Wednesday April 22, 2015

What Pension option is best for you?

Most long-term 3M employees are fortunate enough to have a pension – in some cases, a great pension! Those that started before 1999 – Portfolio A – have the best available pension options within 3M.

Before for we go in to detail about evaluating which option is best for you, I would like to mention that you should feel fortunate that you are in a position to receive a pension. Many people planning for retirement do not have that sort of luxury that you do.

There are a few core pension options that are available and I will talk about: Single Life, 100% Joint and Survivor and 50% Survivor.

Single Life – This option will assure the highest payout, but the most risk. If the beneficiary passes away then there is no benefit left to anyone else. This option is best suited for those that are not married, think they will have a long life expectancy or have a spouse that will not depend on their pension benefit if they were to pass.

100% Joint and Survivor – This would be considered the most conservative option available because as long as either the beneficiary or their spouse is alive the benefit will continue. My experience has shown that this is the most-often selected option due to the low-risk nature.

50% Joint and Survivor – This option would fall in between the previous two options because the surviving spouse only gets 50% the primary beneficiary’s amount. The ideal candidate for this would assume that if the primary beneficiary passes before the surviving spouse, they would not need to full amount, therefore, 50% would be a sufficient benefit amount. By selecting this option, you initial amount would be a bit less than Single Life, but a bit more than 100% JT.

There are a variety of considerations that you should think about before you make the big decision:

1. When you retire – This is important because if you plan to retire young, you will get a reduce amount than if you waited until age 65. Although it may be enough to cover your expenses today, will it be enough to help support your lifestyle down the road – probably NOT!

How you supplement your income in retirement is probably the most important consideration. Will your investments, Social Security or other sources provide adequate income for your family? Proper planning will be required to figure this out.

So if you plan to retire “young” make sure you project out where your income will come from and what you anticipate your expenses will come from in 5-10 years.

Figure out your future income gap and the best way to solve for it.

2. Spousal needs – There have been a time or two when I have been having a conversation with a family and the awkward situation arises where the spouse with the pension says they will take single life. The other spouse then turns and looks at them giving the, “Are you forgetting about me look?” These are never fun meetings to be associated with.

Very simply, you and your spouse need to consider each other’s needs and resources if one of you were not around. I think that the last thing any of us would want would be to put our loved one in a hardship situation due to poor planning regarding pension selection.

3. Social Security – When you plan to take Social Security has a huge impact on when it is best to take your pension and vice versa. These are guaranteed incomes to you. By taking one or the other earlier, it may allow you to delay collecting the other.

I would advise running some scenarios to see where break-even points are and what potential advantages and disadvantages are presented by each. Along these same lines, you would be running scenarios to determine how you maximize Social Security. There are over 81 ways to claim Social Security. Have you done your research?

Think of this as your retirement income puzzle.

4. A financial plan – If you have heard me speak before or have been reading the blog, there is no secret that I am a huge advocate for doing a FINANCIAL PLAN. Why? Very simply, prescription without diagnosis is malpractice.

A good doctor does not just write you a prescription. They run tests, ask questions and other activities to make sure they know all the details. The same is true with your finances. If you just make decisions without weighing all available factors against each other you are probably not knowing all of your risks and potential outcomes.

Envision a scenario where you know how your pension, investments, Social Security, taxes and income needs all affect each other. Wouldn’t you like to know how to maximize all of these and create a cohesive plan that allows of your resources to work together to minimize your risks?

That is what is financial plan will do for you.

In conclusion, know your options and how they affect each other. Remember you only get to select your pension option once. Educate yourself so you make the best choice for your family.

Make it a great week.

If you’d like a complimentary copy of our “5 Critical Mistakes 3m Retirees Make” Report, simply click here to download it.

Tuesday April 21, 2015

4 Consideration for Your Stock Options and Restricted Stock Units

Oftentimes, employers of publicly traded companies will offer stock options (ISO) or Restricted Stock Units (RSUs) as a reward for loyalty and performance to valued employee. They offer this as a way to compensate you for your hard work and dedications. This is also a token to ensure loyalty and longevity with the company.

For many years, companies would issue stock options to their employees, however, today that is changing – more companies are issuing RSUs instead. The primary reason for this change is due to a change in tax code. In the case of 3M, many of you have the ability to choose between stock options and RSUs.

Let’s break down these down….

Before we do that, let me make sure you have a good understanding of the differences.

Stock options – Stock options give you the right to buy a specific number of shares at the grant price. Typically, they will vest over a 3-year period from date they are granted to you. From there, usually you will get a 7-10 year period where you will need to exercise that option.

Since there is a grant price, the stock’s value needs to stay about that price in order for the option to have value.

Lastly, options are taxed upon exercising the option. Most plans will require to have taxes immediately withheld – sometimes as high as 40% for Federal Income tax.

Restricted Stock Units (RSUs) – RSUs are granted units equal to a share of stock. Similar to stock options, they will have a vesting schedule. Once they vest, they will equal one share of company stock.

Unlike, stock options, there is no grant price. This means that the RSU will always have value.

Tax liability is assumed when the RSU vests.

Now that we have the basics, here are some considerations:

  1. Income taxes – RSUs provide little tax flexibility unless you have the ability to control or spread out the vesting schedule. Since most employees receive RSUs while working, they will be adding to their ordinary income each year as the RSU vests.

    For example, let’s assume you have $150,000 salary and receive $60,000 in RSUs in the same year. Your intention is to continue to work for the next 5 years as well. For the next year, your taxable income would be $170,000 assuming a 3-year vesting schedule of RSU. Now if you anticipate continuing to receive the RSUs over the next 5 years, you can see how your taxable income could sky rocket. You could end up paying over 28% in Federal Taxes for these units.

    Stock options allow a little more flexibility since you are not taxed until sell the option. In most cases, you have a 7-year window to exercise the option. If you hold the stock for at least 1-year after exercise, you will now have long-term capital gains treatment for taxes. This could potentially save you to 19.6%.

    Let me explain further… When you are granted the stock option you have the right to buy it at a certain price. When you exercise the option you are now converting that option in to value that can be sold.

    With stock options you can see that you have a little bit more tax flexibility since you can control the amount exercised and sold or holding it longer term to get long-term capital gains treatment.

    I highly urge you to take close look at your potential tax liability when determining which choice is best for you.

  2. Alternative Minimum tax (AMT) – Stock options (ISO) do present one major disadvantage to employees – AMT tax. The spread or difference between the purchase price and the grant price is subject to AMT tax.

    AMT tax was created to prevent high-income earns from paying too little tax because of their ability to find favorable tax deductions and exclusions.

    I could write a whole post on this, but make sure you are considering AMT tax if you decide to go the stock option wrote.

  3. Risk tolerance – As stated earlier, many of you have the choice to pick between stock options and RSUs. I am sure many of you ask the question… “Which is best for me?”

    For many, this simply comes down to your tolerance for risk. Since there will always be value in RSUs, a more conservative investor would go this route. RSUs give you the right to shares, not the right to buy at a given price. Stock options (ISOs) do have this – a grant price when they are considered “in the money” or of value.

    A more moderate or aggressive investor would look to go the route of stock options because there is more upside. The ratio of stock options to RSUs is typically a little bit more. If you are a younger investor or willing to take on a bit more risk, I would consider this option a bit more.

    Lastly, anyone not confident in the future stock price of the company may want to look at RSUs for the reasons explained above.

  4. Total company exposure – Having too much exposure to 3M stock is something I explain in my “5 Mistakes 3M Retirees Make” report. Since you do not have much control over receiving this options or RSUs, I would look to mitigate your stock exposure in other areas like 401k, Employee stock purchase plan or any other investment account.

    No one is here to dispute the success or growth of the company overtime, but as a Financial Advisor, my job is to evaluate client’s risk and make sure we are putting them in a position to take unnecessary risk. Having more than 25% of your liquid net worth in one company stock would be a concern to me. Evaluate it is all I ask.

What does this all mean?

Reading through this post, you clearly know that there are countless factors in determining which type of compensation you choose, when you should sell or exercise them and how to manage the risk of it. Frankly, this can become quite confusing.

To top it all off, you need to be very diligent in your tax planning beforehand.

My advice would be to seek help in building a financial plan that considers all of these options along with all of your other assets. Looking at your goals, needs and desires will help you make the best decision for your family.

If you’d like a complimentary copy of our “5 Critical Mistakes 3m Retirees Make” Report, simply click here to download it.

Please note that neither Cetera Advisor Networks LLC nor any of its agents or representatives give legal or tax advice. For complete details, consult with your tax advisor or attorney.
Opinions expressed are not intended as personal investment advice or to predict future performance.

Monday March 2, 2015

The Best States to Retire in Based on Taxes

Each year various clients will inquire about what states are the most tax friendly during retirement. Unfortunately, there is no easy answer, however, let me give you a basic checklist of considerations. Instead of looking solely at taxes, you should look more broadly at additional factors that impact your cost of living.

Most individuals will look specifically at state income taxes when determining the best solution -states like Florida or Texas come to mind. With that being said, that is a very narrow look at what you should be evaluating. This post is dedicated to laying out some important factors regarding taxes and other considerations before you determine the ideal location to spend your retirement years.

State taxes income – Yes, you should look at this first because it may have the largest monetary impact. The higher your income, the more sensitive you are to this tax. If you are taking IRA distributions, receiving a pension or receiving passive income from a business, all of these would be reduced by state income tax.

There are 7 states at have no state income tax. Based in Minnesota, we have one of the highest state income tax rate at 9.85%. Feel free to go to to see each state.

Sales tax/local tax – Depending on your activities and how much you plan to spend, you may want to put some consideration in to each states sales tax rate. This can add up over time depending on lifestyle.

Housing – Whether you plan to rent or buy, this needs to give be given serious consideration when determining your retirement destination. If you are moving in to a geography that has more expensive housing you may lose all of the savings gains by less income tax. If you plan to own a home, you should factor in property tax relative to your current rate.

Areas near lakes, rivers or oceans are going to command a higher purchase price and rental rate. Also, seasonality will command higher prices. Retirees tend to flock toward warmer climates near water. Demand may increase your cost of living.

Cost of goods and services – Very simply can you maintain the lifestyle you desire at a more or less cost than you currently? I encourage you do to your research!

Medical Insurance – Recent implementation of the Affordable Care Act as made drastic changes to the landscape of medical insurance. For people retiring before the age of 65, you will have to sign up for medical insurance through a state or federal exchange. Overlooking this could drastically increase your expenditure.

Example: In Minnesota, we are fortunate enough to have one of the lowest costs of rates. The average 64 has a rate of $401/month. Whereas, a popular retirement state, Florida, has a monthly rate of $581.1

Relocation- Remember that moving is an expensive. Whether you have family to help you or hire a moving company, the cost to relocate or add a second residence is very costly. If would encourage you to reconsider the move if you are doing it solely for taxes as this is another cost that would eat away at the tax savings.

In conclusion, there is no perfect answer to the best state to call retirement home. I encourage you to start with the checklist and then take a hard look at the lifestyle and cost of everyday living you desire. Each of these points is going to have a greater or lesser weighting based your lifestyle.

1. Manhattan Institute of Public Policy, 2014.

Wednesday January 14, 2015

2015 Market Outlook

Happy New Year everyone! Changing of the calendar year allows most of us to reflect on what we have accomplished or wished we accomplished over the last year. It also provides us the opportunity to think about the year ahead and what opportunities, challenges and changes we all will face.

The real reason for this note, is to provide some perspective on the markets as we head in to 2015. No one truly knows how this year will play out, but here are some comments from me:

Oil prices- We all have now noticed $2/gallon gas at the pump – or less! I saw $1.85/gallon in Apple Valley on 1/12. This should further help our retail economy in the US. GDP, which measures growth of our economy, was up 5% last quarter. Historically, this is a very positive number.   Low gas prices should provide a few more dollars in the pockets of consumers, which in turn most will spend. In my opinion, retailers, restaurant and entertainment will benefit the most.

Low oil prices are not necessarily good though. Many foreign and emerging market countries heavily rely on higher oil prices to support their economy. If these prices continue longer term, it could put pressure on the global economy.

Another factor that most don’t realize is that energy companies tend to carry a lot of debt on their balance sheet to fund exploration, pipelines and growth activities. With $100+/barrel oil six months ago, many energy companies were trying to expand rapidly. They did this by borrowing money and issuing bonds. This could present an issue a year or two from now if oil stays this low.

In summary, good for consumer and good for economy now. If it lasts long-term, there may be some concerns of the financial health of the companies that are carry lots of debt. It is also a concern for those countries heavily dependent on oil. Essentially low oil prices is a double edged sword for the stock market.

Interest Rates – The US 10-year Treasury rate is 1.97% as of 1/7/15. We are not being paid to invest anywhere else. Until this changes, we remain optimistic about US stocks. I would also remain positive about real estate since mortgage rates are remaining near all-time lows. Look for lots of new development in 2015.

Emotions and Behavior – The markets move on fear and greed – that never changes. Each year, media plays a bigger role influencing our investment decisions – not always for the good. Every small move in the market seems like it needs to be justified today. Remember this is the nature of markets, they don’t go straight up or straight down. Most minor moves are usually driven by investor emotions.


Below is a chart from Blackrock showing the emotions of investors over the past 15 years. This is good to keep in mind.



We remain positive about the environment, however, things can change and that is what we are here for. Again, thank you for the opportunity to serve you. We wish you the best in 2015.



Matt Gulbransen

Wednesday October 29, 2014

2015 Social Security and Retirement Updates

Since the fall season is now here, we get to find out if there will be a cost of living (COLA) increase for those individuals collecting Social Security in 2015. We also find out what changes the IRS will be making to 401k, IRA and other employer-sponsored retirement plans.

In an effort to make this very timely and straight-forward, I thought I would write a brief post that outlines the major impacts to all of you.

In 2015, the Social Security Administration will increase the amount its recipients receive by 1.70%. Last year, the increase was 1.50%. Starting in January this will be reflected on the amount that you receive. For those that are not collecting Social Security, this may create a slight adjustment to your estimated amounts as well. I encourage you to look up benefits after the 1st of January.

Moving on to retirement account contribution changes we see a few changes that will provide some benefit to those who are looking to save more. Although these are not monumental increases, every little bit helps and I encourage all of you to take advantage of these savings options if you are eligible. Below lists the major changes:

401k and Thrift Savings Plan– In 2015, annual employee contributions will increase to $18,000/year from $17,500.   For those of you over the age of 50, you get another break in the form of an increase to the “catch up.” This amount increased from $5,500 to $6,000 allowing for a total contribution of $24,000 for those over the age of 50 who want to maximize contributions.

For self-employed and small business owners who normally make SEP-IRA contributions, this increases to $53,000 from $52,000.

I should also note that the IRS did not increase Traditional IRA or Roth IRA contributions for 2015. Nor did the increase “catch up” provision for these either. However, they did increase the income limit by $2,000 for each of these. If you income was close to these limits previously, you may not be able to make these contributions.

To top this off, it looks as if employers are slowing becoming more willing to do 401k matches as well. During the last recession, only 70% of employers were making matching contributions to 401k participants. Today that number is up near pre-recession levels of 80%.

Saving for retirement does not happen overnight. Those that become the most successful understand the concept of consistently saving and taking advantage of these slight increases over time. I hope you found this article helpful and best of luck closing out 2014!



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