Over the past 10 years, Steve Sivak has worked with high net worth individuals in all situations and through several market cycles. Client frustrations with the ‘Big Bank’ model of the business led him to want to improve the experience. Steve created Innovate Wealth with the vision to refocus the business away from a product sales culture and back to the clients, their education, their behavior, and do it all at a more affordable cost.
Steve has been in the financial services industry for 14 years and spent the last 10 working for Wall Street banks. He is a Certified Financial Planner™ (CFP©) and previously attained the Certified Divorce Financial Analyst (CDFA) and Certified Portfolio Managers (CPM) designations while at Morgan Stanley, and an engineering degree from Lafayette College. He spends his free time reading (a lot of finance!), with his dog Kimo, serving on various community Boards, or doing anything outside or active.
BA, Civil Engineering, Lafayette College
Assets Under Management:
First, congratulations on maxing your retirement accounts! That's always a good goal and you've clearly prioritized that during your peak earning years.
It's really impossible for anyone to answer whether this is a good idea unless they had your entire financial situation. Let me try to arm you with more information to make a good decision:
1. There are very few situations in which an annuity makes sense. Very few. It's not to say they're terrible products in all cases, but given your age and savings rate, it's likely not worth using an annuity. You have plenty of time to save enough money to create your own income stream, which is the goal, right?
2. Annuities are often oversold because they pay large commissions. The percentages say your 'advisor' is likely making this recommendation based on how much money he/she will make on the product sale, not how it fits into your strategy.
3. Is your advisor a sworn fiduciary? Have they signed an agreement to that effect? Why not? Advisors that have a fiduciary responsibility and don't receive commissions magically stop recommending annuities.
4. Be very clear about the terms before you sign anything. Understand how it works, and how you can get your money out of the product if you want. Is it too hard to understand how it works? Then why are you buying it? Finance doesn't have to be complicated.
5. Finally, seek out a second opinion from a fee-only, fiduciary advisor. They are sure to look at your entire financial picture and give you an objective opinion, rather than force you into a product.
The first question is whether you have an emergency fund, which should cover 3-6 months of your expenses? I recommend that single income families have at least 6 months', and dual income families have at least 3 months' of liquid, safe investments that can be accessed quickly in the event of an emergency.
After that? It's really overkill to have that much sitting in a money market account, that money should be working for you!
Any money above and beyond your emergency savings should be allocated according to your goals, whether they be short-term or long-term. If you want to buy a house in 3 years and use that as a down payment? Then invest it, but do so somewhat conservatively so you know it'll be there. If you don't need it for 10 years? Invest in the market, and let time do some work for you!
Mutual funds, ETFs, stocks, bonds, can all work, it really just depends on your goals.
Projecting a dollar value into the future relies on many assumptions, including investment return, fees, and tax burden. You can't do anything more than make estimates of these values, there's no way to know for sure what your return will be, or how much you'll pay in taxes 10, 20, or 40 years from now.
Here's what we know for certain: if you make too much money, the IRS will prevent you from making contributions to a Roth. If you are in the 25% bracket now, with your first job, it's not a stretch to say your income is going to increase to the point where you won't be able to make those Roth contributions anymore (for example, in 2017 you begin to lose that ability at $118,000 of adjusted gross income). Make them now, while you're able, and the compounding effect over 40 years can be staggering.
We also know for certain that the deduction for a Traditional IRA contribution also goes away as income rises (in 2017, you start to lose that deduction at $62,000 adjusted gross income if you're covered by a retirement plan at work). If you're in the 25% tax bracket, you may already have surpassed that number. The deduction is a benefit you may lose quickly or already be unable to use with a Traditional IRA.
To summarize, it's not a bad thing to save in either place. I encourage most people to have a 'bucket' of taxable money (IRA, 401k) and non-taxable money (Roth) in their retirement projections, as we have no way to accurately know the tax situation that far in advance. Take advantage of building the non-taxable bucket now, before the IRS limit is imposed, with the expectation you will have a long time to build the other bucket later.
There is a point in the future where you will surpass 'breakeven' and actually get a fair return for waiting. If you live into your 90s, for example, the decision to wait until 70 to receive your SS benefits will be richly rewarded.
But, do you know when you're going to die? You probably don't...
So if you can't predict the future, the next best thing is to crunch the numbers and make a decision based on your personal lifestyle. What's important to you? The predictability of the SS check in the mail earlier? Or the idea that you may have much more coming to you later? Do you have the disclipline to not spend the extra money now, and invest it? Or will the extra amount simply get spent, and therefore you will never recognize the stock market return you reference? What if your large cap stocks lose 30-40%?
There is no 'correct' answer with social security. Yes, the value goes up if you wait, and if you live a very long time that will come out in your favor. But there are too many variables to make the decision solely based on an equation.
'Moving to cash' can mean several things from an investor pespective.
The implication is that you are reducing risk in a portfolio, as cash is considered 'risk-free.' You would excecute this by selling investments or other liquid products and not buying something else, therefore, it stays in cash.
The catch is that most investment institutions/banks will 'sweep' this cash money into a money market fund, or similar short-term investment vehicle. So while this is still considered 'cash,' it is techincally invested and not like the cash in your pocket.
Investment advisors may also use the phrase 'moving to cash' when they are redeeming higher risk investments and placing the money into much safer, shorter-term investments, such as US T-bills. In the investment community this is synonymous with moving to cash, but you are still buying another investment and not putting paper bills in your pocket.
Cash and cash equivalents ARE an asset class, so making this move can be a vital and important part of an investment portfolio when you want to reduce risk and volatility.