Halbert Hargrove Global Advisors, LLC
Relationship Manager & Chair of Wealth Advisory Committee
In his advisory work with clients, Nick’s objective is to deliver an integrated strategy for their wealth. In addition to his investment expertise, Nick says he brings two key strengths to his client relationships. The first is educating them about their investments. “I make an effort to excel at this; it’s extremely important for clients’ peace of mind to understand that we invest with the intention of excelling in good markets and weathering challenging ones.”
Nick is also an excellent listener. “Through listening, I can suggest relevant solutions. I enjoy helping clients work towards goals, solve problems that arise, and uncover risks that they might not have considered.”
As Chair of Halbert Hargrove’s Wealth Advisory Committee, Nick leads the group in exploring financial planning issues that impact clients—and creating responsive solutions. Nick sees his role as “ensuring that we have a diverse set of ideas on the table to make the right decisions.” Nick is based in Halbert Hargrove’s Long Beach headquarters. He was named to his current management role in 2012; he joined the firm in 2005.
Nick holds an MBA from UC Irvine; he earned his B.S. degree in Management Science from University of California, San Diego, where he played college basketball and studied abroad in Florence, Italy. He was awarded the ACCREDITED INVESTMENT FIDUCIARY designation by the University of Pittsburgh-affiliated Center for Fiduciary Studies and is a CERTIFIED FINANCIAL PLANNER.
Nick and his wife Carrie love to travel; being part of close families, they also frequently head to central and northern California for visits. Ever hear of the Calaveras County Frog Jump? His extended family, aka the Gustine Frog Team, has participated in this event for over 50 years. Back home, Nick thinks a good start to the weekend is a morning run or hike in Rancho Palos Verdes.
BS, Management Science, University of California, San Diego
MBA, University of California, Irvine
Nothing contained in this publication is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional.
Yes, an individual can contribute to both a 401k and a Roth 401k. The total contribution into both types of deferrals cannot exceed $18,000 for individuals under 50, and $24,000 for those 50 and over. For example, a 30-year-old person could contribute $9,000 into his or her regular 401k and $9,000 into the Roth 401k portion, for a total of $18,000 in 2016.
There are two key factors that should be considered when deciding between making regular 401k contributions vs. Roth 401k contributions—or potentially a combination of both:
- Current taxable income and expected future taxable income
- Discretionary income
Current Taxable Income and Expected Future Taxable Income
Contributing into a regular 401k will help reduce your taxable income: The contributions you make are “pre-tax.” Invested assets in these accounts grow tax deferred; the distributions you ultimately take are taxable at ordinary income levels. Making Roth 401k contributions, on the other hand, will not reduce taxable income because contributions are “after-tax.” But your investments in a Roth 401k will grow tax free and distributions are tax free as well.
The main reason most individuals contribute to a Roth 401k is they believe tax rates will increase in the future. The thinking here is that contributing into a Roth 401k will help decrease their potential taxes when they start to take distributions from their accounts since distributions from Roth 401ks are tax free.
If you’re planning to contribute into a Roth 401k (vs. a regular 401k), keep in mind that you will have a higher taxable income at the end of the year. You’ll need to budget and have funds available to pay any potential taxes.
For example, an individual who earns $100,000 and makes a regular 401k maximum contribution of $18,000 will have a taxable income of $82,000 because regular 401k contributions decrease taxable income. If the same person were to make an $18,000 Roth 401k contribution, he or she would be taxed on $100,000 of taxable income—because these contributions are “after-tax.” This would amount to paying approximately $4,500 in additional taxes.
Contributions into Roth 401ks generally favor investors who are younger, with lower taxable incomes. Regular 401k plan contributions favor higher earners because contributions decrease taxable income and allow for individuals to have a higher take-home pay after withholdings.
I agree: You should remain conservative with this money—and not take equity risk. The investment options that you should consider to keep the funds in safer investments are:
- Remain in a checking account
- High Yield Savings Account
- Bond funds
- Fixed Annuity
To determine which investment options to consider, I would suggest you first create a projected income and spending plan for your parents. What are their income sources such as Social Security, pension, annuity, and dividend / interest income from investments? Then create an estimate of their annual costs for living in their retirement home. What is the different between their annual income and annual costs?
Calculate the burn rate
Next, it is important to calculate a burn rate of the cash by dividing the cash proceeds from the home sale by the annual expenses not covered by your parents’ income. This calculation helps determine how long the home proceeds will potentially last. It will also help you determine how much risk to take. For example, I will assume that their combined Social Security benefit is $20,000 a year, their annual retirement home expenses are $45,000 a year, and the home sale proceeds were $100,000. You will need to use $25,000 from the home proceeds to help pay for the retirement home ($45,000 - $20,000 = $25,000). The burn rate is ($100,000 / $25,000) = four years in this example. If the burn rate is less than five years, the most conservative options will be to leave $25,000 in checking and possibly use a high yield savings account that pays 1% interest (Capital One, Ally and Barclays, to name a few, are online banks that pay 1% interest).
If the burn rate is more than five years, you might consider keeping one year’s of expenses in your checking account and investing the remaining amount in an intermediate bond fund that is based on iShares Barclays Aggregate Bond index. This index has a combination of investment grade corporate and government bonds to create a more stable investment when markets go down. I would expect to earn between 2-3% per year on average over the next 10 years investing in a fund that tracks this index.
As a longer-term option, consider a fixed annuity
The other option to consider is purchasing a fixed immediate annuity for part of the cash. If your parents are relatively healthy for their age and their burn rate is more than 10 years, you will need to generate a higher return with the cash from the home sale. The biggest downside to purchasing an annuity is that once your parents pass away, you will not receive any funds back from the insurance company. You can avoid this by purchasing a 5- or 10-year rider, which enables the beneficiaries to receive the remaining payments during that period. The upside of a fixed immediate annuity? It will pay approximately 8-9% per year if your parents are in their 80s. You can create an annuity payment estimate by going to https://www.immediateannuities.com/.
In summary, if the cash from the home sale is only expected to help pay for retirement home expenses for less than five years, I would suggest that you keep the funds in your checking or high yield savings account. If the home sale funds are expected to last more than five years, you can afford to take a little more risk by investing in bond funds to generate a little more return. If your burn rate is more than 10 years, then using a combination of checking, high yield savings, bond funds and a fixed immediate annuity will help create more income to support your parents’ living expenses.
I would advise you to ask the attorney who created your family trust the above questions. Your attorney should know the approximate size of your assets, the terms of your life insurance policy, the trust structure, and your wishes to determine the appropriate beneficiary selections.
The decision to either name your children or your family trust as contingent beneficiary will depend on how your family trust is structured and how the assets within your trust and IRAs are scheduled to pass on to your children. If you want your family trust to govern how assets and IRAs pass to your children, then you should name your family trust as the contingent beneficiary after naming your spouse as the primary beneficiary.? Parents who are concerned that an adult child will mismanage their finances—or potentially fall into “Lottery Syndrome”—name the trust as contingent beneficiary. You can direct a trust company, professional fiduciary, or other third party to become the trustee of the assets to ensure that the IRA is managed appropriately and the instructions within the trust are followed. The trust should also be named as contingent beneficiary if your children are minors.
If you would like your children to receive your IRA assets with no restrictions, you can name them as contingent beneficiaries. This gives them the flexibility to manage the inherited IRA and take distributions as they deem appropriate once both parents both pass away.
Naming a beneficiary within a life insurance policy will depend on the purpose of the life insurance policy, the size of your estate, the amount of liquid assets, and the types of assets within an estate. If the life insurance policy is a relatively small amount and is intended to cover burial expenses, naming the children the beneficiaries will allow them to receive funds fairly quickly to pay for burial expenses and other arrangements—without first having to go through the long estate-settling process.
If the death benefit of the life insurance policy is in the hundreds of thousands of dollars—or more—the decision to name the children outright becomes more complex and will depend again on the purpose of the life insurance policy.
First, congratulations on making the 10% contribution and making that commitment.
To better see your options, you should create a “working document” that maps these out. I suggest copying the list of funds and pasting that list into Excel. If you are not familiar with Excel, Microsoft Word will work. Separate the funds into two groups. The top group should include all of the “target date” or “target portfolio” funds that are “all in one” funds and do all of the asset allocation strategies for you; you just have to decide how much risk you want to take. The second list should include all of the funds that invest in an asset category (such as US Large Cap, US Small Cap, International, Real Estate, and Fixed Income).
If you are unfamiliar with investing, I would suggest selecting the “all in one” funds that make the asset allocation strategies for you. If you are unsure of which “all in one” fund to select, call the customer service number on your statement and ask the representative if they are able to provide guidance. If not, ask if there is a questionnaire or some system available that will help you make the investment selection.
If you’re knowledgeable about investing, here’s what I’d suggest: list all of the US Large Cap funds together, the US Small Caps right below, then International, Emerging Markets, Real Estate, Commodities and Fixed Income. I would also suggest calling the customer service number on your 401k statement to ask for help with your investment selection.
Then you will need to determine what allocation to select. A quick tip that you can try is to use the “all in one” funds as guides to determine how much to allocate to each asset class. Select the overall risk you want to take per asset class (i.e. US Large Cap). This will narrow down your choices to just a few paths. You may choose to only invest in passive strategies in each asset class—or you can invest partially in passive and partially in actively managed funds.
If you look at each fund’s performance, you can see the differences over different time periods. I would strongly suggest that you not invest in the best-performing funds over the one-year period. Those are the funds that are most likely to go down in value over the next year. That’s because performance is cyclical. Winners become losers, not necessarily because the funds are managed by bad managers. Rather, asset classes and styles move up and down based on factors such as economic cycles, investor sentiment and interest rates.
Before maximizing your long-term investments, I would suggest that you first build up your emergency fund to three-to-six months of living expenses depending on the stability of your job. Once you reach your emergency fund target, I would prioritize maximizing your Roth IRA contribution for as long as you are under the income threshold and then trying to maximize your 401k contribution. Once you are either above the income threshold for Roth IRA contributions or have additional money to invest after maximizing your 401k, you should start to invest in a taxable investment account.
In terms of allocating these investments, I would suggest investing in diversified index or mutual funds — and avoiding investing in individual stocks. Individual stock investing can be very risky; you risk losing capital permanently as many investors did during the “Tech Bubble” in 2000-2002 and the “Credit Bubble” in 2008. I would also select a combination of index funds that invest in US stocks, international stocks, emerging markets, REITS and bonds to create diversification and to decrease volatility over time.