Retirement Planning Class Materials – Fall 2017





During our Fall 2017 Retirement Planning Today class we had a number of questions, and discussed some material that was not included in the accompanying workbook.  Below, you will find the questions and answers from our two classes.  You will also find a PDF file of the slides that were included in our class presentation, but which are not included in the workbook.


Retirement Planning Today – Fall 2017 Bonus Slides


See the Estate Planning portion of our class in the video below.

We try to cover a lot of ground in two nights – and sometimes don’t get to everything.  This semester, we were not able to complete the estate planning section.  As a part of our class, we have recorded this section for any participants that would like to learn more.  Note that this section covers general information and is not legal advice.  Please consult with a licensed attorney to address legal questions pertaining to estate planning. This video will be available throughout October and November 2017.  



Can you transfer a 401(k) into an existing Inherited Traditional IRA – or should they be kept separate?

These accounts should be kept separate (unless you inherited an IRA as a spouse, and then re-registered the IRA as your own).  For non-spouse beneficiaries, if you have an existing Inherited IRA, this type of account will have its own set of rules, most importantly there will be required minimum distributions each year for that account.  You cannot comingle other assets with the inherited IRA.  See the following guide from Charles Schwab titlted ‘You’ve just inherited a retirement account, now what?


If you delay Social Security until age 70 and then begin your Required Minimum Distributions at age 70 ½ – there likely be will be an increase in taxable income in that year and beyond.  Are there any strategies to manage this bump in taxable income?

 For retirees who decide to delay Social Security until age 70, their benefit will increase 8% per year above their ‘Full Retirement Age’ Benefit.  In most cases, this provides important longevity protection by ‘locking in’ the highest possible Social Security income benefit – for life. 

As it also happens, age 70 ½ is when Required Minimum Distributions begin for retirees who have IRAs or Qualified Retirement Plans.  RMD’s are generally taxable as ordinary income.

So for some retirees, these two changes in income could result in an increased tax bill. Some strategies to mange this potential situation (always consult with your tax advisor first):

  • Consider IRA Qualified Charitable Distributions with some or all of your IRA RMD. Certain qualified distributions can be excluded from your taxable income. 
  • Consider Roth IRA conversions before age 70 ½ in order to reduce the size of future IRA RMDs.
  • Consider beginning IRA distributions before age 70 ½ in order to reduce the size of future RMDs.
  • If you have a health savings account, consider a one-time rollover contribution from your IRA into the HSA (annual limit may apply) before age 65.
  • If you have appreciated employer stock in a retirement plan, consider taking advantage of Net Unrealized Appreciation (which could potentially reduce the size of your future RMDs)


What are some examples of when to typically do a Roth conversion?

 Most often, the best times to do Roth IRA conversions are when there is a reduction in income (i.e. year of retirement or ‘gap years’ after retirement but before Social Security).  If your fundamental assumption is that your current tax rate is lower than what it will be in the future (when you might need Roth IRA distributions for income) then building Roth assets through  Roth Conversions may make sense. See the graphic below from financial writer Michael Kitces who shares this thought in a great graphic format.

                           ©Michael Kitces (full article here)

Other important considerations for Roth Conversions are time (the longer the time for the Roth Conversion to grow the better) and estate planning (if you want to leave potentially tax free Roth assets to your non-charitable heirs).




Upcoming Classes

Upcoming Dates and Times Coming Soon…

We are in the process of finalizing our dates and times for our next Retirement Planning Workshop in Partnership with Western Carolina University’s Office of Professional Growth and Enrichment.  We hold our classes at WCU’s new Biltmore Park Campus.

If you would like to receive a notification when registration is available or to add your name to our wait list – an email alert will be sent out as soon as the dates are finalized and registration is open- click below to add your name to our notification list!


Add Your Name To Our Notification List

(P.S. We won’t contact you for any other purpose or share your information with anyone)


Course Description:
In partnership with Western Carolina University Office of Professional Growth and Enrichment, we are pleased to offer a Retirement Planning workshop.  This course is designed to deliver comprehensive, objective information to help you achieve your most important financial goals.  The course covers many key aspects of planning for retirement such as:

  • Retirement lifestyle planning
  • Goal Setting
  • Retirement Planning Roadblocks and Mistakes
  • Income tax planning
  • Retirement income and expenses
  • Risk management
  • Social Security Planning
  • Investment management
  • Estate planning

As an educational experience, Retirement Planning Today contains something for everyone. We address financial issues that pertain to the self-employed as well as employees of corporations and government agencies. The course is designed to teach you how to build wealth and align your money with your values to accomplish your goals in life. Whether you plan to retire 20 years from now or have just recently retired, the information you learn in this class can deliver rewards throughout your lifetime. You went to school to prepare for your career. Now it’s time to prepare for your retirement.

Instructors: Joel Kelley, CFP® and Jacob Sadler, CFP®


Market Review: 2nd Quarter, 2017

In our most recent Market Review, for the 2nd Quarter 2017 we provide a general report and perspective on global market activity during the most recent quarter, and also includes a message regarding long-term investing and relationship between rising bond interest rates and stock market results.  Click the link below to read!



Q2 2017 Market Review



Woodstone Financial, LLC is a fee-only financial planning and investment management firm located in Asheville, North Carolina.   Contact us to learn more about our services.

What is an Index?

To many investors, the stock market is defined simply by the evening news – which reports daily on the ups and downs of the U.S. Indexes; the Dow Jones Industrial, the S&P 500, and the Nasdaq Composite.


But what is an index, and what does it mean when a popular index like the Dow is on a tear, up or down? What does it really mean to you and your investments?


Great question. In this multi-part series, we’re going to cover some of the ins and outs of indexes and the index funds that track them.


What Is an Index?

Let’s set the stage with some definitions.


An index tracks the returns generated by a basket of securities that an indexer has put together to represent (“proxy”) a particular swath of the market.


Some of the familiar names among today’s index providers include the S&P Dow Jones, MSCI, FTSE Russell and Wilshire. It’s perhaps interesting to note that some of the current index providers started out as separate entities – such as the S&P and the Dow, and FTSE and Russell – only to consolidate over time. In any case, here are some of the world’s most frequently reported indexes.


  • S&P 500 (U.S.)
  • Nasdaq Composite (U.S.)
  • Dow Jones Industrial Average (U.S.)
  • S&P/TSX Composite Index (Canada)
  • FTSE 100 (U.K.)
  • MSCI EAFE (Europe, Australasia and the Far East)
  • Nikkei and TOPIX (Japan/Tokyo)
  • CSI 300 (China)
  • HSI (Hong Kong)
  • KOSPI (Korea)
  • ASX 200 (Australia)

…and so on


Why Do We Have Indexes?

Early on, indexes were designed to offer a rough idea of how a market segment and its underlying economy were faring. They also helped investors compare their own investment performance to that market. So, for example, if you had invested in a handful of U.S. stocks, how did your particular picks perform compared to an index meant to track the average returns of U.S. stocks? Had you “beat the market”?


Then, in 1976, Vanguard founder John Bogle launched the first publicly available mutual fund specifically designed to simply copy-cat an index. The thought was, instead of spending time, money and energy trying to outperform a market’s average, why not just earn the returns that market has to offer (reduced by relatively modest fund expenses)? The now familiar Vanguard 500 Index Fund was born … along with index fund investing in general.


There are some practical challenges that prevent an index from perfectly replicating the market it’s meant to represent. We’ll discuss these in future segments. But for now, the point is that indexes have served investors across the decades for two primary purposes:


  1. Benchmarking: A well-built index should provide an approximate benchmark against which to compare your own investment performance … if you ensure it’s a relatively fair, apples-to-apples comparison, and if you remain aware of some of the ways the comparison still may not be perfectly appropriate.
  2. Investing: Index funds that replicate indexes allow you to indirectly invest in the same holdings that an index contains, with the intent of earning what the index earns, net of fees.


Indexes Are NOT Predictive

There is also at least one way indexes should NOT be used, even though they often are:


Index milestones (such as “Dow 20,000”) do NOT foretell whether it’s a good or bad time to buy, hold or sell your own investments.


Indexes don’t tell us whether the markets they are tracking or the components they are using to do so are over- or underpriced, or otherwise ripe for buying or selling. Attempting to use current index values as a way to time your entry into or exit from a market does not, and should not replace understanding how to best reflect your unique investment goals and risk tolerances in an evidence-based investment strategy.


In fact, market-timing of any sort is expected to detract from your ability to build wealth as a long-term investor, which calls for two key disciplines:

  1. Building a cost-effective, globally diversified portfolio that exposes you to the expected returns you’d like to receive while minimizing the risks involved
  2. Sticking with that portfolio over the long run, regardless of arbitrary milestones that an index or other market measures may achieve along the way


As one commentator observed the day after the Dow first broke 20,000: “Sensationalism of events like these [Dow 20,000] has the ability to trigger our animal spirits or our worst fears if we don’t have a long-term investment plan to keep them in check.”


So first and foremost, have you got those personalized plans in place? Have you constructed a sensible investment portfolio you can adhere to over time to reflect your plans? If not, you may want to make that a top priority. Next, we’ll explore some of the mechanics that go into indexing, to help put them into the context of your greater investment management.


Woodstone Financial, LLC is a fee-only financial planning and investment management firm located in Asheville, North Carolina.   Contact us to learn more about our services.

Investing vs. Behavior

A Tale of Behavioral Instincts

As investors, we are consistently at odds with our pre-programmed human behavior. That is, our basic-survival instincts often play against otherwise well-reasoned financial decisions. As such, the market may favor those who are better at overcoming their impulsive, often damaging gut reactions to breaking news. Once we complete our exploration of market return factors, we’ll explore the fascinating field of behavioral finance in more detail, as this “human factor” contributes significantly to your ultimate success or failure as an evidence-based investor.

Carl Richards Behavior Gap












In our last piece, “Investing Seeking the Future” we wrapped up our conversation about ways to employ stock and bond markets within a disciplined investment strategy. We now turn to the final and arguably most significant factor in an evidence-based investment strategy: the human factor. In short, impulsive/ behavioral reactions to market events can easily outweigh any other market challenges you face.


Exploring the Human Factor 

Despite everything we know about efficient capital markets and all the solid evidence available to guide our rational decisions … we’re still human. We’ve got things going on in our heads that have nothing to do with solid evidence and rational decisions – a brew of chemically generated instincts and emotions that spur us to leap long before we have time to look.


Rapid reflexes often serve us well. Our prehistoric ancestors depended on snap decisions when responding to predator and prey. Today, our child’s cry still brings us running without pause to think; his or her laughter elicits an instant outpouring of love (and oxytocin).


But in finance, where the coolest heads prevail, many of our base instincts cause more harm than good. If you don’t know that they’re happening or don’t manage them when they do, your brain signals can trick you into believing you’re making entirely rational decisions when you are in fact being overpowered by ill-placed, “survival of the fittest” reactions.


Put another way by neurologist and financial theorist William J. Bernstein, MD, PhD, “Human nature turns out to be a virtual Petrie dish of financially pathologic behavior.”



Behavioral Finance, Human Finance

To study the relationships between our heads and our financial health, there is another field of evidence-based inquiry known as behavioral finance. What happens when we stir up that Petrie dish of financial pathogens?


Wall Street Journal columnist Jason Zweig’s “Your Money and Your Brain” provides a good guided tour of the findings, describing both the behaviors themselves as well as what is happening inside our heads to generate them. To name a couple of the most obvious examples:


  • When markets tumble – Your brain’s amygdala floods your bloodstream with corticosterone. Fear clutches at your stomach and every instinct points the needle to “Sell!”
  • When markets unexpectedly soar – Your brain’s reflexive nucleus accumbens fires up within the nether regions of your frontal lobe. Greed grabs you by the collar, convincing you that you had best act soon if you want to seize the day. “Buy!”


An Advisor’s Greatest Role: Managing the Human Factor

Beyond such market-timing instincts that lead you astray, your brain cooks up plenty of other insidious biases to overly influence your investment activities. To name a few, there’s confirmation bias, hindsight bias, recency, overconfidence, loss aversion, sunken costs and herd mentality.



Your Take-Home

Managing the human factor in investing is another way an evidence-based approach helps to guide us- using data driven methodology instead of emotion.  By spotting when we (as investors) are falling prey to a behavioral bias, it is possible to overcome emotional decision making and implement a strategy based on rational observations.


Woodstone Financial, LLC is a fee-only financial planning and investment management firm located in Asheville, North Carolina.   Contact us to learn more about our services.

Image Attribution: Carl Richards (c) 2013 Behavior Gap

Retirement Planning Class Materials – Winter 2017






Our Winter 2017 Retirement Planning Today class, was held in partnership with Western Carolina University’s Office of Professional Growth and Enrichment.   During our class we had a number of questions, and discussed some material that was not included in the accompanying workbook.  Below, you will find the questions and answers from our two classes.  You will also find a PDF file of the slides that were included in our class presentation, but which are not included in the workbook.


Retirement Planning Today – Winter 2017 Bonus Slides


What is a qualifying quarter of coverage for work credit for Social security and Medicare?  A qualifying quarter is based on the amount of earnings that you have.  For a quarter of coverage (QC) in 2017 is $1,300. “Quarter of coverage” is a legal term, but you may also see the term “Social Security credit” (or just “credit”) used elsewhere. A QC is the basic unit for determining whether a worker is insured under the Social Security program. No matter how high your earnings may be, you cannot earn more than 4 QC’s in one year [i].


If you don’t have 40 quarters of work credit can you qualify for Medicare? Normally, you need to have earned about 40 “credits” or “quarters” by paying Social Security and Medicare payroll taxes while working — equal to about 10 years of work — in order to get Part A services without paying premiums. The premiums have already been covered by your payroll taxes. However, if you don’t have enough credits you may qualify for premium-free Part A services on the work record of your spouse, provided that you are 65 or older and your spouse is at least 62. In some circumstances, you may qualify on the work record of a spouse who is dead or divorced [ii]. Following the overturning of the Defense of Marriage Act, people in a same-sex marriage can also qualify on their spouse’s work record if they live in a state that accepts same-sex marriage or recognizes the laws of other states that do. Otherwise, if you’re 65 or older, you can buy into Medicare by paying monthly premiums for Part A hospital insurance. You can also join Part B and pay the same premiums as other people. In both cases, you must be a U.S. citizen or a legal resident (green card holder) who has lived in the United States continuously for at least five years. The amount you pay for the Part A premium in 2014 is $234 a month (if you have 30 to 39 work credits) or $426 a month (if you have fewer than 30 work credits). These amounts usually change a little each year. If you continue working until you’ve earned 40 credits (about 10 years’ work in total), you’ll no longer be required to pay Part A premiums.


What are the average Long Term Care Insurance premium costs?  According to data from the 2012 Long Term Care Insurance Price Index – the average age 55 year old couple purchasing LTCI can expect to pay $2,700 per year for $340,000 of coverage [iii].  Premiums may vary widely, based on criteria in the policy (daily benefit, lifetime benefit, inflation protection, elimination period, etc.) and may vary widely based on the health of the applicant.  It is best to work with an insurance professional who specializes in objectively evaluating available LTCI policies.


Which is better – Interest compounded Daily or Annually?  Usually a daily compounding rate is better (the more frequent the better). For example, $10,000 compounded at 5% will grow to $10,500 after one year, when compounded annually.  Compounded daily, $10,000 will grow to $10,512.67 at 5%.  There is a difference, though it is incremental.


Is there an authorized clearing house for unclaimed retirement accounts? According to a recent news story from National Public Radio, some retirement accounts, bank accounts, (and tax refunds) are unclaimed by their beneficiaries or forgotten about [iv].  The best place to start in the search is your state governments repository for unclaimed funds.  The website may be a good starting point in this search.


What income is considered for Social Security Earnings Test (Pre Full Retirement Age)? If you earn income before your designated Full Retirement Age and have already filed for Social Security – your income benefit may be reduced $1 for every $2 of earnings above a specified level.  This is known as the earnings test- and it only applies to earned income.  Investment income is generally not included in this calculation[v].


What can you use Health Savings Account for?  What are the uses pre 65 and post 65?  Prior to age 65, distributions (Tax Free and Penalty Free) from a Health Savings Account must be used for ‘Qualified Medical Expenses’.  After age 65, you can take penalty-free distributions from the HSA for any reason. Withdrawals made for non-medical will be subject to ordinary income taxes. Given that Medicare does not cover all of your medical expenses, most HSA owners over 65 continue to use their HSA funds for qualified medical expenses. This will ensure they get the maximum benefits from their HSA [vi].


Can an HSA be used to pay for Long Term Care Insurance Premiums? – Yes, but only for qualified LTCI policies.


Can an HSA be used to pay for Healthcare and Medicare premiums? – Yes, and Medicare premiums over 65.  At age 65, you can use your HSA to pay for Medicare parts A, B, D and Medicare HMO premiums tax-free and penalty-free. You cannot use your HSA to pay for Medigap insurance premiums[vii].


What is difference between ordinary and qualified dividends?  As a general rule, dividends are qualified when they’re paid by a U.S. corporation or a foreign firm in a country with tax agreements in place with the U.S. So if you get a dividend from Microsoft (MSFT), that’s a qualified dividend if you hold the stock for more than 60 days during the 121-day period starting 60 days before the ex-dividend date. Generally speaking, most regular dividends from U.S. companies with normal company structures (corporations) are qualified – qualified dividends may be eligible for capital gains tax treatment[viii].


Is your Social Security benefit calculated based on the best 35 or most recent 35?  It is based on the highest 35 (best 35).


Is your Social Security estimate based on continuing to work and earn at current level?  Yes, the benefit estimate is based on your past earnings and a projection of your future income, which assumes your income will remain at the same level as the previous year until you retire. You could get more than the estimate if you end up earning more in the future or less if your income drops. The estimate also assumes you continue to work until you take benefits at age 62, at full retirement age or at age 70, so it’s less helpful if you plan to retire at a different time. Use the online calculator or the more precise (and more complicated) detailed calculator at to enter your future earnings estimates.  Removing years with zero earnings will have a greater impact than replacing years with relatively low earnings – because of the way the benefit is calculated to disproportionally count low earnings[ix].


What are the total contribution limits for qualified defined contribution plans?  What if you have more than one plan?  There is a limit (adjusted each year) for the maximum amount you can contribute to a qualified workplace retirement plan (i.e. 401(k), 403(b), SIMPLE IRA, etc.).  The contribution limits vary by account type – but the total contribution limit (employer matching/safe harbor plus employee contributions/deferral) cannot exceed a specified limit.  Currently that limit is $54,000 (2017) if under 50, and $60,000 (2017) over 50.  For example: If you are an employee and you have both a 401(k) and SEP IRA through your employer, your deferral contribution to the 401(k) cannot exceed $18,000 ($24,000 if over 50), and the total contributions to both accounts cannot exceed $54,000 ($60,000 including 401(k) catch-up contributions if over age 50).  If you believe you have over contributed to qualified retirement plan – you must correct this over contribution no later than the tax filing deadline of the following year in most cases[x].













Investors Seeking the Future

As investors, we seek…the future?

Putting our money to work today (by investing) is all about tomorrow – its about our future expected returns and our fight against future inflation.

What Drives Market Returns?

In our last piece, “Diversifying for a Smoother Ride,” we wrapped up a discussion about the benefits of diversifying your investments to minimize avoidable risks, manage the unavoidable risks (that are expected to generate market returns), and better tolerate market volatility along the way. The next step is to understand how to build your diversified portfolio for effectively capturing those expected returns. This in turn calls for understanding where those returns actually come from.

The Business of Investing
With all the excitement over stocks and bonds and their ups and downs in headline news, there is a key concept often overlooked. Market returns are compensation for providing the financial capital that feeds the human enterprise going on all around us, all the time.

When you buy a stock or a bond, your capital is ultimately put to work by businesses or agencies who expect to grow successfully, whether it’s growing oranges, running a hospital or selling virtual cloud storage. You, in turn, are not giving your money away. You mean to receive your capital back, and then some.

Financial Capital (DFA)









Investor Returns vs. Company Profits
A company hopes to generate profits. A government agency hopes to complete its work with budget to spare. Investors hope to earn generous returns. You would think that, when a company or agency succeeds, its investors would too. But actually, a company’s or agency’s success is only one factor among many others that influence its investors’ expected returns.

At first, this seems counterintuitive. It means, for example, that even if business is booming, you cannot necessarily expect to reap the rewards simply by buying stock in that same, booming company. (As we’ve covered before, by the time good or bad news is apparent, it’s already reflected in higher-priced share prices, with less room for future growth.)

The Fascinating Facts About Market Returns
So what does drive expected returns? There are a number of factors involved, but among the most powerful ones spring from those unavoidable market risks we introduced earlier. As an investor, you can expect to be rewarded for accepting the market risks that remain after you have diversified away the avoidable, concentrated ones.

Consider two of the broadest market factors: stocks (equities) and bonds (fixed income). Most investors start by deciding what percentage of their portfolio to allocate to each. Regardless of the split, you are still expecting to be compensated for all of the capital you have put to work in the market. So why does the allocation matter?

When you buy a bond …
• You are lending money to a business or government agency, with no ownership stake.
• Your returns come from interest paid on your loan.
• If a business or agency defaults on its bond, you are closer to the front of the line of creditors to be repaid with any remaining capital.

When you buy a stock …
• You become a co-owner in the business, with voting rights at shareholder meetings.
• Your returns come from increased share prices and/or dividends.
• If a company goes bankrupt, you are closer to the end of the line of creditors to be repaid.

In short, stock owners face higher odds that they may not receive an expected return, or may even lose their investment. There are exceptions. A junk bond in a dicey venture may well be riskier than a blue-chip stock in a stable company. But this is why stocks are generally considered riskier than bonds and have generally delivered higher returns than bonds over time.

This outperformance of stocks is called the equity premium. The precise amount of the premium and how long it takes to be realized is far from a sure bet. That’s where the risk comes in. But viewing stock-versus-bond performance in a line chart over time, it’s easy to see that stock returns have handily pulled ahead of bonds over the long-run … but also have exhibited a bumpier ride along the way. Higher risks AND higher returns show up in the results.

Your Take-Home
Exposure to market risk has long been among the most important factors contributing to premium returns. At the same time, ongoing academic inquiry indicates that there are additional factors contributing to premium returns, some of which may be driven by behaviors other than risk tolerance. Next up, we’ll continue to explore market factors and expected returns, and why our evidence-based approach is so critical to that exploration.


Woodstone Financial, LLC is a fee-only financial planning and investment management firm located in Asheville, North Carolina.   Contact us to learn more about our services.

Diversifying for a Smoother Ride

Back To Classroom


Observation #1: A smoother ride builds confidence.

Observation #2: Confidence is important for the long-term investor.


In our last piece, “Managing the Market’s Risky Business,” we described how diversification plays a key role in minimizing unnecessary risks and helping you better manage those that remain. Today, we’ll cover an additional benefit to be gained from a well-diversified stable of investments: creating a smoother ride toward your goals.


Diversifying for a Smoother Ride

Like a bucking bronco, near-term market returns are characterized more by periods of wild volatility than by a steady-as-she-goes trot. Diversification helps you tame the beast, because, as any rider knows, it doesn’t matter how high you can jump. If you fall out of the saddle, you’re going to get left in the dust.


When you crunch the numbers, diversification is shown to help minimize the leaps and dives you must endure along the way to your expected returns. Imagine several rough-and-tumble, upwardly mobile lines that represent several kinds of holdings. Individually, each represents a bumpy ride. Bundled together, the upward mobility by and large remains, but the jaggedness along the way can be dampened (albeit never completely eliminated).


15 DFA Guesswork Investing


If you’d like to see a data-driven illustration of how this works, check out this post by CBS MoneyWatch columnist Larry Swedroe  “How to diversify your investments.”


Covering the Market

A key reason diversification works is related to how different market components respond to price-changing events. When one type of investment may zig due to particular news, another may zag. Instead of trying to move in and out of favored components, the goal is to remain diversified across a wide variety of them. This increases the odds that, when some of your holdings are underperforming, others will outperform or at least hold their own.


The results of diversification aren’t perfectly predictable. But positioning yourself with a blanket of coverage for capturing market returns where and when they occur goes a long way toward replacing guesswork with a coherent, cost-effective strategy for managing desired outcomes.


The Crazy Quilt Chart is a classic illustration of this concept. After viewing a color-coded layout of which market factors have been the winners and losers in past years, it’s clear that the only discernible pattern is that there is none. If you can predict how each column of best and worst performers will stack up in years to come, your psychic powers are greater than ours.


16 DFA Randomness of Returns


Your Take-Home

Diversification offers you wide, more manageable exposure to the market’s long-term expected returns as well as a smoother expected ride along the way. Perhaps most important, it eliminates the need to try to forecast future market movements, which helps to reduce those nagging self-doubts that throw so many investors off-course.


So far in our series of Evidence-Based Investment Insights, we’ve introduced some of the challenges investors face in efficient markets and how to overcome many of them with a structured, well-diversified portfolio. Next up, we’ll pop open the hood and begin to take a closer look at some of the mechanics of solid portfolio construction.


Woodstone Financial, LLC is a fee-only financial planning and investment management firm located in Asheville, North Carolina.   Contact us to learn more about our services.

Moving On: The 401(k) Rollover Decision

Back To Classroom


The Responsibility: Increasingly, Americans are responsible for their retirement savings.  For the most part, gone are the days of the 30 year employment tenure and the corresponding pension plan.   Individuals are on the hook for saving, investing, and managing their retirement savings during their working years, and into their retirement.  While  saving and investing in a workplace retirement plan, such as a 401(k), is an extremely important topic, let’s limit our focus here to what to do with your account during a transition-either into retirement or to another employer.  Specifically, should I rollover my 401(k) into an IRA (individual retirement account)?

The Options: Before you can answer this question, first review the options available to you, and the corresponding pros and cons.  Generally when you are ready to retire, the options for your 401(k) are as follows (your plan provider must give you the specific options for your plan):

– Roll the money into an IRA and hire a professional advisor or self-direct your investments

– Roll the money into a new employer’s plan (If you are changing jobs)

– Take a lump sum (Seldom recommended and generally you must pay 100% of the taxes due)

– Leave the money in the plan

Of these choices (if available), when retiring or changing jobs the decision often comes down to either rolling over to an IRA vs. leaving the money in the plan/ rolling to a new employer’s plan.  Because this is the most common decision individuals face, spelling out a few of the important pros and cons may help in the decision making process.

The Pros and Cons:

Pros: Do Rollover Because…

Cons: Don’t Rollover Because…

Investment Flexibility: The number of investment choices available to you through an IRA will most likely be greater than in your workplace retirement plan Creditor Protection: Retirement plans such as 401(k) plans offer tremendous creditor protection.  This protection is almost always greater than the $1 Million limit on protection in an IRA account.
Professional Management: If you work with a financial advisor, they can manage the IRA’s investments and coordinate your distributions.  An advisor also helps to review income tax implications of the account, and can make sure that your investments are in alignment with your financial goals. Costs: Depending on the arrangement, it may be more cost effective to leave your assets in a retirement plan.  Often there are low management fees, and often there are no transaction costs.  Carefully compare the total costs of your employer’s plan with the costs of professional management.
Costs: Costs to manage a retirement plan are often ‘trickled’ down to the plan participants.  These plan costs will not be passed to you in an IRA (although other costs may apply) Loans: Many 401(k) retirement plans offer the ability to take ‘loans’ from the balance of your account.  While there are pros and cons to this actual decision, the option to borrow from yourself is not available in an IRA
Roth Conversions: Once you have rolled your retirement plan into an IRA a Roth Conversion will be much easier to complete. Your Plan’s Distribution Rules: Some retirement plans may have specific rules related to rollover IRA distributions that may be restrictive and/or have additional costs
Inherited IRAs: IRAs and 401(k) retirement plans are passed on by beneficiary designations.  However, a beneficiary of an IRA can establish an inherited IRA easily, while a 401(k) beneficiary may be restricted by plan rules. Working past 70 ½: If you plan on working past age 70 ½ you may have the option to defer taking your Required Minimum Distributions (RMD)
Required Minimum Distributions: When you reach 70 ½ you must begin taking minimum distributions in either a 401(k) or an IRA.  Having a professionally managed IRA will allow you to carefully plan for and meet the RMD requirements each year. You Own Company stock in your 401(k):  If you own company stock in your 401(k) you will want to carefully consider the option to rollover as special tax considerations apply called Net Unrealized Appreciation.


One Final Note: Trustee to Trustee Transfer vs. Rollover Check.  If you do decide to rollover your workplace retirement plan into an IRA, a trustee to trustee rollover is often recommended because the assets simply move from one custodian to another.  If you personally receive a check for the rollover amount, your employer is usually required to withhold 20% of the total amount, and then you have only 60 days to deposit it into a new account + the 20% withheld, or it may be considered a distribution.  In addition you are only allowed to complete one such 60-day rollover per twelve month period.


Woodstone Financial, LLC is a fee-only financial planning and investment management firm located in Asheville, North Carolina.   Contact us to learn more about our services.

Managing The Market’s Risky Business

Back To Classroom


What is a simple, one word answer to the Question: How can we manage investment risks?


The Answer: Diversification


There’s Risk, and Then There’s Risk

Before we even have words to describe it, most of us learn about life’s general risks when we tumble into the coffee table or reach for that pretty cat’s tail. Investment risks aren’t as straightforward. Here, it’s important to know that there are two, broadly different kinds of risks: avoidable, concentrated risks and unavoidable market risks.


  • Avoidable Concentrated Risks

Concentrated risks are the ones that wreak targeted havoc on particular stocks, bonds or sectors. Even in a bull market, one company can experience an industrial accident, causing its stock to plummet. A municipality can default on a bond even when the wider economy is thriving. A natural disaster can strike an industry or region while the rest of the world thrives.


In the science of investing, concentrated risks are considered avoidable. Bad luck still happens, but you can dramatically minimize its impact on your investments by diversifying your holdings widely and globally, as we described in our last post. When you are well diversified, if some of your holdings are affected by a concentrated risk, you are much better positioned to offset the damage done with plenty of other, unaffected holdings.












  •  Unavoidable Market Risks

If concentrated risks are like bolts of lightning, market risks are encompassing downpours in which everyone gets wet. They are the persistent risks that apply to large swaths of the market. At their highest level, market risks are those you face by investing in capital markets in any way, shape or form. If you stuff your cash in a safety deposit box, it will still be there the next time you visit it. (It may be worth less due to inflation, but that’s a different risk, for discussion on a different day.) Invest in the market and, presto, you’re exposed to market risk.


Risks and Expected Rewards

Hearkening back to our past conversations on group intelligence, the market as a whole knows the differences between avoidable and unavoidable investment risks. Heeding this wisdom guides us in how to manage our own investing with a sensible, evidence-based approach.


Managing concentrated risks – If you try to beat the market by chasing particular stocks or sectors, you are exposing yourself to higher concentrated risks that could have been avoided with diversification. As such, you cannot expect to be consistently rewarded with premium returns for taking on concentrated risks.


Managing market risks – Every investor faces market risks that cannot be “diversified away.” Those who stay invested when market risks are on the rise can expect to eventually be compensated for their steely resolve with higher returns. But they also face higher odds that results may deviate from expectations, especially in the near-term. That’s why you want to take on as much, but no more market risk than is personally necessary. Diversification becomes a “dial” for reflecting the right volume of market-risk exposure for your individual goals.


Your Take-Home

Whether we’re talking about concentrated or market risks, diversification plays a key role. Diversification is vital for avoiding concentrated risks. In managing market risks, it helps you adjust your desired risk exposure to reflect your own purposes. It also helps minimize the total risk you must accept as you seek to maximize expected returns.


This sets us up well for our next piece, in which we address another powerful benefit of diversification: smoothing out the ride along the way.



Woodstone Financial, LLC is a fee-only financial planning and investment management firm located in Asheville, North Carolina.   Contact us to learn more about our services.