Four Considerations When Retiring with SURS Retirement Savings Plan

Introduction

To be or not to be, that is the question. A binary choice. In the past, a SURS Self-Managed Plan (SMP) participant once had a binary choice like this. Annuitize or not annuitize. Annuitization would ensure a lifetime stream of income and the retiree health insurance. By not annuitizing, or taking the lump sum option, one was turning down the health insurance and assuming the risk of portfolio management.

Along with the rebranding of the SMP to the SURS Retirement Savings Plan (RSP), more choices were added. With more choices comes more complexity. Participants may still choose to annuitize the lump sum as they have in the past. Alternatively, one may choose to use the new Secure Income Portfolio (SIP). Some of the new benefits SIP affords are:

1) the potential to have one’s retirement income stream increase with market returns, and

2) the ability to leave the residual value of one’s SURS account to heirs at death.

Along with these new choices come more options. One new choice is the ability to only use half of the account to produce guaranteed income and still maintain state-provided health insurance. This ability provides guaranteed income through the Secure Income Portfolio (“SIP”). The remaining 50% would be kept in the Lifetime Income Strategy (“LIS”) and can be accessed as needed.

To review a more comprehensive explanation and analysis of the new RSP, you can download a whitepaper we authored here.

What we have learned

As we have begun to assist clients through the retirement process since the change from SMP to the new RSP Plan, here are a few items we have learned along the way.

Retiring before age 60

There are different rules for participants retiring before age 60 when using the SIP.

If you choose to have some balance remain in LIS and not be subject to the guaranteed payout through the SIP, you can’t access the amount in the LIS until you turn age 60. One benefit of using the SIP is that you can choose to only use half the account for generating pension income and still qualify for the health insurance benefit. After age 60, the other half – the LIS half – can be used or withdrawn as desired. However, prior to age 60 that freedom to withdraw the account does not apply.

If you retire before age 60, your SIP benefit cannot yet increase with market increases – it is “locked” until age 60. Just like at age 60 and later retirement, the benefit amount may not go down. The “floor” is set at retirement. Once one reaches age 60, benefit increases due to market gains can be granted. If market decreases do happen between retirement and age 60, the principle in the LIS account is reduced even though the benefit is not.

Flexibility at a cost: tradeoff between income and principal

The benefit of using the SIP includes:

• ability to allocate a portion of your account balance to draw upon at your discretion

• ability to leave the leftover balance of your account to a beneficiary and heirs at death

• ability for guaranteed income to increase overtime with the performance of investments

However, these benefits come with an expense – you could potentially receive a smaller pension relative to other options.

The pension amount can be expressed as a withdrawal rate, which is the annual benefit divided by the total lump sum balance. For example, a pension benefit of $5,000 per month or $60,000 per year on a $1 million account balance equates to a withdrawal rate of 6%. When activating the SIP, or annuitizing your balance, rates will depend on a variety of factors including, but not limited to: age, whether a survivor benefit is being provided, and market rates at retirement.

Under recent rates, if one is age 65 with no survivor benefit and annuitizes the account (without using the SIP), a withdrawal rate of 7.4% could be expected.¹ If the same individual uses the SIP they could expect a withdrawal rate of 4.81%.² In real dollar terms in this example, with a $1,000,000 balance, it would mean the difference between receiving $6,183 per month and $4,008 per month.

In this example, the monthly pension benefit is only 65% of what it might have been had the account been fully annuitized. One might think “I worked hard all these years and this is all I get?” Keep in mind, you are giving up some monthly benefit in order to potentially get future rate increases, and to preserve that value for heirs.

Do not forget balances at TIAA and Fidelity

While most assets were transferred to Voya during the changeover to RSP, some legacy funds may still exist at TIAA or Fidelity. At retirement, remaining balances in TIAA or Fidelity need to be annuitized with that company or transferred to Voya and incorporated into the SIP. One of these two actions are mandatory to qualify for and enroll in the SURS health insurance benefit. This would apply even if the TIAA balance is extremely small and would not produce much monthly income.

Choose wisely, your decision is irrevocable

Once your lifetime benefit in the LIS Secure Income Portfolio is “activated,”³ there’s no going back. One cannot later terminate the contract and take the entire LIS and SIP balance for one’s own. This might apply if you are an early retiree (before Medicare age 65) and need the SURS health insurance. Before 65 the health benefit is large but diminishes following enrollment in Medicare. At 65, if you were to want to terminate enrollment, and take the lump sum balances for one’s own management and quit paying the higher fees for benefits you’re no longer using, the rules would prevent enacting this strategy.

Footnotes

[1] Principal Life Insurance Company Illustrative Table of Annuity Premiums for SURS Rates as of October 1, 2022

[2] Chart – SURS Blended Rates- Rolling Periods, Lifetime Income Strategy – Q4 2022

[3] SURS Retirement Savings Plan Member Guide, page 22, https://surs.org/wp-content/uploads/Guide-RSP.pdf

Retiree Health Insurance Under SURS

Introduction

We have found that retiree health insurance benefits can be the most common point of confusion for State of Illinois employees retiring under the State University Retirement System (SURS). In this post, we will break down the basics of the Retiree Health Insurance Benefit, how to qualify, and the features and drawbacks of this benefit.

Special Note for SURS Retirement Savings Plan participants: In fall of 2020, SURS rolled out the newly rebranded SURS Retirement Savings Plan (RSP), which has added another layer of complexity. See the whitepaper we wrote for a more detailed overview of this change.

Qualifications

Service Credit

To begin, let’s discuss the qualifications for retiree health insurance benefits. The first requirement is service credit. Service credit can vary based on your SURS membership Tier, which is determined by the date of first employment under a SURS covered employer. For anyone with service credit prior to January 1, 2011, you are considered a Tier I participant. A Tier I participant is eligible for retiree insurance benefits after 5 years of service credit. Anyone beginning service credit on or after January 1, 2011 is a Tier II participant. 10 years of service credit is required for Tier II participants to be eligible for any retiree health insurance benefit.

The service credit discussed above is the minimum requirements to be eligible for retiree health insurance. Meeting the minimum service credit requirements only provides for a subsidy of the cost of this benefit. To have your insurance fully subsidized by the State of Illinois, you need 20 years of service credit. Members who meet the minimum coverage requirements and have less than 20 years split the cost of coverage with the state. The chart below summarizes this cost split:

Costs above are for the employee only. Coverage for a spouse or dependents is available for an additional cost.

Annuity Election

The second requirement in addition to meeting the service credit requirements to qualify for retiree health insurance is to annuitize your pension. If you separate from service and defer taking a monthly retirement benefit under SURS, you would not be entitled to the retiree insurance benefit until you have annuitized your pension plan. Taking a refund of your pension plan balance, including rolling over your plan balance to an IRA or other retirement plan will result in a forfeiture of retiree health insurance benefits.

Annuitization of SURS is the process of converting your benefit into a stream of income payable monthly for the remainder of your life. For the Traditional and Portable plan, this is fairly straightforward. Your pension is based the higher of two formulas which SURS will calculate for you. Your main decision is whether to select a survivor benefit for your spouse or a qualified dependent.

The Retirement Savings Plan has more flexibility, which makes annuitizing a bit more complex. Here is a summary of your options.

1.    Annuitize the entire balance of your SURS RSP. This annuity will generally be administered for SURS through Principal Insurance company, or at TIAA if you still have funds in your RSP portfolio invested at TIAA.

2.    Move at least 50% of your RSP portfolio balance into the SURS Secure Income Portfolio and activate the lifetime income benefit. When selecting this option, all RSP investment funds not otherwise annuitized must be first moved into the Lifetime Income Strategy (LIS) portfolio. Next, with all non-annuitized RSP funds in the LIS portfolio, at least 50% of those LIS funds must then be moved into the SIP with its guaranteed income benefit. After moving all funds into the LIS and activation of at least 50% of your LIS fund total into the guaranteed SIP, any LIS funds not in the SIP may be moved back to RSP Core Funds or withdrawn.

3.    A combination of Options 1 & 2 – for example, you could use 1/3rd of your RSP account to buy an annuity through Principal. With the remaining RSP balance, allocate 50% to the SIP for lifetime income and 50% to the LIS or Core Funds for periodic withdrawal.

We have commonly heard the misconception that RSP participants must use the new SIP to maintain health insurance, which is not true. Electing an annuity remains an option.

Timing of Retiree Health Insurance

It is possible to retire from the University and delay drawing your pension. This may be beneficial if you have alternative insurance coverage through new employment or a spouse. Deferring your benefit has two potential benefits. First of all, your pension benefit (traditional or portable) may increase or the balance of your account can continue to grow (RSP). Secondly, if you are not yet Medicare-eligible, the State of Illinois will pay an additional monthly incentive to opt out of retiree insurance.

Example 1

A University Employee has 20 years of service at age 50, at which point she leaves university employment to pursue a second career with a private sector employer. The new employer offers health insurance. The employee leaves her account balance with the SURS RSP, which allows the balance to continue to grow. At age 63, she fully retires from her private sector position and needs health insurance. At this point, she activates one of the RSP income options to qualify for health insurance as a State of Illinois retiree.

The Value of Retiree Health Insurance under SURS

There may be cases where an individual chooses to forgo their SURS retiree health insurance benefits, but before making this irrevocable decision, it is important to understand what those health insurance benefits are worth.

How SURS Retiree Health Insurance works with Medicare

Those in the SURS RSP are also required to participate in Medicare. While working, everyone pays into the Medicare system. Upon turning age 65, you must sign up for Medicare. If you are still working and covered by your University insurance, you only need to enroll in Medicare Part A, but may delay Part B until you retire.

Medicare has three parts:

• Part A, which covers Hospital services and is generally free for those age 65+

• Part B, which covers doctor visits and other outpatient services. Part B has a monthly premium starting at $170.10 (2022); cost can increase based on income.

• Part D, which covers prescription drug costs

Once you retire and become a SURS annuitant aged 65 or older, you are required to enroll in the Total Retiree Advantage Illinois (TRAIL) plan, managed through Illinois Central Management Services (CMS). This is a Medicare Advantage plan, which means it combines Medicare Part A, Part B, Part D and a Medicare Supplemental Policy (commonly known as a Medigap policy). Even under the TRAIL program, you still must pay the Medicare Part B premiums on your own. The State of Illinois subsidizes (or entirely covers) the rest of your supplemental health cost.

How much is this SURS health insurance subsidy worth? 

For a retiree with 20 or more years of service, age 65 or older and on Medicare, the value of this benefit is around $150 per month. This is based on the amount the State of Illinois covers for the cost of the Advantage Plan (Illinois Central Management Services, 2022).

For a retiree with 20 or more years of service and under the age of 65, the SURS health insurance benefit is significantly more valuable. Prior to Medicare eligibility, the State picks up the entire cost of their health insurance. For those retiring before age 65, the cost of health insurance can be a significant obstacle.  For example, marketplace plans at healthcare.gov range in cost from $1,165 to $1,791 for a 60 year old male in the Champaign County area.

Conclusion

Health Insurance is one of the biggest obstacles we see for clients who wish to retire prior to eligibility for Medicare at age 65. If you are retiring early from the University, it could be a valuable benefit. The requirement to annuitize is the biggest obstacle, especially for those in the SURS Retirement Savings Plan. Once you are Medicare eligible, the value of the insurance benefit is less valuable as Medicare covers a significant portion medical expenses and Medicare supplement policies are low in cost as compared to private health insurance.

Insurance Changes for Illinois State Retiree Health Insurance

In September, the State of Illinois Department of Central Management Services (CMS) announced changes to the State of Illinois Retiree Insurance Program. These changes impact retirees enrolled in the Total Retiree Advantage Illinois (TRAIL) who are also Medicare Eligible. This applies to members who are currently enrolled, or plan to enroll in the TRAIL Medicare Advantage Prescription Drug (MAPD) plan effective for the 2023 plan year.

Following a proposal process, the State of Illinois has selected Aetna Medicare Advantage Prescription Drug (MAPD) PPO Plan as the new medical and prescription drug plan beginning January 1, 2023. This will replace the existing plans, most commonly the HMO Plans through UnitedHealthcare, Health Alliance, or Humana. This change is automatic and does not require participants to take any action .

Here are a few Frequently Asked Questions (FAQs) that may help you:

Why is this change happening?

The contract with current providers expires December 31, 2022. State law requires a competitive process to compare proposals submitted by various vendors. Aetna was selected as part of this process.

With any change in insurance provider also comes concern over coverage of existing doctors and hospitals. While it is yet to be seen how these concerns will be addressed, it is worth noting this is not a new process. A similar process unfolded when Health Alliance was dropped in exchange for UnitedHealthcare.

Can I maintain my current Medicare Advantage Plan Provider?

No. To maintain coverage under the Total Retiree Advantage Illinois (TRAIL), including subsidized premiums under your retirement annuity, you and your dependents will automatically change to the new provider.

You may opt of out of TRAIL by visiting MyBenefits.illinois.gov. This must be completed by November 30, 2022. If you opt out, you will want to select a new Medicare Supplement and Part D or Medicare Advantage plan in the private market. You will be responsible for the full premiums for these Supplement/Advantage plans. You can compare plans at Medicare's Website. If you opt out, you may re-enroll in the TRAIL program with a qualified life event or during the next year’s open enrollment.

What if I am not Medicare Eligible?

This change only impacts members and their dependents whose coverage is under a Medicare Advantage plan. If you or any dependents are not Medicare-eligible, your coverage is through the State Employees Group Insurance Program (SEGIP) and is not impacted by this change. This change may impact you if you become Medicare eligible in the future.

What is a Medicare Advantage Plan?

Medicare is commonly made up of three parts:

•          Part A – Covers Hospital Services

•          Part B – Medical Insurance

•          Part D – Prescription Drugs

Most Medicare participants also add a Medicare Supplement plan to cover any gaps and add services above the base Medicare plans.

Medicare Advantage Plans combine all the above plans into a single plan, administered through a private health insurance company. In this case, Aetna is the private company who will take over administration.

Do I pay Medicare Premiums if I am enrolled in a Medicare Advantage Plan?

Yes. While a Medicare Advantage plan replaces original Medicare, you are still responsible for Medicare Part B premiums, which are either paid directly to Medicare or deducted from Social Security benefits. Note that, for most people, Medicare Part A is free (paid through Payroll taxes while working). Your Part B premium is based on your income and can change from year to year. Part D may also have a supplemental cost. These premium adjustments are called the Income Related Monthly Adjustment Amounts (IRMAA) as follows:

What’s Next for Me?  

As mentioned previously, for those opting out, actions will need to be taken. For those choosing to stay on the TRAIL MAPD program, the change is automatic for members and their dependents. You will receive a welcome kit in the mail from Aetna with more information on the plan and new member ID Cards. With all the Medicare spam mail that gets sent out, keep a sharp eye out for any correspondence from AETNA, CMS, or anything with the TRAIL logo.

Further Reading and Sources:

•         SURS News Release Retiree Healthcare Update - SURS

•         Illinois Central Management Services My Benefits Website

•         Aetna Coverage Details State of Illinois | Aetna Medicare

•         Medicare Premiums Detail at Social Security - IRMAA Sliding Scale Tables 

•         TRAIL Enrollment Guide (2022) FY 2022 Benefit Choice

Selecting the Right SURS Plan for You

Abstract

Selecting the right Pension Plan under SURS is complex. Below are some of the factors we discuss and a summary of how they may impact your decision:

	Traditional Plan	Portable Plan	Retirement Savings Plan
High-income Participants	Less Favorable	Less Favorable	More Favorable
Participant Control of Investments	No	No	Yes
Pension Income Guaranteed	Yes	Yes	No
Career Stage	Favors Late-Career	Favors Late-Career	Favors Early-Career
Flexible Options at Retirement	Least	Moderate	Most

Introduction

Congratulations on your new role with an Illinois public institution! In addition to meeting your new colleagues, learning the ropes of your new department, and developing your new courses (if instructing), you will need to select a pension plan under the options offered through the State Universities Retirement System (SURS). Choosing the right plan can be complex, so we have narrowed down the factors we have found make the biggest difference.

We encourage you to be diligent in your selection process, but do not delay! While you have 6 months to select a plan, matching contributions are not allocated to the self-directed plan until you decide. If you fail to decide, you will automatically be enrolled into the default option of the Traditional Plan.

So, let’s get started!

An Overview of the Options

When you begin employment, you must select from three plan offerings: Traditional, Portable, or Retirement Savings Plan (hereafter referred to as RSP). The RSP was previously known as the Self-Managed Plan (SMP) until it was updated and rebranded in 2021. You may find that some colleagues still refer to it as such.

While all three plans are considered pension plans, they can be distinguished at a high level between defined benefit and defined contribution plans. In a defined benefit pension plan, your retirement income is based on a formula. The Traditional and Portable plans fall under this category. In this case, your income at retirement is determined by your average earnings and length of service. The pool of money that backs this pension is managed by SURS and the investment risk is borne by the State of Illinois.

In contrast, the RSP is a defined contribution plan. Your future retirement income is based on the balance of your account at retirement. Your contributions along with matching contributions from the state are deposited into a separate account for your benefit. You are responsible for selecting and managing the investments in that account and bear the investment risk of that account. When you retire, you can convert that account balance into a stream of income called an annuity. The level of this benefit will be determined by the balance of your account at retirement. You can read about these annuity options in the white paper we wrote about this plan by clicking here.

Options	Plan Type	Summary
Traditional Plan Portable Plan	Defined Benefit	Retirement benefit based on formula Employer bears investment risk
Retirement Savings Plan	Defined Contribution	Retirement benefit based on account balance You bear investment responsibility and risk

How Salary Impacts your Choice

One major difference in the plans is the level of income counted towards your pension benefits. Due to this difference, salary and future growth potential could be the single biggest factors to consider in selecting your plan.

The Traditional and Portable plans are limited to a state-determined Maximum Pensionable Earnings, currently $116,470.42 (Fiscal Year 2022). If your salary exceeds this limit, your contributions to the plan (8% of salary) and employer matching contributions (7.6% of salary) will only be based on your wages up to the limit. Similarly, your final average salary to determine your annual pension will be capped based upon this same limit.

The RSP uses a federal limit for Maximum Pensionable Earnings, currently $290,000 (Fiscal Year 2022). This makes the RSP more favorable to those whose current or future salary may exceed the annual Traditional and Portable annual wage limit. To illustrate, consider the following examples.

Example 1 – Pension Under Traditional Plan

Dr. Zhao has been recruited by the University of Illinois as a Professor and a starting salary $200,000 per year. She selects the SURS Traditional Plan. She works for 25 years, retiring at age 67. Her pension is $64,000/year[i] or $5,333/month.

Example 2 – Pension Under RSP

Let’s assume the same base facts as example 1, except Dr. Zhao selects the RSP plan. She invests her RSP Account Balance into a portfolio of 40% Bonds and 60% Stocks, earning an annualized return of 9.4% per year[ii]. At age 67, she retires with a SURS RSP Balance of $2.8 million. She then annuitizes this balance and receives a lifetime income stream of $142,000/year or $11,833/month[iii].

There is a crucial difference between Examples 1 and 2. As an employee, your contribution to SURS ends after your income exceeds the Maximum Pensionable Earnings. Consider the following table to illustrate:

Plan	Maximum Pensionable Earnings	Contributions Assuming $200,000 Salary
Traditional Plan Portable Plan	$116,470.42	Employer: amount required annually based on actuarial formula Employee: $116,470.42 x 8% = $9,317.63
Retirement Savings Plan	$290,000.00	Employer: $200,000 x 7.6% = $15,200 Employee: $200,000 x 8% = $16,000

This means Dr. Zhao would contribute over $6,682.37 ($16,000 - 9,317.63) more per year to the SURS RSP than the SURS Traditional Plan.

Example 3 – Supplemental Savings

Assume the same facts as Example 1, except Dr. Zhao chooses to add the $6,682.37/year to a supplemental retirement savings plan (403b). We will also assume the same hypothetical portfolio used in Example 2. At the end of 25 years, she has an account balance of about $600,000. Assuming the same annuity rates as Example 2, she could receive an estimated additional income of $30,000/year, or $2,500/month, from her 403b account.

Together, these three examples illustrate the impact the salary cap has on the outcome. For someone whose income exceeds the salary cap, selecting the Traditional or Portable plan results in the missed opportunity to receive matching contributions.

Investment Control

For those who choose the RSP, one feature of the plan is the ability to control investment decisions. Voya is the current plan custodian. Through their platform you can allocate your account balance between a mix of different investment choices. One option is to select a custom mix of Core Funds. Core Funds are a set of low-cost, index funds designed to track a variety of investment benchmarks. Participants can choose a custom combination of Core Funds in proportions that they deem most appropriate for their situation, but are self-responsible for managing the balances between the Core Funds over time. An alternative to the Core Funds is the Lifetime Income Strategy (LIS) Fund. The LIS is an investment fund that is managed to automatically adjust the risk level of the fund based on your planned retirement date.

As illustrated in the above examples, choosing the RSP provides participants with the potential for maximizing pension payments in retirement. However, the downside is that you also bear the investment risk that comes along with your investment selections, which, depending on market and investment performance, can directly impact the future balance of the RSP and thus, the size of the pension payments which can be generated by that RSP balance.

If you prefer to have the employer retain the investment risk and receive a guaranteed income, then the Traditional or Portable may be a more suitable option.  These plans are professionally managed by the investment staff with SURS.  No matter the outcome of investment performance, your ultimate pension benefit is guaranteed.

While investment returns in the future cannot be predicted based on past performance, historical data generally shows more favorable returns for those who are invested for a long period of time[iv]. This suggests someone entering employment earlier in their career could benefit from a long period of time to allow investments to compound and grow in value, which may favor the Retirement Savings Plan.

Someone nearing the end of their career may not have a long-time horizon to ride out the ups and down of investment performance. In that case, a new employee in their later working years may favor enrolling in the Traditional or Portable plan.

Vesting & Flexibility

The trend has been toward a more mobile workforce, where multiple job changes throughout one’s career are not uncommon. Academia is not immune to this trend. Therefore, you should consider the flexibility and portability of benefits in the event of an employment change. Here is a summary:

The Traditional plan has the least flexibility for departure or refund. 

• Requires 10-years of service credit to vest.

• If you are fully vested and leave SURS-covered employment, you can:

  • Wait and draw benefits at full retirement age, or

  • Take a refund of your own contributions plus interest. Employer matching contributions are forfeited with this choice.

• If you are not yet vested and leave SURS-covered employment, you are only entitled to a refund of your own contributions. Employer contributions are forfeited unless you later vest.

The Portable plan offers some benefits of the defined-benefit plan while maintaining some flexibility in case of departure.

• Requires 10-years of service credit to vest.

• If you are fully vested and leave SURS-covered employment, you can:

  • Wait and draw benefits at full retirement age, or

  • Take a refund of your contributions, employer matching contributions, plus interest.

• If you are not yet vested and leave SURS-covered employment, you are only entitled to a refund of your own contributions. Employer contributions and interest are also refundable after 5 years of service credit.

The Retirement Savings Plan offers the most flexibility.

• You vest with 5 years of service credit.

• If you are fully vested and leave SURS-covered employment, you can take a refund of your contributions, the employer contributions, and growth and interest of the account.

• If you are not fully vested and leave SURS-covered employment, you can take a refund of your contributions and growth and interest of the account. Employer contributions are forfeited.

For all plans, eligibility for retiree health insurance requires you to fully vest. Taking the full refund option for any pension will forfeit retiree health insurance benefits.

Survivor & Legacy Benefits

In exchange for reduced flexibility, the Traditional plan offers the most generous survivor benefits. Survivors would receive 2/3rds of your accrued monthly retirement benefit, payable to your eligible survivor.  This benefit comes at no extra cost to you. 

Example 4 – Survivor Benefits, Traditional

Following the same facts as example 1, assume that Dr. Zhao had selected the SURS Traditional pension with a base benefit of $5,333/month. If she were to die shortly after retiring, her spouse would be entitled to a survivor benefit of $3,555/month for life. At the death of Dr. Zhao and her spouse, no additional survivor benefits would be payable to children or other heirs.

The Portable plan only offers a default survivor benefit if you die before reaching retirement.  In that case, the benefit is 50% of your accrued retirement benefit (as compared to 2/3rds under the Traditional plan).  Upon retirement, you can choose to purchase a survivor benefit greater than 50% at a cost to you of reduced lifetime payments.

Example 5 – Survivor Benefits, Portable

Following the same facts as example 1, assume that Dr. Zhao had selected the SURS Portable pension with a base benefit of $5,333/month. If she were to die shortly after retiring, her spouse would not be entitled to any survivor benefit. At retirement, Dr. Zhao could instead choose to take a reduced monthly pension to add a survivor benefit for 50%, 75% or 100% of the original pension.

The RSP does not provide an automatic lifetime survivor payment.  You or your survivor are always eligible for a refund of your own contributions and earnings. After 1.5 years of service, employer matching and related earnings are also refundable to survivors.  Your survivor may choose a lifetime payment with this refund, with the amount of such payment based on your account balance at that time.

FINAL NOTES

This guide was written for those enrolling in SURS now and are therefore in Tier II SURS plans. This applies to those enrolled on or after January 1, 2011. If you first enrolled in SURS prior to this date and are a Tier I participant, some of these plan provisions may be different.

I’ll note that many clients consider the RSP a refuge from the troubled finances of the State of Illinois. The idea is that funds are held separately, in-trust, and therefore safe from the creditors of the State. This is true. By federal law, RSP funds must be deposited in a timely manner to your account, including employer matching.  State matching of the other pension plans has not always been made timely, which is a big part of the pension underfunding problem.

However, this advantage of the RSP does not make the Traditional or Portable plans “unsafe”.  The Illinois constitution states that pension benefits cannot be diminished, which guarantees participants their right to future benefits.  Previous attempts at pension reform have tested and found this guarantee to be true.  Unlike municipalities and territories, Detroit and Puerto Rico being recent examples, a State may not go bankrupt and therefore discharge the indebtedness of pension through bankruptcy.  While it is yet to be seen how the state will solve its current financial crisis, it must pay the promised bill of pensions. 

Regardless of whichever plan you choose, I would also encourage you to fund additional savings beyond your mandatory pension contributions.  While the SURS system does provide generous pension benefits, the pension was not designed to cover all your needs beyond working years.  Additionally, depending on your work history, you may not qualify for social security benefits as you do not participate in the social security system while actively participating in SURS.  Even if you have a past earnings history in social security, your social security benefits may be reduced as a result of the benefits you earned while participating in SURS.  While there are many savings options out there, the 403b and 457 savings plans offered through the University are often a good place to start.  We generally recommend supplemental savings of at least 7% and ideally 10% of earnings beyond your required SURS contributions. 

CONCLUSION

Navigating this initial decision on retirement plan choice will have a lasting impact on your future financial security.  Compounding the importance of this decision, it must be made in the flurry of other important activities of moving, starting a new job, selecting other benefits and adapting to your new role.  If you need help interpreting these decisions in your own financial life or want the peace of mind that you have considered the entire picture, please let us know.  Many of our clients are members or retirees of SURS.  We have helped hundreds of clients through the complexities of pension decisions.  If you would like our perspective or professional opinion on your own decisions, Contact Us today!

Further Reading

SURS Traditional - SURS Traditional Guide

SURS Portable - SURS Portable Guide

SURS Retirement Savings Plan - SURS RSP Guide

Sources

[i] Calculated using the General Formula: 2.2% x 25 Years of Service x the maximum pensionable earnings limit of $116,470.42. Result rounded to the nearest thousand for simplicity of reading. There is a second formula called Money Purchase formula based on investment returns that may result in different pension calculation. We used the General Formula because your benefit can never be less than this result.

[ii] Investment Returns based on Shea, B. (2021). Investment Returns since 1926-2021 from Ibbotson's SBBI.

[iii] Future account balance calculated on investment return as described above and is not guaranteed. Past performance does not predict future results. Annuity calculated using a 50% Joint and Survivor Annuity Rates for 65-Year-Old Annuitant and 60-Year-Old Spouse as provided by Principal Life Insurance Company, Illustrative Table of Annuity Premiums for SURS Rates as of Jan. 1, 2021

[iv] How risk, reward & time are related (2022). Vanguard. Risk, reward & compounding | Vanguard 

This post was updated August 2022.

TIAA Changes More Than Just Its Name

Written by Karen Folk, CFP®, Ph.D., Founder & Advisor Emeritus of Bluestem Financial Advisors

Overview

Both my husband and I have been loyal clients of TIAA (formerly TIAA-CREF) for over thirty years.  Throughout our academic careers, we chose TIAA over several possible providers.  We were attracted to their low cost mutual funds and long nonprofit heritage of service to teachers.  Founded in 1918 as the Teachers Insurance & Annuity Company to help teachers retire comfortably, they have become a leading retirement plan provider for academic, research, medical, cultural and government employees. 

Recently, as an account holder, I have grown concerned by TIAA’s behavior towards us as consumers.  We have noticed increasing encouragement by TIAA representatives to consolidate and rollover other retirement assets to their platform.  We were notified in 2015 that TIAA had appointed a full-time representative locally.  We were subsequently contacted on multiple occasions asking us to meet with this representative.  After researching this individual on LinkedIn, I noted his past experience included sales roles with other large brokerage firms, but listed no Financial Planning credentials beyond the minimum required licenses.

A recent New York Times article “The Finger-Pointing at the Finance Firm TIAA” (October 21, 2017, Gretchen Morgenson), revealed some rather dramatic changes in TIAA that have led to whistleblower complaints to regulatory agencies as well as a lawsuit.  The whistle-blower complaint filed with the Securities and Exchange Commission, obtained by The Times, “was filed by former TIAA employees who contend they were pressured to sell products that generated more revenue for the firm but were more costly to clients while adding little value”.  This was followed by the NY Times article “TIAA Receives New York Subpoena on Sales Practices” (Nov 9, 2017).  The NY state attorney general has subpoenaed records from TIAA to investigate possible regulatory infractions. 

Both articles increased my concerns about whether the changes I noticed at TIAA are contrary to their long tradition of unbiased advice at low cost.  As we investigated further, my husband was surprised to learn that parts of TIAA stopped being a nonprofit in 1997 – he, and I am sure many other TIAA clients, was not aware that much of TIAA is now a for-profit enterprise. 

The NY Times October 21st article explains that, in 2005, TIAA established the Wealth Management Group.  This group offers investment management services for a fee, a fee which is in addition to the underlying administrative and investment fees charged by TIAA funds.  The lawsuit and whistleblower complaints claim that TIAA’s Wealth Management Group, now called “Individual Advisory Services”, is pushing customers into higher-cost products that generate higher fees.  Given that TIAA continues to highlight its nonprofit heritage and its salaried employees, my concern is that TIAA clients are not aware of this conflict of interest. 

Based on my own experience, experiences reported to us by clients, and the NY Times articles, we did some additional research we thought worth sharing.

Our ADV Takeaways

We started by reading TIAA’s Form ADV, Part 2A, of the TIAA Advice & Planning Services’ (“APS”) Portfolio Advisor Wrap Fee Disclosure Brochure.  The ADV is a public disclosure document required by the Securities and Exchange Commission (SEC) of all professional investment advisors.  The Form ADV discusses investment strategy, fee arrangements and service offerings.  In my opinion, the relevant items are:

Compensation arrangements.  In the “Advisor Compensation” portion of the ADV, TIAA states several times that “The compensation does not differ based on the underlying investments chosen within the solution, nor does the Advisor receive any client commissions or product fees.” While true, these “salaried” advisors do in fact earn “credits” towards their annual variable bonuses based on a number of factors.  The ADV states clearly, “the annual variable bonus gives Advisors a financial incentive to enroll and retain client assets in the program” (i.e. a managed fee account, more complex solutions, or other TIAA products such as life insurance).   The ADV states again that “Advisors have an incentive to and are compensated for enrolling and retaining client assets in TIAA accounts, products and services, but do not receive any client commissions or product fees.”  Advisors are also compensated for “gathering, retaining, and consolidating” any new TIAA client accounts that they persuade clients to transfer to TIAA from other brokers (e.g. Morgan Stanley, Fidelity, Merrill Lynch, etc.).

My Concerns about TIAA Financial Advisor Compensation

In addition to the base salary received by all advisors, TIAA provides additional compensation in the form of variable annual bonuses to individual advisors. These bonuses are determined not only as a percentage of the amount of assets under management advisors accumulate, but also by the amount of wealth advisors are able to transfer from existing funds into their TIAA managed brokerage accounts. This means, that, while advisors receive a base salary (“no client commissions or product fees”), the bonus structure heavily influences advisors to move client assets to new managed accounts with added management fees, and to sell complex solutions (i.e., TIAA annuities or TIAA insurance) to their clients. In my opinion, this adds a conflict of interest similar to that of conventional brokers who receive higher commissions for selling certain products or certain funds.  Yet, TIAA continues to emphasize its “no client commissions or product fees” mantra.

My additional concern about TIAA is that their recent more aggressive sales tactics seek to funnel existing TIAA clients nearing retirement into much higher cost TIAA Advice & Planning Services Advisor managed accounts.  Enrolling in these accounts could result in retirees unknowingly paying additional fees to the advisor on top of the mutual fund fees they now pay in their current TIAA accounts.  Accepting a TIAA Advisor’s Advice & Planning Services proposal contract includes substantial additional fees which may not be apparent to a customer who does not mine the depths of the lengthy ADV, Part 2 disclosure document.

How much would an unsuspecting TIAA client who converted to a TIAA Advisor wrap fee account pay annually?  The TIAA fee schedule for Advisor & Planning services accounts is an asset-based program fee.  (reproduced below from the Form ADV):

If a TIAA client with $500,000 in assets chose to work with a TIAA Advice & Planning Services advisor in a program account, their annual fees (in addition to annual mutual fund fees) would be $4,925; for a client with $1,000,000 in investments accounts, their annual fees would be $8,925.  My concern is that TIAA clients contacted by or directed to a local TIAA advisor may not understand or realize the higher fees that come with that advisor’s proposals.  

A final concern deals with TIAA directing existing clients to their local representative for a “review”, as we personally experienced.  That “review” comes with a hidden incentive for the local representative to propose an advisor managed account.   In addition to our being contacted by phone several times, the TIAA website has been redesigned to feature a prominent “My Advisor” icon on every page in the upper right.  Existing clients who login to view their accounts and use that icon are directed to call their local TIAA representative.  Why is the local representative “My Advisor” rather than TIAA representatives reachable by phone whom we have dealt with in the past? 

Conclusion

TIAA has an exemplary not-for-profit heritage of serving education professionals with low cost, well-rated funds.  While the TIAA Board of Overseers continues their service to nonprofit employers, the new TIAA Advice & Planning services business structure follows a more common brokerage firm model.  Specifically, the way their advisors are compensated appears to incentivize TIAA salaried employees to steer clients to higher cost managed accounts and other insurance products and to gather additional assets held outside TIAA.  I believe that this managed account model introduces a conflict of interest for advisors to serve the best interests of TIAA clients.   Per the TIAA whistleblower’s complaint, this bonus compensation structure pushes advisors to move clients into products “more costly to clients while adding little value”.   While a TIAA advisor’s proposed investment portfolio may appear more diversified due to including a larger number of TIAA funds, the client’s original choices of fewer funds without the managed account fee may serve that client’s interests just as well at a much lower cost. 

In addition, a TIAA advisor managed account provides solely investment advice.  While tailored to your “goals”, I believe investment decisions should be made in the context of a comprehensive financial plan, not as an isolated component.  Without incorporating tax planning, management of other risks and a detailed cashflow analysis, tailoring an investment portfolio to “your goals” can lead to unintended consequences, especially when making decisions about retirement income from a portfolio.  As for financial planning advice, I recommend consulting a trained Certified Financial Planner™ professional who, as a fiduciary, is bound to act in your best interests.  Why pay TIAA to manage your accounts when, for a similar fee, a fee-only planner can provide a financial plan that includes portfolio management in the context of a comprehensive plan?

While Bluestem Financial Advisors continues to enjoy a strong working relationship with TIAA through the SURS state retirement program, transparency is of the utmost importance to us, and we hope it is for you as well.  Buyer beware: a proposed portfolio promoted to you by your local TIAA advisor may come with much higher ongoing expenses than just continuing to self-manage your original lower-cost TIAA mutual fund choices.  

Paying too much in taxes? Find a tax-focused financial planner

The following post is shared content from the Alliance of Comprehensive Planners. 

Tax-focused financial planning is not just for the one percent. On the contrary taxes are the hub of the financial wheel with consequences to virtually all financial decisions. Under-planning and overpaying simply delays financial independence. So, why don’t more Americans engage in tax-focused financial planning?

The disconnect between financial planning and tax planning is costing American taxpayers dearly. Aside from the many who intentionally allow higher withholding throughout the year just to claim a sizeable refund in April, are those who overlook the tax implications of their retirement distributions, investment allocations, estate planning decisions or education savings. All have tax liabilities attached, either in the short or long term.

Accountants and tax preparers might identify those consequences in hindsight, when it’s too late to avoid tax penalties. And, financial advisors,who often simply state, “consult your tax advisor” are just washing their hands of the tax consequences of their advice, leaving it up their client to connect the dots. Indeed, it is this short-sighted, often rear view, of taxes as a once-a-year task, rather than a pervasive feature of financial life, that makes the tax-focused financial planner uniquely positioned to advise clients in all aspects of their financial lives.

“All aspects” is a hefty claim. Yet, tax-focused financial planners are informed not only by their clients’ financial profile, but also by the real context and implications of their advice. Cash flow and financial behaviors, the expectations for children and demands of aging parents, job security and income growth are as important as retirement planning, investment strategy and the tax consequences for the all-of-it. It’s holistic. It’s fiduciary based. And, it’s decidedly uncommon.

Focusing on history, is as bad as ignoring it, and tax preparation is often just that: passive and backward-looking. Tax planning is anticipatory, active and looks forward, sometimes even beyond the current year to future years.

Those knee-deep in regret over the tax return they’re filing in April, might reconsider their approach for 2017. With a tax-focused financial planner, planning for their 2017 tax return would already be underway.

To read more on the subject of tax-focused financial planning check out the Tax Alpha White Paper written by fellow ACP Advisors Jonathan Heller and Robert Walsh (edited by Bluestem’s very own Karen Folk and Jake Kuebler). For more information on the Alliance of Comprehensive Planners visit their website at www.acplanners.org.

In Case of Emergency

Guest Blogger: This post was written by Eric Schaefer, a senior studying Financial Planning at the University of Illinois.  Eric is working towards becoming a Certified Financial Planner. He serves as President of U of I’s Financial Planning Club and is currently an intern at Bluestem Financial Advisors, LLC.

One of the cornerstones of a financial plan is protecting against the unexpected. We often address this through purchasing adequate life insurance coverage, maintaining proper emergency reserves (“ready cash”) and developing a thoroughly diversified investment portfolio. However, many overlook planning for unexpected financial events, especially those that may be particularly unpleasing.  One such topic is, have you and your family thought about what you would do in the event of an unexpected medical emergency?

Following up on the HIPPA authorization article featured in our Fall Newsletter (Click Here to Subscribe), we would like to elaborate a bit further on the importance of having a medical emergency plan by highlighting a few key actions items to consider:

1.) To ensure family can get updates on you during a medical emergency, make sure that your HIPPA privacy forms are filled out completely and with the necessary signatures. Parents, if you have an adult child or student away at school, make sure they complete and sign the HIPPA form as well.  You may also want to complete clinic specific authorization forms at their campus medical facilities. This will ensure that no matter where they receive emergency treatment you will have the appropriate access to their records and care providers. 

2.) Upon admittance to the hospital, if the patient is unconscious the staff will first look for an EMERGENCY CONTACT card in a purse or wallet and/or check for an “in case of emergency” (ICE) contact in their phone. Modern cell phones often allow ICE contacts that can be accessed while our phone is locked.  Some add on applications can also digitally display a Medical ID card from the lock screen. 

If you aren’t the best with technology that’s OK! This would be a great opportunity for your children to show you by setting up their own digital ID on their phone. It’s also not a bad way to kill two birds with one stone. Additional information on how to set up and where to find these applications is listed below.

In the event that you either do not have a smart phone or would prefer to use a more traditional method for confirming your identification, there are many websites with Medical ID card templates that you can print out. Those with chronic conditions, allergies, or who are fashion oriented may consider Medical Emergency ID jewelry. What better gift to get your significant other, son or daughter than a necklace with their blood type and YOUR name and phone number on it?

3.) The alternative to carrying Medical ID cards or filling out numerous forms at different healthcare facilities would be to have a medical power of attorney, also referred to as an advanced healthcare directive. This is the most effective of all the options mentioned and an essential item in your estate plan. These medical power of attorney documents are state specific, so you will want to be sure to fill out the appropriate version for where your child plans to spend the majority of their time. Not only will this compliment a comprehensive medical emergency plan, but it will also afford your children the opportunity to begin thinking about and discussing with you the importance of life planning and determining what is truly important to them.

Here at Bluestem we would like to encourage all of you to address your physical well-being with the same careful and considerate preparation as you do with your financial well-being. Hopefully you nor your family members will ever be in a situation where you must utilize any of the items mentioned above, but in the event that you are, we hope that this post will have helped you make the necessary arrangements.

Additional Resources:

ACP Fall 2016 Newsletter

iPhone Medical ID & ICE Setup

ICE Setup for Any Smartphone Platform

Department of Labor Fiduciary Rule

The U.S. Department of Labor just released its long-awaited fiduciary rule. The new rule aims to protect consumers saving in retirement accounts by amending the definition of fiduciary. The rule, in the pipeline for several years, applies to IRA, 401k, 403b and other retirement accounts that fall under the Employee Retirement Income Security Act (ERISA). Advisers and Brokers giving advice on investments in retirement accounts will now be required to act in the client’s best interest, i.e. when they offer advice on investment products in retirement accounts they must provide impartial advice and avoid conflicts of interest. Prior to this, they were only required to sell “suitable” investments to clients. While the rule does make a gallant effort to protect consumers, it also gives many concessions to commission sales-focused advisers. The rule implementation timeline was extended to January 1, 2018 (causing many to argue this simply gives more time for large companies to fight the rule); the rule also allows brokers to continue to sell certain products as long as they enter into a legal contract with the consumer that, among other things, discloses any conflicts of interest. How many consumers will read and understand such contracts? The rule has received considerable opposition from large investment firms, mainly those in the industry who are heavily sales-focused. Their major complaints revolve around new compliance regulations and the fact that the rule will dramatically alter their former commission based-sales approach. The prior “suitability” rule has no requirement to put the consumer’s best interest above the advisor’s interests.

While many in the financial services industry are upset by the new rule, others, like Bluestem, welcome the new consumer protections and are thrilled that the DOL is making an effort to help protect individuals saving for retirement. As a Fiduciary, Registered Investment Advisor, Bluestem always has and always will put our client’s best interest first. We are proud to be a fee-only financial planning firm and will continue to offer unbiased advice and stellar service to all of our clients. While other firms need regulatory nudging to get on board with fiduciary standards, we live by them every day. In fact, the financial planning organizations we belong to, NAPFA and ACP, believe that the new rule is a step in the right direction to add much needed consumer protections.

So how does this DOL rule affect Bluestem? In a nutshell, it doesn’t. It’s very possible that there may be some new regulatory compliance procedures for us, but in the big picture, Bluestem isn’t making any changes. Bluestem is passionate about fee-only, no product sales, financial planning. It’s this passion for fee-only planning that has kept us on the right side of this issue from the beginning. While others will be clamoring to further water down the new rule or put up a fight to protect their outdated and biased way of offering “financial advice”, Bluestem will continue our efforts to provide trusted, clear-cut advice and spread the word about our professional fee-only alternative to product sales masquerading as financial planning.

Student Loan Forgiveness for University Employees

Guest Blogger: This post was written by Mary Carroll, a senior studying Financial Planning at the University of Illinois.  Mary is working towards becoming a Certified Financial Planner. She serves as President of U of I’s Financial Planning Club and is currently an intern at Bluestem Financial Advisors, LLC. One of the biggest fears students have is getting a zero on an assignment. There are times however when the goal of the assignment IS to get a zero. That’s right, you may be able to zero out your student loan debt in five steps. This assignment may not be an “Easy A”– but it could save you thousands on your student loan repayment.

Before we jump into the five steps, a quick history lesson: In 2007, President Obama signed into law the Public Service Loan Forgiveness (PSLF) program to ease the overwhelming student loan burden for many entering full-time public service jobs, often at lower pay than in private sector jobs. PSLF is designed to forgive the remaining balance (and accumulated interest) on federal student loans for certain borrowers after they have made 120 qualifying payments while employed full time by certain public service employers.

There are five “Rights” to Student Loan Forgiveness to ensure you don’t get it “Wrong”:

1) The Right Loan: applies to Federal Direct Loans ONLY. Direct Loans include subsidized and unsubsidized Stafford loans, PLUS loans, and Direct Consolidation Loans. This program does not apply to any private student loans.

2) The Right Repayment Plan: You must be using one of three repayment plans that base payments on income: • Pay-As-You-Earn (PAYE) or Revised Pay-As-You-Earn (REPAYE) • Income-Based Repayment (IBR) • Income-Contingent Repayment (ICR)

3) The Right Kind of Employment: Full-time employees at Universities (that are not-for-profit) and tax-exempt organizations under section 401(c)(3), such as the University of Illinois, qualify you! “What qualifies as full-time employment?” Is a common question. The answer is an average of 30 hours per week for the year. As a teacher (or other employee) under contract for at least 8 months for the year, you meet the “full-time standard” if you work an average of at least 30 hours per week during your contractual period. Additionally, the PSLF program applies to other jobs besides University Employees. Qualifying public service employment in the government, a 501(c)(3) nonprofit organization, full-time AmeriCorps position, the Peace Corps, or a private “public service organization” qualify you as well.

4) The Right Number of Payments: Rinse, lather, and repeat 120 times (once a month for ten years). The only payments that count are payments that you have made while doing Steps 1-3 any time after October 1, 2007. This means that payments made before electing an income-based payment plan and prior to beginning public service work, won’t count toward the 120 number you need. Payments must also be made on-time (meaning no later than 15 days after their due date).

5) The Right Documentation: Show your work!! How many times do you have to tell your students that one? Show your work and turn in an employment certification form periodically to the Department of Education. They will let you know if you are on the right track to receive loan forgiveness. You don’t want to get to the end of your 120 payments only to learn you messed something up!

An added bonus point to the assignment: Typically, when a debt is forgiven the IRS includes the amount forgiven as taxable income in the tax year the loan is forgiven. However, any amount forgiven at the end of the 10 years due to the PSLF program is forgiven tax-free. This means you avoid paying federal income tax on the amount forgiven, which is an additional savings! Thank you, teacher!!

Don’t be tardy – start on these 5 steps today!

For more information check out the resources provided below.

Unsure of what type of loan you have? Visit: https://studentaid.ed.gov/sa/?login=true Income Drive Repayment Plans: https://studentaid.ed.gov/sa/repay-loans/understand/plans/income-driven Employment Certification Form: https://studentaid.ed.gov/sa/sites/default/files/public-service-employment-certification-form.pdf https://studentaid.ed.gov/sa/sites/default/files/public-service-loan-forgiveness.pdf https://studentaid.ed.gov/sa/repay-loans/forgiveness-cancellation/public-service#qualifying-payment

Cycle of Market Emotions

You are probably aware of the stock market activity over the past week. Friday saw the largest drop of the week, rounding out weekly losses in the 5-6% range. This, in turn, fueled massive negative media coverage over the weekend. No doubt, the negative news adds to fears and is one of many factors leading to further losses in the market. As usual, we encourage you to hold steady through the current market gyrations. One soundbite repeated over the weekend news cycle is that the market has not seen a single day drop like Friday’s since 2011. Do you remember which day it was? My guess is that, unless the last drop significantly affected your life or financial plans, the answer is no. The uncertainty of the future can be scary. Our natural first reaction is fear and trying to avoid further losses. Our brains are hardwired to react this way. However, acting on this emotion would be a mistake. It would lead to selling when the market is low, when in reality, that is the complete opposite of the approach you should be taking. The chart below illustrates this.

I predict one of two possible outcomes of the market in the next year:

1. The market will continue to decline as the world economy sorts through its current concerns. For our retiree clients, they will ride the downturn relying on the safety of their bond ladders without fear of where their next paycheck is coming from. For our working clients, they will keep working, contributing regularly into the market and buying stocks while they are on fire sale. Over the long term, the market will recover!

2. The market will recover in the next few weeks and we will quickly forget about the conditions of the past week.

Cycles such as the one we are currently experiencing are part of investing. Doing nothing when the market is getting a little haywire may seem counterintuitive or that we are avoiding the problem. The reality is that sticking to a long term plan through market changes takes resolve and commitment to the stated investment goals. Fighting instinct is hard, but doing so leads to better investment performance in the long run and, more importantly, a better chance of realizing your financial goals.

Sorting out Maximization versus Optimization

Financial Planning is often thought of as a quantitative field. Planning is done to answer questions such as how much should I be saving, how should I invest or how can I reduce my tax liability. Numbers are collected, plugged into a formula and out comes a result. When questions are answered individually, solutions can be maximized to seek the best result. For example, maximizing portfolio returns might be done by gathering facts about time horizon (period of time funds will be invested), risk tolerance (how much risk you are willing to take), and investment choices (what choices are available in your investment plan). The problem with maximizing is you are often constrained to looking at a single piece of a larger financial picture. Are your choices about investing impacting your tax situation? Are immediate financial goals competing with longer term goals? Taking a comprehensive approach to planning can help here by taking time to understand the bigger financial picture. Where are the trade offs between decisions? How will one decision affect another? How do you balance a series of choices that all impact each other?

This is how I would define Comprehensive Financial Planning. Working with an advisor knowledgeable in multiple areas of finances; taxes, insurance, investing, retirement, and so on. The advisor working with you to create a plan considering how each area will impact the other. Comprehensive Planning can achieve good results, but can it achieve the Optimal Results?

Sometimes planning hits a wall where the best recommendation conflicts with what you are willing to change. The best answer is not always the most acceptable answer. To reach a goal under current circumstances, perhaps the best answer is to work longer, work more, spend less, delay satisfaction and save more. In reality, finances are really just a tool used to achieve life goals. Sometimes, it is better to adjust the goal than to adjust the financial situation.

The following is an illustration we often use with clients. It shows many values one might hold in their life. In each area, we ask them to rank how satisfied they are, by placing a dot to represent the level. The innermost circle represents low satisfaction and the outermost represents complete satisfaction. The ultimate goal is to balance each area out so that when you connect the dots, they form a truer circle.

In Example 1, the person is very out of balance. A lot of time and energy might be focused on career, giving a lot of satisfaction in that area plus leading to financial security, but leaving insufficient time for family and social activities. In the planning realm, decisions might need to be made to correct this imbalance. With this illustration, it might become clear that some financial goals can be sacrificed in exchange for other life goals.  To reach Example 2, it would be more acceptable to cut work hours, save less, but have more time to devote in the areas of social and family activities. 

It is not uncommon for our clients to begin to see these trade offs. When you reach financial independence, choices becomes less about accumulating more. Instead, focus shifts to using money to do things like buy time (outsourcing housekeeping or yard work to free up time to be spent with family). Or, maybe the career becomes less important as salary or advancement opportunities are forgone in exchange for time to focus on social endeavors.

To me, this is the process of Optimizing a financial plan. Taking the time to step back and see the big life picture. Not only making the right financial choice, but making the best use of financial resources to achieve all of life’s goals. If you are ready to optimize your life, contact us today.

Identity Theft Actions

In a previous Blog post, Protecting Your Financial Life in the Digital Age, we discussed ways to protect yourself against identity theft. While it is important to take all the precautions you can to protect yourself it is also important to know what to do if you should fall victim to identity theft. Below are several actions to take if you find your identity has been compromised. Action 1: At a minimum, you should place a fraud alert with the three Credit Reporting Agencies.  This should limit a potential thief’s ability to establish new credit in your name.  Complete instructions can be found with this link.

For added protection, consider freezing your credit. This will limit any new credit from being established under your name while the freeze is in effect.

To freeze your credit, contact each of the nationwide credit reporting agencies:

• Equifax — 1‑800‑525‑6285
• Experian —1‑888‑397‑3742
• TransUnion — 1‑800‑680‑7289

You'll need to supply your name, address, date of birth, Social Security number and other personal information. Fees vary based on where you live, but commonly range from $5 to $10. This fee may be waived with a verification that you are a victim of identity theft.

After receiving your freeze request, each credit reporting agency will send you a confirmation letter containing a unique PIN (personal identification number) or password. Keep the PIN or password in a safe place. You will need it if you choose to lift the freeze.

Action 2: Request credit reports from at least one of the three Credit Reporting Agencies.  Review your report for any lines of credit that you don’t recognize.  The report will have instructions on disputing your account if needed.  Reports may be accessed for free at www.AnnualCreditReport.com.

Action 3: Contact custodians of your bank and investment accounts to inform them of your identity theft.  Banks may assign new account or credit card numbers.  Investment custodians may flag your account to avoid distributions of funds without additional steps to authenticate requests.

Action 4: Consider filing a Police Report and an Identity Theft Complaint with the Federal Trade Commission (link here).  Document all communication with banks and financial institutions.  Keep dated notes of phone calls and copies of all correspondence.  Official disputes should be in writing and sent with tracking (such as certified mail with a return receipt).

Action 5: If you are victim of Tax related fraud, also consider these steps.

Generally you will need to file a paper tax return.  Along with the return, Form 14039 – Identity Theft Affidavit will need to be attached to alert the IRS of the fraudulent activity.  For subsequent years once your identity has been authenticated, the IRS will provide you a PIN Number to file future returns electronically.

Consider requesting a tax transcript to see what return was filed under your social security number.  This can be done at http://www.irs.gov/Individuals/Get-Transcript.

Consider reviewing your Social Security statement to ensure that your earnings history is reported correctly.  This can be done at http://www.ssa.gov/.

#GivingTuesday

There is no doubt that the holiday season is officially upon us. It is difficult to go out and about and not be inundated with signs for holiday shopping deals. Around every corner is another flashy ad encouraging you to be a good consumer and spend spend spend. That said, there is nothing wrong with holiday shopping and gift giving, but what about giving back in a different way? We have all heard about Black Friday, Small Business Saturday and Cyber Monday, but how many of us are familiar with Giving Tuesday? Giving Tuesday is a nationwide initiative that encourages individuals and organizations to spend the Tuesday after Thanksgiving practicing generosity. So, after you have filled up with food on Thanksgiving, loaded your shopping cart on Black Friday and clicked your way to consumer bliss on Cyber Monday, why not spend Tuesday, December 2nd celebrating generosity by donating to your favorite charities? There are many reasons why people give: altruism, gratitude, recognition, compassion, generosity, the list goes on and so do the benefits. However, one benefit we can all appreciate is the ever famous tax deduction. Recently, Jake Kuebler appeared on WCIA’s Current to discuss charitable deductions and budgeting for charitable giving. For some of Jake’s tips on giving be sure to check out the full segment below.

Bluestem would like to wish you all a very Happy Holiday season!

Kuebler shares insights with Investor's Business Daily

Recently, our own Jake Kuebler spoke with Investor's Business Daily's (IBD) Aparna Narayanan about ways young Advisors are adapting traditional business models by using new technology and social media. Jake’s experience as a young business owner, as well as his leadership on NAPFA Genesis, has given him ample insights into the changing landscape of financial planning. The article hits on several of these new ideas, which you can click here to read.

Protecting your Financial Life in the Digital Age

The news of cyber vulnerabilities and retailer hacks seems never ending. This  past week, another major fast food chain, Jimmy Johns, announced a data  breach and possible loss of consumer payment information. Other recent big  breaches include Target and Home Depot. Then came news of another security  bug, “Bash” aka “Shellshock”, endangering the security of many websites. To  help you protect your financial information in the digital age, I compiled a list of  financial best practices and some recommendations for keeping yourself safe:

Credit versus Debit:

To protect yourself from fraud, ditch your debit card and stick with credit. Debit cards do not come with the same consumer protections as credit, even if the debit card carries a Visa or MasterCard logo. If your bank issues a debit card for ATM access, request an ATM only card that cannot be used in stores or do not carry the card unless you plan to make a cash withdrawal from an ATM.

Credit Monitoring and ID Theft Insurance? Generally I do not recommend these products. Credit monitoring only alerts you of suspicious activity. You can do this yourself by checking your credit regularly (a service we provide for our clients). As for insurance, you are not generally liable for fraudulent activity. Therefore, ID theft insurance is covering only out-of-pocket costs for fighting fraud. Insurance does not compensate for the aggravation and your time, only actual costs such as postage.

A more effective way to prevent fraudulent accounts from being established in your name is to freeze your credit with each of the three credit reporting agencies. Here is a guide offered by Financial Radio Personality, Clark Howard: Clark Howard Credit Freeze and Thaw Guide

Keep in mind that freezing your credit has its own downsides. Applying for or opening new credit will require work on your part to “thaw” your file. Also, some identify verification services rely on your credit file. Without access, you may not be able to validate yourself online.

Paper versus Electronic account statements:

Let’s face it, paper statements are just as vulnerable as electronic. Use whichever format you prefer and the one that you will be more likely to review promptly. Reviewing statements is your best defense against unauthorized activity.

Paper Statements can get lost in the mail and potential thieves can steal from your mailbox. Best practice would be to have a locked Post Office box to receive financial mail and never mail anything sensitive except through a locked mail collection box (Blue USPS Mailbox).

For electronic statements, do not count on your financial institution to retain digital records forever. Download them to a local (secure) computer and back them up regularly. Consider automating your computer backups with a system such as Mozy, Carbonite, or Box.com.

Passwords:

Use a secure, unique password for each financial website. Make your password long (12 or more characters) with combinations of upper and lowercase, numbers and symbols. When possible, enable two-step verification. This will require a separate authentication when a website is accessed from an unrecognized or new device. The two-step verification works because an access code is sent in a text message to your phone or in an email. The code is required to access your account in addition to the usual password, and thieves don’t have access to your phone or email from their device.

Consider a password manager system to generate and store your passwords. I use a system called LastPass. I only need to memorize one password, and LastPass can store all the rest. However, make sure your master password is very secure and change it often.

Shopping and Banking Online:

Only access financial information from your own devices and only if you have up-to-date security software with real time protection. Public computers or those used by others (e.g. in hotels or internet cafes) may have spyware or key loggers trying to capture passwords and other secure data.

Avoiding Scams:

Reputable institutions will not call you to request verification of non-public information (Social Security Numbers, Account Numbers, etc). Calls such as these are most likely scams. If you get a call requesting this type of information, hang up and call back the institution with a number you know to be real such as the phone number on the back of a credit card or website. In addition, the IRS almost never calls taxpayers, especially as first contact. Any notices regarding your returns will be by a letter sent through the US Postal Service.

Have any more tips? Leave a comment with your thoughts or suggestions.

Real Change Happens at the Margin

I recently finished my second half marathon, finishing the race just under my target time of two hours. While pleased with reaching a personal goal, there is nothing really compelling about my story. No overnight success, no major rise to overcome great obstacles. There was a time when running for fun would sound crazy, let alone running for hours on end. I started running 14 years ago to get into shape. I cannot say I really even enjoyed it at the beginning. My first runs were on a basement treadmill, 1 mile at a time. Soon a single mile was easy, so I pushed it to two and then three. For a challenge I decided to run a 5k, which lead to another and then another. Each time I aimed to cut my time by pushing my regular runs just a little faster and a little further. Each time I hit a goal, I moved the target just a little bit further. A little longer distance, a little shorter time.

My evolution has been slow and incremental. My progress from year to year is minimal, barely even noticeable. Review these changes over years, and the results are slightly more impressive. Change happened from minor adjustments made over time and the result of those adjustments compounded over time.

In a post appearing on The Daily Good, author James Clear outlines this same strategy. He describes how marginal changes led Great Britain’s cycling team to win the Tour de France in 2012 and 2013. Then, he shows the following illustration of how small changes, stacked onto one another lead to substantial changes over time.

This is a principle that we use daily with our Financial Planning clients. Big changes may happen at the beginning of our relationship, but planning is a long term process. An incremental series of good decisions and judgment based on an end goal will lead to long term success. As we work together year after year, we provide the long term perspective that keeps decision making on track and also reduces errors in behavior.

How can you apply this to your own financial life? Comment below if you want to share your own story.

Millennials' Guide to Getting Rich

If you read the rest of this post, you will find my title to be a bit flippant.  Had I added the work "Quickly" to the end, it would be downright misleading.  Except for the rare instance where someone inherits a fortune, wins the lottery or marries a multi-millionaire, getting rich is a slow and boring process.  This fact is mostly overlooked by the media.  Boring does not sell newspapers or generate web hits and therefore good financial advice is rarely a media event. That is why I was excited to see some press on a newly released e-Book written by Financial Advisor and author William Bernstein for Millennials (aka Gen Y, born 1980's through early 2000's).  Concisely written, the book summarizes how to actually build financial freedom, aka wealth.  Spoiler alert, the method is simple but the application will take effort on your part.

The book is so short, it is hardly worth summarizing on this post.  You should seriously consider taking 30 minutes to read the ~14 page guide yourself.  Purchase the e-Book for $0.99 on Amazon's Kindle Library or download free in PDF format.

What really resonates about this book is the simplistic method he advocates; live below your means (save 15%), educate yourself on the basics, keep the portfolio simple because you will not beat the market.  These are all key parts of our approach to financial planning.  Success comes not from taking big risks or complex strategies, but by being diligent and making good decisions.

I will not underplay the "making good decisions" factor.  We are all human and we all make errors in judgment.  Some errors are unavoidable, but others come from fear, greed or other emotional roadblocks.  Decisions need to be made objectively in context of your current situation and future goals.  Doing this on your own is incredibly difficult.  Even the most savvy among us regularly make less than objective decisions.  For many, this is the value of having a Financial Planner.  To act as the objective, informed third party and provide a fresh perspective.

Be sure to check out some of the press on this book, including an interview on NPR's Here and Now and a summary by columnist Scott Burns.

Behave your way to Success

This past week I had the opportunity to visit Salt Lake City for the Spring Conference of the National Association of Personal Financial Advisors (NAPFA). The theme of this year’s conference was Behavioral Finance. A hybrid of psychology and economics, this exciting field aims to explain our behavior and decision making in our personal finances. Some examples of application to our behaviors around money include:

• Tendency of individuals to overestimate their own abilities and believe they are above average. This explains why so many fall for the fallacy of active investment management. They try to beat the market by selecting investment securities based on prior performance or time their purchase of securities to beat the market.
• Focusing too narrowly on frames of references or over-weighting recent events. For instance, a short term fluctuation in the market might cause an individual to perceive higher risk than actual longer-term risk and sell stocks at exactly the wrong time.
• The power of momentum, when we fail to take action that is in our best interest. In other words, procrastinating on actions we know we need to make but simply put off. This may affect getting that life insurance policy, signing our estate documents or rebalancing our portfolio.

The point of Behavioral Finance research is to explain how our past experience and mental processes can get in the way of day to day decisions. Even more importantly, it seeks to understand how to overcome these mental biases. Dr. Meir Statman, Professor and Author of What Investors Really Want, describes these biases as similar to having less than perfect vision. By understanding where our behavior and economics intersect, we can correct that vision and make better decisions.

Understanding behavior and how it can affect reaching financial goals is a top value of hiring a Financial Planner. Value does not come from number crunching, projections, or investment management alone. Value received is your advisor seeing the whole picture of your life, and tempering emotions with appropriate decision making. A trusted advisor encourages you to reach your goals by keeping you accountable and on track through a series of small, incremental decisions.

5 Excuses for Not Hiring a Financial Advisor

(And why you should rethink the excuses)

Are you thinking about hiring a Financial Planner, but failing to take action?  We see many people who put off the decision for far too long, costing them time or money.  Here are some common reasons many fail to hire an advisor  and misinformation that you may have heard about financial advisors.

#1 – I do not have enough money

I will concede that Financial Planners have a reputation for only serving the wealthy.  Many firms  have portfolio minimums, often in the mid-six-figures or more.  However, Financial Planning as a profession (not sales as discussed below) is relatively young and still evolving.  Early models of the 1980’s and 90’s were built around investment management.  Financial planning was a manual, time intensive process.  Large portfolios were needed to cover the high cost of doing comprehensive financial planning.

However, this is rapidly changing.  Financial Planners, like all entrepreneurs, are continuously developing new business models to serve a wider base of clients.  New efficient technology has pushed down the cost of providing services.  There are many groups of advisors and companies who provide financial planning services to a wider audience.  For instance, online companies such as LearnVest are springing up to provide basic planning services at ultra-low cost.  For more customized services, there are advisors who provide hourly consultations, such as those in the Garrett Planning Network.  Finally, there are advisors that provide ongoing, holistic services to the middle market, members of the Alliance of Comprehensive Planners.

My point here is, there are many types of advisors out there.  You have to be willing to put a little time into your search to find the right fit. The right advisor will provide services in line with your needs, have expertise in issues you face, and communicate with you in a manner that you understand and trust.

At Bluestem, we not have a minimum portfolio size for new clients.  We are a growing firm and always accepting new clients, but we do limit our growth each year to ensure that we provide the best service we can to new and existing clients.  This means we are selective about the clients we take on in order to ensure that our expertise and services match their needs.

#2 – Financial Planning means “Sales”

I sometimes get uncomfortable when people ask me what I do for a living.  Not because I am ashamed, but because of the response I get to saying Financial Planner.  There is is a lot of negative connotation behind the title.

The problem lies in the lack of regulation or consistency of the title Financial Planner/Advisor.  Pretty much anyone can use the title, regardless if they are actually providing planning services or are just a salesperson for investments or insurance products.   There have been efforts to clarify, but the sales industry is quick to mimic true financial advisors or confuse consumers. Even so, those selling products cannot copy what a true Financial Planner really does, so let me tell about that.

A true financial planner is interested in who you are.  They want to learn your goals, ambitions and values.  They understand that maximizing your income and wealth are important, but only because that helps you achieve something more.  Money is not the end result.  Once they understand who you are and what you are about, they help you begin piecing together a financial strategy to achieve those goals and values.

They understand there are many pieces to your financial life to manage; human capital (career), taxes, insurance, children, legal, retirement, and the list goes on.  A planner is there to help you make decisions that encompass all the different areas.

I have been called a Jack of all Trades and Master of None.  In the context, it was meant to be negative, but it has some truth.  My knowledge is broad by design.  I need personal skills to learn about you and technical skills to see how all the pieces fit together.  I also have to recognize how changing one financial piece of your life will affect another.  I am a professional and recognize my limitations.  When depth of knowledge is needed, I maintain an arsenal of professionals to assist.  Attorneys, Insurance Agents, CPAs, Real Estate Agents, and Brokers may be brought in when needed.  Alone they may not know the whole picture, but I am there to assure that a cohesive result is achieved for my clients.

If you are looking to hire an advisor, be willing to ask lots of questions.  You should be especially interested in hearing about the process of working with the advisor.  Results are important, but there are no guarantees in life.  There are too many unknown variables for a professional to make promises they cannot keep.  Do not be influenced by flashy marketing with anecdotal success stories and past performance statistics.  That may not indicate success for your future.  Focus on hiring someone who has a solid process to help you evaluate your needs, anticipate changes and help you adjust course as needed.

#3 – I can do it myself

I concede, this one is actually true.  You probably can do it yourself. Be honest with yourself, will you?  Will you devote the time to set goals, educate yourself, evaluate important financial decisions, monitor your progress and adjust as needed?  Most of us will not.  It is too easy to get caught up in day-to-day life to think about our own future objectively or strategically.

Would it surprise you to know I hired my own Financial Advisor?  It is not because I cannot do it myself.  It is because I know there is value in having an objective third party.  Someone who can cut through my own emotional and mental roadblocks.  Someone who can force me to take a long term view and someone who can coach and encourage me to keep moving in the right direction.

There are many reasons someone might hire an advisor.  Some people like to manage their own plan, but hire an advisor for an objective review to validate that they are on the right track.  Others find they have little patience for the process and do not enjoy learning the ins and outs of financial planning. They hire an advisor to delegate and turn over the responsibility to a competent planner.

#4 – I cannot afford to hire an Advisor

Many of us are willing to make an investment if we expect the future benefits will be greater than the initial outlay.  The same should be true of hiring an advisor.  I believe any advisor you hire should, in the long term, add more value than the cost of their services

As clichéd as it may sound, sometimes peace of mind can be one of the biggest values in hiring an advisor.  Research from the Consumer Federation of America (CFA) and Certified Financial Planner Board of Standards (CFP Board) has shown that families that take time to plan have better financial preparedness for meeting goals and dealing with emergencies, save more and are more confident about their finances. Is it worth your money to sleep better at night, avoid arguments with a spouse over money, or to know you are on the right track?

Maybe you are skeptical and want to see hard dollar savings.  Morningstar, an investment research firm, has attempted to quantify the value of hiring an advisor.  They define gamma as value an advisor adds to an individual through the financial planning process.  These values include added investment returns through optimizing portfolio allocation, withdrawal strategies and tax savings.  They postulate the added return could be as high as 1.59% of your portfolio.

This research does not even include the savings of avoiding mistakes such as incorrect tax returns, buying the wrong financial product, paying unnecessary fees to high cost institutions and financial products.  How about the cost of inaction?  How much are you paying because you fail to take action?

#5 – This is not the right time OR I do not have the time

I hear this a lot.  Someone will reach out because they are experiencing a life transition that comes with a financial pain or have an important decision to make.  The person is so caught up in the life transition, they ignore or procrastinate making needed financial decisions.  They deal with the symptoms, not the underlying problem.

I think a person’s overall health and well-being is like a wagon wheel.  Each spoke represents one aspect of the person’s life.  The spokes include physical, mental, relationship, spiritual/moral/religious, and financial health.  In order for the wheel to be round and turn easily, you need to devote equal time and energy to all.  Otherwise, your wheel may become flat in certain sections and have trouble moving you forward.

Another way to put it, if you ignore one area of overall health and balance, you may end up harming the whole system.  Taking the time to make a plan will take an investment of time and energy, but will pay off with future peace of mind, flexibility and independence.