Asset Management: Frequently Asked Questions
Q: I am leaving my job and must decide what to do with my retirement plan assets. What are my options?
A: The four most common retirement plan distribution options to choose from are:
Q: How do they differ?
A: DIRECT ROLLOVER INTO ROLLOVER IRA: A Rollover IRA allows you to move your eligible rollover money from your employers retirement plan directly to an IRA without paying current taxes or penalties. If you decide to keep your retirement savings working for you, a Rollover Individual Retirement Account (IRA) may be a smart choice because of its ease and convenience.
ROLLOVER TO NEW EMPLOYERS PLAN: If you are changing jobs and your new employer sponsors a qualified retirement plan that accepts rollovers, you may opt to move your eligible rollover money directly into your new employers plan. Talk to the plan administrator at your new company, as rules and investment options vary.
LEAVE MONEY IN CURRENT PLAN: Generally, this option is available if your vested account balance in the plan is greater than $5,000. You may elect to take your money out at a later date or keep the money in the plan until normal retirement age. Many distribution options available to you today will be available when you decide to take your money out of the plan. While this may be the easiest course of action to take now, later on you may find it too restrictive. Check with your plan administrator for details.
CASH DISTRIBUTION: If you decide to take your retirement distribution in cash now, you may end up with much less than you were expecting. Thats because your distribution will be subject to:
Q: Which is the best option for me?
A: A number of factors must be considered, so it is always best to consult with a financial advisor. He or she can talk with you about your goals, then help devise the best financial plan to help you reach those goals.
Q: What if I want to invest the money after it is withdrawn?
A: Again, our professionals can assist you in considering the best investment strategies to meet your needs. Our team will consider such important issues as short-term versus long-term investments, diversification of your portfolio and more.
Q: How do I decide?
A: Its best to develop a relationship with a financial advisor. Wed love to meet with you and assist you in mapping out the right plan for you. Best of all, it costs you absolutely nothing to talk with us. Just give us a call, and well be glad to help.
Q. Do I have to have a trust to use your investment services?
A. Many of our customers choose trust arrangements because of the unique advantages they offer. No, youre not required to create a trust. If you prefer, you can put our professionals to work on a less formal basis. All it takes is a simple letter of instructions, designating us to act as your investment agent.
Q. What are the advantages of a trust?
A. With a trust you can not only draw on our broad investment capabilities, but also arrange to have us perform any number of special services, now or in the future. These personalized services could range from making payments of estimated taxes while youre traveling abroad to providing full personal financial management in the event you suffer an incapacitating illness. You can also name one or more beneficiaries to receive the assets of your trust at your death. These distributions avoid probate. Or, you can have your trust continue beyond your lifetime, serving as a source of continuing income and support for your spouse, a child or others whom you designate.
Q. Is it difficult to set up a trust?
A. Not at all. To put a Cumberland Security Bank trust advisor to work as your trustee, you take two simple steps. You bring us the money and/or securities you wish to place in trust, and you give us your written instructions in the form of a trust agreement. The agreement, drawn up by your attorney, is signed by you (as creator of the trust) and by Cumberland Security Bank (as trustee). Thats all there is to it.
Q. If I create a trust, can I maintain control of it?
A. Certainly. Our trust customers control their trusts in three ways:
Q. Are trust services expensive?
A. No. Our fees are competitive with those charged by investment advisory firms (for services that may not include custodianship of securities, record keeping and other conveniences) or by mutual funds.
Q. How big does a trust fund have to be?
A. If you think of millions of dollars when you hear the word "trust," youre the victim of a widespread misconception. Todays trust institutions have developed ways to handle even relatively small trusts efficiently. In any case, we dont think in terms of fixed minimums. Instead we ask ourselves, "Is a trust the best way to meet this persons financial management needs?" One of our trust advisors will be happy to sit down with you to determine if a trust is right for you.
Q. How much of a return will I get on my money?
A. That depends on your goals - current income, long-term growth to offset inflation, or some balance of the two -and on ever-changing investment conditions. Historically, diversified portfolios of good quality stocks have produced a total annual return (dividends plus growth in principal value) averaging around 10%. Bonds have produced somewhat lower returns overall, but they offer a higher level of current income than stocks. As your trustee, our goal is to provide reasonably consistent returns over the years. We emphasize careful asset allocation, the selection of quality investments and constant vigilance.
Q. Are trust funds insured by the FDIC?
A. Primarily, trust funds are invested in stocks, bonds or other income-producing assets. These trust investments are not bank deposits. Securities and other assets administered by a bank as trustee are held separate from the banks own assets, under strict audit controls, and cannot be reached by the banks creditors. As a result, the need for FDIC insurance is generally limited to uninvested trust cash, such as income awaiting distribution. In general, the owner of a revocable trust account is insured up to $250,000 for each unique beneficiary.
Q. How can I find out more about trusts?
A. Thats easy. Our trust advisors will be glad to assemble further information for you, analyze your investment requirements and answer questions not covered here. Just give us a call at (606) 678-9164.
Q. What is a 401(k) account?
A. An employer-sponsored 401(k) plan allows an eligible participant to contribute pre-tax dollars to a tax-qualified retirement plan. It may not be the same thing as the pension your parents or grandparents may have had, but it has the same goal: to help you pursue financial security for your retirement. There are several basic features of a 401(k) plan:
Q. Beyond being able to use pre-tax dollars, what are the other benefits of a 401(k) plan?
A. There are numerous advantages of participating in a 401(k) in addition to the tax savings that go along it. For example, in addition to your own contributions, your company may offer a matching contribution at a given level. Imagine receiving money towards your retirement, simply because you chose to participate in the plan! Any employer-contributed dollars are invested in your account and accumulate tax-deferred, until they are withdrawn, usually at retirement.
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Q. Can you borrow out of your 401 (k) plan?
A. While the objective of a 401(k) plan is to help secure your retirement, some plans do allow loans, through which participants may borrow money from their own accounts and repay themselves accordingly. Other plans may offer distribution options such as hardship and in-service withdrawals. It is important to keep in mind that any withdrawals from a 401(k) account (excluding loans, unless they are not repaid), are taxable as ordinary income and may be subject to a 10% early withdrawal penalty if the participant is under age 59-1/2. Consult your plan administrator for specific details concerning your particular plan and the options available.
Common Investment Questions
Q. When do I need to start investing beyond having a savings, money market or certificate of deposit?
A. You should begin planning for retirement whenever you start bringing home a paycheck. Although its easy to think when youre 25 that you dont need to start planning for retirement until youre 40 or so, thats a dangerous proposition. Starting early and saving small amounts every payday over time can generate more retirement income than attempting to invest large sums of money over just a few years. Heres a quick example*:
Mary begins saving $100 a month in her retirement plan at age 25 and continues to age 65. If her investments realize a fixed 8% average annual return, she will have a $351,428 balance at her retirement time. Sam, on the other hand, doesnt start saving until he is 35. To have the same plan balance as Mary when he retires (assuming the same 8% return), Sam needs to save more than twice as much ($234 a month).
* This investment return, which is compounded monthly, is intended only for illustrative purposes. Actual rates of return cannot be predicted and will fluctuate. Source: NPI.
Q. When do I need to start saving for a childs college education?
A. Some advise that its smart to start saving for your childs college on the day you say thank you to your obstetrician. Thats not bad advice, given that some analysts predict in 10 years from now, the national average in tuition for a public college is expected to be in the range of $100,000, and $440,000 for a private college. Tuition costs are rising faster than the rate of inflation, so you need an investment vehicle that can keep pace. Our financial advisors will be happy to help you and your family come up with a personalized plan to conquer the costs of college.
Q. Isnt it always best to invest conservatively for long-term goals like retirement?
A. Many investors think conservative investments are the way to counter the possibility of market declines. That can be a major mistake. Low investment risk can mean low returns that barely keep pace with inflation. Instead of choosing only conservative investments, you should consider how much risk you can take with your investment and then choose a mix of securities designed to offer the highest potential return given that level of risk. Its also important to remember that the more time you have to meet your financial goals, the more opportunities your investments have to recover from the periodic declines that inevitably affect investment markets.
Q. Shouldnt I shift to more conservative investments once I retire?
A. Shifting all of your securities-based assets into money market accounts and CDs at the point of retirement may not necessarily be the most beneficial. Conservative investments may not grow as much as you need them to; specifically, they may not be able to keep up with inflation. As a result, your standard of living may be eroded at a time when you should be enjoying it most. It may be better to preserve an investment mix with growth potential and gradually shift parts of your assets into more conservative investments as you are close to drawing on them.
Common Misperceptions About Investing
I cant afford to start investing.
The reverse is true. In todays economy, you cant afford to not invest for the future. You can, in fact, begin building a portfolio of securities-based investments at any time. If your employer offers a tax-deferred 401(k) retirement plan, start participating now, regardless of your balance in other forms of traditional savings accounts. If you dont have an employer-sponsored plan, you can look to other forms of long-term investments using a number of options. Our financial advisors will be glad to sit down with you and advise you on a plan thats right for you.
I cant afford to pay for an investment counselor.
There is no cost for working with a Cumberland Security Bank financial advisor to develop an investment plan that meets your needs. Our doors are open to anyone who would like to sit down and develop an investment plan.