IMG Wealth Management
Financial Planner, Analyst
Nathan Edwards is a CERTIFIED FINANCIAL PLANNER™ professional and CFA charterholder. He is committed to the idea that establishing clearly defined financial objectives is the keystone of the financial planning process. With these objectives as the foundation for a viable financial plan, Nathan believes that it is possible to elevate one's peace of mind and financial well-being both now and into the future.
IMG Wealth Management was created by professionals from Investment Management Group in 2017 to meet the specific needs of high net-worth individuals and institutions. Nathan and IMG Wealth Management's team of financial planners, investment managers, and support staff have developed a business model tailored to the unique requirements of their core clientele.
Assets Under Management:
If you fall within the parameters the IRS has outlined here, you might be able to have your cake and eat it, too, so to speak! Generally, you can convert your primary residence into a rental property and avoid paying taxes on some or all of the capital gains upon its eventual sale. That is, as long as you owned and lived in the property as your “main home” for two of the five years prior to the date of sale.
A big sticking point, and potential risk, is a matter of timing. Yes, you have to have occupied the home as your primary residence for at least two of the last five years. That’s usually the easy part. The hard part is the clock that starts ticking once you move out. If you resided at the property continuously for at least two years prior to moving, then you’ve got three years to sell it.
It sounds easy on paper, but, as we saw during the most recent financial crisis, buyers do not always materialize when they are needed. The timeline factor becomes an even more important consideration if the plan is to rent the property for a couple of years prior to putting it on the market.
Considering what’s at stake, it is certainly advisable to speak with a tax professional – and probably a disinterested realtor – that is familiar with your specific situation prior to making any decisions.
“Beta” (or historical beta) as commonly used to refer to the sensitivity of a single company’s stock to a benchmark, and “beta” – as in the sometimes confusing description of regression coefficients – can be exactly the same thing.
When beta is a reference to the slope coefficient of a regression equation, it will produce “Beta” when the independent variable is the benchmark (“The Market”) and the dependent variable is the individual stock in question.
The “Market Model” is actually a simple linear regression model that tries to describe a relationship between returns on an asset and returns on the market portfolio. In this case the slope coefficient is actually defined as Beta (the sensitivity of the return on an asset [a single stock, for example] to the return of the market portfolio [which can be replaced with a specific benchmark, like the S&P 500 Index]).
Beta for Beta’s sake, though, is often calculated as Beta = (Covariance of the returns on a stock and the returns on the benchmark) / (Variance of returns on the benchmark). However, the results for Beta should be the same as in the regression equation.
If you want to demonstrate this point to yourself, gather the beginning of month closing price data for a stock of your choosing and the S&P 500 Index for the last 61 months. Calculate the monthly returns for both the stock and the index (you should end up with 60 periodic returns for each). You can use Excel to calculate the covariance of the stock and the index, and the variance of the index. Divide the covariance by the variance of the index, and you should end up with the same Beta shown for the stock in Yahoo Finance (different sources calculate Beta differently).
You can then use Excel to perform a regression analysis, using the stock returns as your Y (dependent) variable, and the index returns as your X (independent) variable. The output should produce a slope coefficient (beta) that is identical to your previously calculated Beta.
This is a question that should be thoroughly explored with a financial professional that is aware of your household’s specific financial situation and objectives. Without diminishing that fact, I would like to try to offer a general answer to your question that might at least provide some food for thought.
One of the big determinants of your ability to make this work is the tax treatment that will be applied to your liquid/investment assets moving forward.
For example, if 100% of your assets are currently in a Roth IRA (which would allow the assets to accrue interest and be distributed to you without having to pay taxes) your dollars will make it further than if 100% of your assets are in a Traditional IRA (which will accrue interest on a tax deferred basis, but will be taxed as ordinary income upon distribution). If the dollars are in fully taxable cash (non-retirement) accounts, then taxes on investment earnings would also need to be factored into the equation. Of course, there are also tax considerations to be made with regard to the state and city in which you will reside in retirement.
All of that being said, even if you will not pay municipal taxes, I believe that you might be cutting it close if you want to maintain this level of income adjusted for inflation of even 2.5%; especially if your assets are in a pre-tax retirement account. If you haven’t fully factored in the rising cost of healthcare as you age and/or the potential for long-term healthcare needs into your initial income requirement, then things might get really tight at the back end of your plan.
So, if you take your current assets, assume a positive and static rate of return (without accounting for sequence of return risk), and subtract the difference between your need and recurring income (Social Security retirement benefits), it might appear that your asset will last into your eighties. Unfortunately, it is the potential variability of investment returns, realized inflation, taxes, and health-care costs that tend to catch retirees by surprise.
I know that I’m not providing a tremendous amount of detail, but that is because I can’t. There are so many other factors to be considered; like the types of investments you feel comfortable with (which will help determine assumed rates of return on your assets), the value of your home (which might buy you a little more time if it is more valuable than a property that you might be willing to downsize into in the future), a complete assessment of cash flows and taxation, and a number of other factors.
I have seen a lot of retirement plans at various phases, and the only reason that I offer even this limited input is that it sounds like you’re in a position that might work out. However, if it doesn’t, it is probably going to start really breaking down on you when your options for generating additional income would be limited. That is, like so many others, your plan will look like it should work without issue using simple assumptions, but it will be details like inflation, taxation, investment earnings, and healthcare that will catch up in a big way.
My intention is not to be a fear-monger, but I do encourage you to take a very close look at your situation now, and what it might look like well into the future, with a financial professional that you know and trust. With complete knowledge of your circumstances, it might turn out that you and your spouse will be in really great shape over the long-term. Based on the very limited information you’ve provided here, though, there might be some concerns as far as sustainability.
If your present interest is to develop a better understanding of the process of financial planning, I highly recommend looking into becoming a CFP® professional. I wish that I would have signed up for the classes as soon as I entered the industry. The information, in and of itself, is valuable for prospective planners, but the largest benefit to me was being introduced to specialized segments of the industry that I hadn’t previously recognized. In other words, the courses helped me understand exactly what I wanted/needed to focus on.
A great way to take a trial run of some of the topics covered by the CFP® program, and to learn some things along the way, is to pick up a copy of the Financial Planning Competency Handbook. It’s not necessarily cheap, but the information is solid, and it’s much less expensive than signing up for the courses only to decide that they’re not for you.
For less general and more technical themed resources, CFA Institute publications are a fount of knowledge.
Since you have surpassed age 59 ½ you will no longer be subject to the 10% early distribution penalty tax for any distributions that you take from your 401k. Having surpassed age 59 ½ also means that you do not have to leave your employer to become eligible to transfer some or all of your 401k to an IRA, if appropriate.
Essentially, because of your current age, you have a wide variety of options to distribute the assets within your 401k to yourself. The next big consideration is likely going to be one of managing taxation.
Even though you will no longer be subject to the 10% early distribution penalty, you will still have to pay taxes on any distributions from the account that aren’t associated with a Designated Roth Account or after-tax contributions. This means that you will want to consider how much you distribute to yourself in a given year, to try to avoid paying more in taxes than is necessary.
If you find that you want to start taking distributions, and your current 401k plan is not conducive to what you are trying to accomplish, you do not have to distribute 100% of the assets to yourself - and incur the associated tax obligation - to acquire more control over your assets. Remember that – if it makes sense to do so – rolling over your pre-tax 401k assets into a Traditional IRA, is a non-taxable event over the age of 59 ½. Because of the nature of IRAs, it should be possible to establish an IRA with the liquidity and investment characteristics that you desire. Of course, any pre-tax assets rolled over to a Traditional IRA would still be taxed as you draw on the assets to generate income for yourself.
On the other hand, depending on the specifics of the plan, it might make sense for you to leave your assets within you current 401k and distribute assets directly from that plan.
The best way to pay yourself from these assets will be highly dependent upon your personal needs and objectives, and the stipulations associated with your current 401k plan. But know that, because of your age, your options are plentiful.