwoskin-interviews-nahum-daniels-certified-financial-planner-integrated-retirement-advisors/  THINK BUSINESS* is Jon Dowskin’s 1:1 in-depth and soulful conversations with executives, managers and sales people who are making a difference in their companies, communities and in themselves.

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Here are a few of the points made during the interview:

“I’ve been an entrepreneur all my life,” says Nahum Daniels. “I was originally in the publishing business. Early on in my career, I spent seven or eight years living in Japan. That was back in the 1970s, and I published a book which was at that time considered to be “alternative lifestyle” focused. The book was called The Book of Tofu, and it ended up changing everything in the American food retail industry. Today, you’ll find multiple types of tofu sold in every grocery store; you can’t escape it. But back then, prior to the book, no one even knew what tofu was.”

“That’s the power of the written word,” Nahum continues; “It can change an entire culture.”

Nahum spent more than a year writing his book, Retire Reset! What you need to know and your retirement advisor might not be telling you.

In the early 1980s, Nahum met Bill Gates through one of his Japanese business contacts. He ended up working for Microsoft, before it was a public company, back when it was a small start-up. At that time, PCs were just being launched, and computer books were extremely technical, complex and filled with jargon. It was Nahum’s task to revamp the books’ content and design to appeal to consumers as Microsoft set out to lead the way in the personal computing industry.

As a business mentor, Nahum found Bill Gates to be a very focused leader. “He totally concentrated on the people he was working with, and was highly-attuned to both their needs and his business objectives. He was at the leading edge of innovation and had a view of what the future looked like,” Nahum explains.

“Bill is a very unique individual. By the time he reached high school, he was spending the majority of his time programming and coding. At a very early age, he had a sense of the tremendous power of the personal computer. He wanted to make sure the future happened; he was out to reshape the world and he wasn’t afraid to be an entrepreneur or leader,” says Nahum.

Later on, Nahum Daniels moved from book publishing and personal computing into financial world, specifically retirement planning. But he found himself writing and publishing again [the book, Retire Reset!] when he realized how much complacency there was in the financial industry around the subject of retirement.

“Since the 1990s we’ve been taught by the financial industry that retirement planning involves investing in a mix of stocks and bonds comprising a “balanced portfolio” and expecting the best. Standard performance expectations for securities or stocks range from 9-12% returns per year, while bonds are expected to return 4-5% per year.”

“I make the case in my book that we may be facing a span of a decade or more of extremely low returns, much lower than these projections,” says Nahum.

“People need to spend more time focusing on this. We need to learn to see the alternative scenarios that might unfold, and adapt and hedge against them, achieving financial objectives even if lesser returns materialize going forward. This is essential to retirement planning and portfolio construction specifically for retirement.”

“We need to reorient. People are living much longer, but Americans think short term—only to the next month or quarter,” Nahum continues.

“Retirement planning is all about thinking 50 years down the road.”

“Even most financial advisors have not really made a scientific study out of how to create a portfolio that works this long, which puts us at a disadvantage. With interest rates dropping lower—getting close to zero, or even negative like Germany or Japan—we can’t get yield or income from our assets. How will we have enough cash flow without spending down our capital?”

“Writing my book allowed me to study the industry icons who have analyzed markets and done in-depth research on returns. They have uncovered options and they’ve run the calculations to show that some alternatives to the stocks/bonds scenario may perform better for retirees through time. That’s what I help people with.”

 

Rethinking Your Retirement Investing To Hedge Against A Market Downturn

 

Rethinking Your Retirement Investing To Hedge Against A Market Downturn

Studies show most Americans aren’t saving enough for retirement. A recently-released World Economic Forum report warned that most retirees risk running out of money as much as a decade before death. And the anxiety of being ill-prepared for the golden years can grow when portfolios do not, leading some advisors to recommend over-weighting stocks to provide the impetus for long-term growth.

Retirement planner Nahum Daniels thinks the risk-reward trade-off of investing a retirement nest egg in stocks and bonds can result in even more worry. And, given a bad sequence of returns -coupled with the fact that people are living longer than in previous generations -many retirees could run out of money faster.

“Psychologically, we’ve grown confused about the financial dynamics of retirement,” says Daniels (www.integratedretirementadvisors.com), author of Retire Reset!: What You Need to Know and Your Financial Advisor May Not Be Telling You. “Since the early 1990s, when the 401 (k) replaced the defined benefit plan in corporate America, there’s been a fundamental shift in perception. When retirement was pension-based, planning was about guaranteed income and the employer had to keep the promises it made. Today, participants in 401 (k) plans have to know about stocks, bonds and ‘Balanced Portfolio’ management because they’re responsible for their own unpredictable outcomes.

“Ironically, centering a retirement portfolio on Wall Street’s securities-driven risk/return tradeoff may actually be a formula for an even more insecure retirement. The reason is the cyclical volatility inescapable in equity markets. Nor are bonds immune from losses: The Fed’s rate manipulations, coupled with our nation’s current $75 trillion debt overhang, introduces an abnormally high level of volatility to bond prices. The real crisis in retirement planning is not just our savings shortfall but our misguided mindset; we need a perceptual shift about what our real goals are and a tactical reset to reach them.”

 

Daniels offers four principles to reset a retirement portfolio and hedge against a market downturn:

  • De-risk. Whether in the accumulation or spend-down phase, the retirement nest egg cannot afford market losses without eventually paying out less. “Insulate your nest egg from them and guarantee the outcome when you can,” Daniels says. “It’s unnecessary to resign yourself to self-imposed austerity to accommodate market volatility.”
  • “Size your nest egg as efficiently as possible by optimizing the sustainable yield it can generate,” Daniels says. “Work it back from your income need. For example, if your nest egg supports a withdrawal rate of 5 % rather than 3%, you can achieve your goal with 67% less capital.”
  • Daniels says the latest academic research favors the integration of actuarial science with investment expertise in the construction of a “stable-core” retirement portfolio. “Longevity insurance has a heightened economic value in an era of open-ended life expectancy,” Daniels says, “while historically no asset class beats equities for long-term growth potential. Balancing the two is key to getting the best result and hard-boiling the nest egg.”
  • “Today’s fixed index annuity (FIA) lends itself well as the actuarial component of a retirement nest egg,” Daniels says. “Anchoring a stable-core portfolio to it can protect against market declines while still participating in a needed share of upside potential.”

 

“Buying and selling securities at all the wrong times can increase the odds that you run out of money,” Daniels says. “Retirement investors need a form of protection that can keep them invested without costing so much that it devours their return in the process.”

 

About Nahum Daniels

Nahum Daniels (www.integratedretirementadvisors.com) is the founder and chief  investment officer of Integrated Retirement Advisors, LLC. He is the author of Retire Reset!: What You Need to Know and Your Financial Advisor May Not Be Telling You. A Certified Financial Planner and Retirement Income Certified Professional, Daniels has served mature investors for over 30 years.

How An FIA Can Replace Bonds As Your Hedge Against Volatile Rates

 

How An FIA Can Replace Bonds As Your Hedge Against Volatile Rates

Interest rates heading to zero or below in the United States, following the pattern set in Europe and Japan, will only make it harder for most nest eggs to do their job. They could also foreshadow low returns across most major asset classes, making both wealth accumulation and retirement-income generation harder to achieve. With the bellwether 10-year Treasury note bouncing around 1.5% and the 30-year Treasury bond hitting all-time lows under 2%, all fixed income yields are expected to trend lower. If governments and high-grade corporates start paying little if any interest, they will contribute less and less cash flow to a “balanced” retirement portfolio.

On the other hand, were rates ever to normalize, longer-dated bonds would suffer a capital loss, undermining the other role in Wall Street’s policy portfolio played by bonds as a counterbalance to the volatility of stocks.

Keep in mind that the shrinking 10-year rate is also the key metric for appraising asset value and risk. Zero and/or negative rates may initially boost asset values, but longer term, the next round(s) of rate reductions may trigger a major reset in equity, bond, and real estate values, already considered on some measures to be inflated.

A strong argument can be made that retirement investors are living through a systemic paradigm shift and that the resulting uncertainty should focus them on the potential utility of hedging. Recent academic research agrees that investors in or near retirement can benefit from reallocating their nest eggs not between stocks and bonds but by integrating equities with longevity insurance.

Today, the Fixed Index Annuity (FIA) stands out as a rapidly evolving form of longevity insurance designed to anchor a retirement portfolio. Independent research, most notably under the auspices of Yale School of Management Professor of Finance Emeritus Roger lbboston, makes the case that the right FIAs can complement or even replace bonds in the nest egg, adding as much as 1 % to 2% of excess annual return – or even more in a low-rate environment. Add to that excess return the 1 % to 2% a year that actuarial science can contribute in the form of “mortality credits” and we can start to breathe a little easier.

 

Long-term pros may outweigh the cons

It’s important to note that the FIA is complex and has been characterized as such by the Securities and Exchange Commission, the National Association of Insurance Commissioners, and the Financial Industry Regulatory Association. Any guarantees are backed solely by the financial strength and claims-paying ability of the issuing company and the instrument offers varying levels of access during a gated surrender-charge period. Thus FINRA rightly stresses that investors do their due diligence when choosing among advisors before deciding whether a certain FIA is right for you.

The effort may well be worth it. Emphasizing downside protection, the FIA aspires to deliver steady mid-single-digit returns -without exposing the policy’s accumulated value to market volatility.

Because FIA performance is linked to a market index stripped of its downside risk, Wall Street’s risk-return formula trades off some of the index’s upside potential.

Those trade-offs take the form of caps and participation rates quantified by the investment banks serving as an insurer’s counter-parties. Accepting less upside to avoid market losses and stabilize returns is the price investors have always paid to hedge, and it’s up to each of us to judge whether it’s a price worth paying in the FIA.

 

Nahum Daniels is the founder and chief investment officer of Integrated Retirement Advisors, LLC., a Registered Investment Advisor in the State of Connecticut. He is the author of Retire Reset!: What You Need to Know and Your Financial Advisor May Not Be Telling You. A Certified Financial Planner and Retirement Income Certified Professional, Daniels has served mature investors for over 30 years.

Retirement Guidelines for Millennials

Millennials looking to retire at age 65 have thirty to forty years to prepare and another thirty to forty years to provide for.  Here are some guidelines we use in our practice:

 

Acquire discipline: set aside 10% of disposable income to the retirement nest egg.

Open your eyes:  Retirement investing is intended to ultimately generate decades of income in the distant future to sustain unprecedented longevity.

Learn patience: the nest egg should be “put to work” by compounding consistent gains; aim strategically for singles and doubles rather than swinging for the bleachers.

De-risk:  Market volatility and realized losses, especially early in the accumulation or spend-down phase, can undermine the best-laid plan and the ability of the nest egg to achieve its long-term income objectives, so avoid them.

Seek shelter: The retirement portfolio should be insulated from rising taxation, the most consistent drag on growth especially for Millennials who may face higher taxes than their forebears.   It should therefore be “nested” in IRAs, Employer qualified plans, deferred annuities and cash value life insurance to provide the needed tax shelter.

Hedge:   Invest the nest egg for the long term insulated from downside risk but positioned to share in the market’s upside potential.

Diversify:  Another key to long term investment success, diversify across asset classes in terms both of tactics and strategy.

Think outside the box:  Explore the economic advantages offered exclusively by actuarial science rather than limit yourself to conventional stock-and-bond investing.

Integrate:  learn how next-gen longevity insurance can complement securities in a retirement portfolio to achieve more predictable results.

Consider the alternative:  Evaluate the multi-faceted fixed index annuity (FIA) and the role it might uniquely play as a retirement portfolio’s stable core.

 

The Solo 401k

 

  1. The solo 401k is ideally suited for successful Millennials setting themselves up as single-employee businesses making enough money in the “gig” economy to start thinking seriously about tax-advantaged saving for retirement. The 2019 maximum deductible contribution of $56,000, possibly doubled by a contribution for an eligible spouse working in the business—no matter the ages of the plan participants—can be a powerful incentive to get serious about the long-term future.    Of course, the solo 401k can be useful for older GenXers too and even for Baby Boomers who have become consultants to the corporations and/or industries that have laid them off as full-time W2 employees.

 

  1. Whenever the right fact pattern presents, Integrated Retirement Advisors quick to recommend this plan. The key is for the business owner to be making enough money to take advantage of the plan’s generous capacity and low-cost simplicity. Another determinant is the expectation of doing so in future without the need to hire employees.  Once employees (other than a spouse) enter the picture, the solo 401k plan must be converted to a standard employer plan that gets more complicated (due to non-discrimination testing) and more expensive (due to additional operating and administrative costs).  Of course, every contribution to a solo plan can incent and boost a retirement investing effort, so even setting one up for a few years while a business scales up can be very advantageous.

 

  1. Limited access to the plan’s accumulating account is probably the greatest drawback to this arrangement.  Like any tax-qualified plan, once a contribution is made access to the funds is limited by IRS regulations.   Withdrawals before age 59-1/2 are subject to income tax plus a 10% premature withdrawal penalty.  Solo plan loans of up to $50,000 can be taken, but they’re tax-inefficient and must be repaid with interest over five years.  If they default, they too can generate early withdrawal penalties.

 

  1. In terms of investment, the more diversified and flexible the platform, the better. Providers come in a variety of shapes and sizes.  The big brokerages offer prototype plans that may limit their offerings to stocks, bonds, funds and ETFs.  Some securities boutiques offer self-directed plans that provide access to real estate, precious metals and other alternatives, including bitcoin!

 

  1. We make it a point to inform clients that 401k plans, including the Solo variety, permit insurance contracts as investments. Today’s fixed index annuity (FIA) can provide market-linked growth potential together with downside protection, a combination that lends itself well to long-term compounding. Integrated with securities, these contracts can help de-risk a retirement portfolio without necessarily imposing an unbearable opportunity cost.  Roger Ibbotson’s recent research suggests they’re worth considering as a bond alternative.

 

  1. Life insurance is also a permissible alternative in a Solo 401k plan. When permanent coverage may be needed for personal and/or business reasons, funding it pre-tax in a 401k plan can prove very cost-efficient.  Given enough time, index-linked life contracts can provide temporary protection together with investment growth. Once the protection feature is no longer needed, the contract can be surrendered for its cash value that is then added to the account’s aggregate holdings.

What Is An Annuity?

An annuity is first and foremost a stream of payments.  For most retirees, the payor is an insurance company.  Properly regulated, an insurer can “guarantee” the payments it promises; in fact, if an insurer gets into trouble, annuitants in payout status are considered senior creditors, i.e., they get paid first—even before the rent.

Annuities can pay for a specified number of years or for a lifetime or two, which given today’s extended life expectancies, can be open-ended.  Today’s extended life expectancies gives actuarial science enhanced economic value when it comes to providing a return on investment:  an annuity can yield more from the get-go if average life expectancy is assumed while the longer an annuitant lives, the more payments received, the greater the IRR.  So annuities are best purchased by people expecting to live into their nineties– or even beyond—who don’t want to worry about running out of money no matter how long they survive.

In a traditional fixed annuity, the insurer invests in mostly investment-grade fixed income instruments to match its assets to its liabilities.  Based on its projected earnings (usually reflecting the yield on the US ten-year Treasury) and its projected expenses, it shares the blended yield on its portfolio holdings with the annuitant, paying a fixed return for the guaranteed duration.  The purchasing power of that fixed return will be eroded over time by inflation, which is a key drawback to this structure.  The payout, however, remains unvarying, unless you buy an inflation “rider” which increases it year to year based on some measure, but inflation riders tend to be expensive and depress the initial payout level.

A variable annuity also offers an income that will never run out, but the insurer invests the policy-owner’s premium in equities.  The objective is to generate a higher level of income over time, but the income payout is subject to market risk and can either increase or decrease from year to year.  The potential to decrease—possibly requiring “belt-tightening” and a reduced lifestyle that can end up being permanent—is the biggest drawback to this structure.  A poor sequence of market returns can end up undermining the income floor most annuities are intended to provide.

The fixed index annuity is a relatively new hybrid.  Like a fixed annuity, it guarantees an income floor from inception.  But unlike a traditional fixed, its earnings are linked to one or more market indices and those earnings can be applied to the annual income payout to establish a higher floor from year to year.  If markets are favorable, the annuity income can increase and those increases are rendered permanent; unlike a variable annuity, the income yield doesn’t suffer even if markets have a bad year or two.

The older an annuitant, the higher the initial payout of any income annuity.  So the traditional fixed can be very advantageous for retirees in their 80s.  They should shop for the highest payouts being offered by the better-rated companies and consider a portfolio approach.  The deferred fixed index annuity lends itself well to investors approaching or just entering retirement, say between ages 55 and 75, aspiring to give inflation a run for its money over the long term without taking a hit on the initial payout once begun and risking income reductions if markets decline.

Retiring at 45, the opportunities and the pitfalls

 

 

Even retiring in our mid-sixties today poses unaccustomed challenges revolving around our unprecedented longevity–the increasing odds that we might live deep into our mid-90s or even beyond–and our psychological tendency to electively compromise our lifestyles once we stop earning income out of fear of spending too much too soon and running out of money.  So if a thirty-year retirement is bedeviled by these factors, think about a 50-year period extending from age 45!

 

It’s crucial for anyone seriously contemplating early-retirement to make a study of the complex psychological and financial dynamics involved, or work with an advisor who has.  Most of us don’t know what we’re up against in modern retirement, and that goes for untrained financial professionals as well as clients.  True, it’s an opportunity for extraordinary self-realization but it’s also rife with the risk of financial ruin no matter how much money we may start with.

 

The “early retirement” planning process really needs to start at the “back end” with a vision of the lifestyle desired.  A new profession of retirement coaching has emerged to assist people in finding meaning in retirement no matter when it might start.  I call this aspect of retirement planning its “soft” side to distinguish it from the financial dynamics; I refer to them as retirement’s “hard” side.  The two are intertwined.

 

The process of planning a meaningful retirement isn’t “one size fits all ” In financial terms retirement can come in small, medium and large.  How much you’ll need to accumulate, and in what vehicles, will be determined by the cash flow you’ll need to sustain your envisioned lifestyle.   Is your goal to escape the grid and live the single life of adventure or is it to be a high-profile head of household educating your children and practicing communal philanthropy to make the world a better place?  It’s essential to start with your vision of a meaningful life freed from the need to work and earn.  Keep In mind, though, that “meaning” can be expensive to sustain.

 

Obviously, living on $50,000, adjusted each year for inflation, requires a much smaller nest egg than living on $500,000 or $5 million.  Once you settle on the cash flows you’ll need, you can size the income-producing nest egg required and focus on its core portfolio construction. The more income you can generate from your nest egg–the higher its yield and the more reliable its duration–the more efficient its construction can be and the less capital you will need to get the job done.  This frees up other capital to satisfy your risk appetite or philanthropic intent.

 

To retire early you will want to start saving and accumulating whatever capital you will need as soon as you have a clear vision and a declared objective.   If it’s to last a lifetime, the nest egg needs to be de-risked to avoid untimely market losses that could prove hard to recover.  Better to position your income-dedicated retirement portfolio to compound safely over time.  Smoothing returns and avoiding losses is key to portfolio design; we believe you should look for financial instruments that can guarantee the outcome.  Next-gen longevity insurance can play a stabilizing role in the nest egg.  Linked to the underlying markets, Its new varieties offer downside protection together with a reasonable share of upside potential both before and during retirement.  We use them extensively in constructing our “stable-core” retirement portfolios.

 

That’s because losses incurred in retirement planning can undermine even the most consistent effort.  Market risk should be hedged and minimized if not totally avoided.  Taking on uncompensated risk is anathema.

 

In fact, retirement at every stage is an exercise in risk management.   Risk sensitivity is accentuated the earlier you start and the closer you get to the goal line.

 

Avoiding depletion is like walking a tightrope.  Success is not dependent on how much wealth you start with; it’s more a factor of the ratio of your spending in retirement to your dedicated retirement capital.   Study the concept of the “safe” withdrawal rate and figure out a way to exceed it without prejudicing your ultimate success.  Getting good advice on how to do that may even be worth paying for.

 

Unless your income goals in retirement are modest, it’s hard to save enough out of one’s wages to build an adequate nest egg no matter how early you start, especially if you have a spouse and family to feed, house, clothe and educate.  Starting a successful business or owning shares or stock options in a start-up that ultimately gets acquired or goes public are more often the sources of wealth creation among age-45 retirees.  A carried interest in a real estate or financial firm—a share of the profits—can be another path to early riches.

 

Ironically, while risk taking is often the source of early-retirement wealth, the nest egg itself should be hedged and protected.  In our practice we go further and recommend insuring it for higher initial yield and longevity guarantees that can survive an individual issuer that may go under.

 

Retiring early only accentuates this ever-present dialectic that characterizes a retirement that, if starting at 45, can last far longer than your work life.

 

Retirement Investing For Entrepreneurs

 

Entrepreneurs are risk takers by nature; most swing for the fences in their chosen enterprises.  Most fail once or twice before succeeding.  Many businesses fail even AFTER having succeeded.

Retirement savings need to be approached differently. 

  1. The retirement nest egg should be fed starting as early as possible and should be focused on steady growth with downside protection.
  2. If started early enough and insulated from losses, even 10k per year can compound into a significant portfolio over time.
  3. Not sufficiently appreciated, life insurance is an ideal retirement tool for entrepreneurs under 50. Even older under certain circumstances.
  4. Investment-oriented life insurance compounds with doubled-up vigor by benefitting from the tax-avoidance features it offers; all internal growth is tax-deferred.
  5. In addition, life insurance offers tax-free access to gains in the form of policy loans, usually of the “wash” variety. This turns a life policy into an unlimited Roth IRA.
  6. The Fixed Index Universal Life (FIUL) policy offers the greatest growth potential; some varieties offer extraordinary loan features.
  7. Based on today’s tax regime, nothing beats the retirement funding potential of this financial instrument; what’s more, being tax-free on the payout side takes the recipient off the grid. The cash flow from this source is non-reportable.
  8. The instrument also serves the traditional family protection needs met by life insurance.
  9. It can also serve business needs: funding deferred compensation arrangements; buy-sell agreements with partners and co-shareholders; and key-person coverage to protect the on-going viability and on-going-concern value of an enterprise.
  10. Thus, retirement planning should be built into the wide array of planning needs unique to entrepreneurial endeavor.

 

Ask us for examples and stories from 30 years’ experience working with small business owners available.

About Nahum Daniels

 

 

Nahum Daniels is a serial entrepreneur who has made a career of innovative, forward-looking thought leadership on the leading edge of change since 1970. 

Boot-strapping his first business set up in Japan in 1970 at the age of 25, with neither business experience nor capital, Nahum built Autumn Press, his first publishing enterprise, into a major counter-cultural source of information and inspiration for the growing “alternative lifestyle” market then taking root in the United States and abroad.   As a publisher he learned first-hand the power of the pen and contrarian thinking able to challenge and change social norms when his company released The Book of Tofu by William Shurtfleff.  Bill had been turned down by numerous mainstream publishers he had approached about his “soybean curd” cookbook when tofu was something most Americans knew nothing about and could find only in very uninviting food shops located deep in Chinatown, a part of town they rarely if ever frequented.  Over a million copies later, tofu has since become a dietary staple in American homes available practically everywhere food is sold. All of Nahum’s publications under the Autumn Press imprint focused on leading edge lifestyle issues—including environmentalism (Nuclear Madness by Australian physician Helen Caldicott) and East/West philosophy (The Looking Glass God: Shinto, Yin Yang and a Cosmology for Today by M.N. Stiskin) together with dozens of other titles.

In 1981, after selling his first imprint, Nahum caught the personal computer bug and early on sensed the social and lifestyle impact the emerging technology could exert.  He joined Bill Gates’ Microsoft—several years before it went public and became the giant corporation it is today—to launch Microsoft Press.  His purpose via the start-up was to educate the reading public by tapping the authoritative and pace-setting work being done at Microsoft and Apple.  Microsoft Press set a new standard for “computer books” that transformed the genre into the easy-to-read and pretty-to-look-at computer publishing product available today.

In 1986, Nahum entered the financial services industry when its leading edge consisted of transforming salespeople into client-centered consultants who viewed themselves as true fiduciaries.

The launch of the personal financial planning industry had just gotten underway and intrigued him:  money and its uses had always been a fascination that focused his attention.  The idea of advising the affluent on investing, insuring and tax planning captured his imagination and he went back to school to earn the professional certifications needed to practice, including the Certified Financial Planner designation, the Retirement Income Certified Professional designation, NYU’s Tax Certificate and numerous other securities and insurance licenses that required learning and on-going accreditation. His timing put him on the leading edge of an emerging profession.

Bringing a non-judgmental “Zen mind” to it, he has sought to break through conventional thinking to identify state-of-the-art solutions to today’s financial challenges, retirement being perhaps the greatest we face as individuals and as a society.  Specializing in the retirement arena, Nahum has surveyed the evolving marketplace and developed an expertise in both the psychological and financial dynamics that must be understood and integrated by Baby Boomers, GenXers and Millennials if they aspire to a “successful” modern retirement that could last decades.

In “Retire Reset: What you need to know and your financial advisor may not be telling you  Nahum offers a contrarian view that challenges conventional thinking and an innovative approach that aims to reset both mindsets and investment portfolios by balancing the leading-edge financial solutions available today that tend to be insufficiently understood or appreciated by consumers and financial advisors alike.  His is a growing voice much needed in the face of our unprecedented demographics, in the judgement of the late economist Peter Peterson,  the “transcendent problem of the twenty-first century.”

Pros and Cons of Borrowing from your 401k Plan account

 

The advisability of taking a loan from a 401k plan account is always a facts-and-circumstances determination. And like any tax-related decision that affects retirement success, it can get very complicated. So my first advice to anyone seriously contemplating this move is to get professional help from an accountant and/or financial advisor.  Questions like these make it a good idea to have one or the other to turn to.

 

  1. Perceived financial urgency is the reason most people resort to their pre-tax 401k savings. Needing money for an emergency or an economic opportunity seen as time-sensitive, with no other resources conveniently available, is the driving motivation for most people.  It’s almost always better to use after-tax savings for such contingencies, but if there aren’t enough—or any—the situation leaves little choice. The first proposition to test is whether the perception of urgency matches reality.

 

  1. The biggest advantages of using the 401k account include relative ease of access ( if the plan’s provisions even permit loans usually up to half the vested balance with a max of $50,000, it’s not a given although most do) and interest rates of prime plus one (tough to beat at a bank or on a credit card balance!). Borrowers can also find solace in the idea that they are paying interest to themselves.

 

  1. The reality of the loan’s full potential effects are more complicated. The regulatory five-year payback terms have to be honored; if the loan defaults income taxes become payable on the unpaid balance and if the borrower is under 59-1/2 at the time of default a 10% premature withdrawal penalty can take an additional bite. If you change employer or get laid off during the five-year payback, the loan balance becomes fully payable within 60 days.  And even when the terms of the payback are fully honored, you’re using newly-earned after-tax dollars to repay a loan of pre-tax money that you will be taxed on AGAIN when you withdraw the funds in retirement. In other words, you’re turning tax-deductible dollars into doubly-taxed dollars (surprise!) so you should have a really compelling reason to do it.  Not to say they don’t sometimes come into play.

 

  1. Savers who withdraw money from their 401k accounts are also losing exposure to the long-term return potential of stocks and bonds. Depending on the investor’s time horizon, that could impose a tangible opportunity cost, especially on younger plan participants who can theoretically better tolerate market volatility.  The long-term impact of reduced returns can have a devastating impact on accumulation objectives. As they say, investing success isn’t based on “timing” the market but “time in” the market.  Missing exposure to a bull-market phase of a full market cycle can leave a long-lasting deficit the full effects of which won’t be apparent until actual retirement.

 

  1. Tax rates are always changing and are very unpredictable. Logically, you want to contribute to your employer plan when tax rates are high, to legally avoid them, and withdraw the money you’ve accumulated when tax rates are low, to end up with more spendable income. The current tax regime has lowered tax rates for most Americans.  Who knows what the rates will be decades in future.  The best general advice may be not to rock the boat unless the urgency you perceive is very real and you have no alternative.