Six Financial Planning Considerations for a Successful Retirement
How much money will you need to retire? Do you have a financial plan to help you meet the needs of retirement? Do you have enough assets to last a retirement of 20 to 30 years? Do you have a Retirement Income Spend-Down Plan? How will you manage rising health care costs and long-term care?
These are loaded questions; many factors are involved and a “cookie cutter plan” will not meet the needs of everyone. Baby Boomers were most impacted by the “Great Recession” 10 years ago. Given the economic rebound since and inevitable recessions in the economic cycle, we wanted to take a look at strategies for a secure retirement by examining the five common planning issues people may encounter.
According to a recent Schwab survey, only 25 percent of Americans have a written strategy for retirement.
So, when ideal-LIVING reached out to us at Lawrence S. Tundidor, AIF®, AAMS®, AWMA® of Tundidor & Weiss Investment Group, we were grateful for to be given the opportunity to offer our insight in order to help future retirees find ways to avoid these common issues. Here are six key points that will make all the difference.
one. Take control of your money
two. Not having a proper retirement income spend-down plan
three. Having an antiquated investment portfolio
four. Underestimating risks: longevity, investment, inflation
five. Lacking protection for your family and estate
six. Working with a financial advisor who puts your best interests first
Take control of your money
Upon changing employment/retirement, some keep their money in the original employer sponsor plan. It is important to take into account one’s personal situation and consider the various options, which include: keeping your assets in the original plan; withdrawing your assets (taxes are generally due upon withdrawal and any applicable tax penalties that may apply); or choosing to rollover your assets to an employer-sponsored retirement plan that accepts rollovers or to another eligible vehicle such as a traditional IRA. It is imperative to take control of your money when you make the decision to retire from your company. Considering your options will give you the freedom to work toward maximizing your investments.
Pension Maximization Possibilities
Examine pension survivorship benefits. If you are one of the lucky ones to retire with a pension, at the time of retirement, you must elect how you will disperse the benefit. To protect your spouse, you can typically opt for a lower monthly amount to ensure your spouse is covered until “end of plan.” This may or may not be the best option. Some clients choose to opt for the single life benefit and instead have an Insurance policy to protect their spouse or beneficiaries. In some cases, not only can it protect loved ones, but some insurance policies allow for the death benefit to also be used for long-term care. This can ensure that the benefit will be used during one’s life, death, or both. This is an irrevocable decision, so consult with a financial advisor before finalizing your election.
The majority of pension benefits do not have a “COLA” (Cost of Living Adjustment) increase with age, therefore, consider what the money will be worth in 20 years. Assuming above a three percent inflation rate, a $4,000 a month pension would only be worth about $2,000 a month in 20 years. For those with a lump sum option, consider the option to invest and generate an income stream that has the ability to offset inflation pressures over time.
Not having a proper retirement income spend-down plan
Where do you draw your money from when you need it? From an IRA? Sell stocks? 401Ks? Real estate? Brokerage accounts?
You have worked very hard for your money and decisions on when and where to use your money can have ill-intentioned consequences.
Plan where your money will come from instead of putting it all into one pot. In retirement, you should consider having long-term, mid- term, and short-term investments to help protect you from market fluctuations while maximizing your income potential. More conservative investments go in short-term, moderate investments for mid-term, and more aggressive in long-term. Picking and choosing investments to liquidate on a monthly basis can be stressful, and most advisors show you how and where to save but not how to create an income stream from your investment assets.
When drawing income directly from a 401k, the plan provider will typically sell shares or “units” to send you a monthly amount you requested. The issue with this strategy is that you are indiscriminately selling shares in an up or down market regardless of price. In a down market, you are selling shares at a lower price and therefore cannot allow time for those shares to recover essentially burning the candle on both ends. Consider investments that provide a dividend or yield that allow you to draw income without selling shares.
Having an income spend-down plan can help minimize taxes. For example, if you are taking all of your income from your IRA, this could potentially put you in a higher tax bracket. The goal is to determine how much money to draw from each of your investment assets to maximize your returns and minimize your tax consequences.
Having an antiquated investment portfolio
A recent Vanguard study projected investors’ portfolio returns over the next 10 years to be between three and five percent annually versus nine to 11 percent they have enjoyed over the last decade. Many pre-retirees/retirees have invested with a 60/40 stock/bond ratio and think their portfolio is diversified and able to generate enough income. In the past, bonds have yielded five to seven percent, but now most estimates put projections for bond returns at an average of two percent. It is important to examine having some portion of your investments in alternative assets or alternative strategies to work to minimize volatility and potentially increase return. As few as two percent of the U.S. population has a truly diversified portfolio with alternatives. Diversification may allow you to hedge against inflation and interest rates.
There are three major types of risk that people fail to analyze: investment risk, longevity risk, and inflation risk.
Investment risk (tied to sequence of returns) is the possibility that your investments could lose value because of movements in financial markets. A recession historically comes once or twice every decade. If you had retired during that time and were forced to sell investments to fund your retirement expenses, then you would have lost a great deal of the upside when the market recovered. For example, Disney stock had dipped down to $20 in 2008; you may not have been able to wait for it to recover and then sell when the price was much higher. Now that it has been 10 years since the last recession and many have enjoyed great returns since then, it would be wise to re-evaluate their investments to make sure they are in line with their time horizon. Many individuals who visit the Ideal-LIVING Shows today were still working and still had many years to retirement in 2008; but now that they are closer to retirement, it is important that they evaluate their current situation.
People today are living longer, and this forces us to evaluate longevity risks. According to the Wall Street Journal, there is a 50 percent chance that a Baby Boomer today will live to age 90. If you don’t plan accordingly, your income could run out before you do. Most people think if they draw 4 percent out per year, they will have enough income to last. Some have recently argued that number should be about 2.5 to three percent per year. In the first three years of retirement, the average retiree tends to spend approximately 20 percent more and this overdraw can also contribute to insufficient sums for the later years if not planned for correctly.
Don’t forget inflation. At above a three percent inflation rate, the value of a dollar in 20 years is about half of what it is worth today. A 2018 Bankrate survey concluded that some Americans are still risk averse and have left a large amount of money sitting in cash. If the bank gives you a yield at a rate under inflation, you are actually earning a negative return during that time. Be aware of how inflation affects your bottom line and focus on inflation adjusted income in retirement.
Lacking protection for you. Your family, and your estate
According to Fidelity, a 65-year-old couple retiring this year will need an average of $275,000 to cover out-of-pocket medical expenses. And that doesn’t include the costs associated with long-term nursing home care.
Often times, retirees might have a last will and testament, but not a comprehensive estate plan. Adequate protections should be evaluated for health ,as well as leaving a legacy. The US Census indicates that one in five Americans may become disabled for a period of time. Do you have a plan in the event a disability occurs years before retirement due to an accident or poor health? Do you have a plan to deal with the rising cost of long-term care (LTC) insurance? According to the US Department of Health and Human Services, around 70 percent of adults over the age of 65 will need long-term care insurance at some point in their lives, and it is usually at the tail end of a financial plan when assets tend to be at their lowest point after 20 to 30 years of withdrawals. Consider ways to mitigate those long-term care costs. Traditional long-term care can be a good option for some as they can lock in a specific benefit and have the ability to grow it to offset inflation. The downside is that if you don’t use the benefit, you typically lose it, and as you get older, the premiums are not fixed and can go up over time. A Hybrid Life Insurance policy with a long-term care rider allows one to have a life insurance benefit while still working or in retirement, with the ability to use some or all of their death benefit for the purposes of long-term care in their later years. This option can give clients the ability to pay for a benefit that they know will be used in one way or another, potentially eliminating the feeling of “use it or lose it” that some may have with traditional policies. Also, Hybrid policies can be structured with “fixed” premiums or a lump-sum and therefore, reduce the risk of rising premiums that some may experience traditionally. The downside is that underwriting requirements are typically more stringent since you are underwriting a death benefit and living benefit together. Many individuals have older cash value policies without a LTC benefit that may consider
re-evaluating those policies to create a new benefit. The third option is asset-based; using either retirement accounts or cash to generate an annuity stream during retirement that can continue to pay for long-term care costs later in life. This option can also be useful to individuals who are not able to pass the medical examination requirements of traditional or hybrid policies, as well as those in risk classes such as smokers and those with Diabetes where the price may be prohibitive.
As far as a strategy for estate planning is concerned, all pre-tax retirement plans and traditional IRAs require a minimum annual distribution after reaching the age of 70 and a half. Most take that distribution and simply put it into a savings account. Other options can be to take the cash and invest post-tax, to contribute to long-term care protection, or to leave a legacy. What type of legacy would you like to leave? You could gift money to your children/grandchildren, set up an endowment for charity, or protect the assets in a trust. There are countless options and strategies to create the legacy you choose.
Working with a financial advisor who puts your best interests first.
Post-retirement living is very different, so take the time to explore your options well in advance of your retirement age. We encourage you to sit down with an unbiased, independent financial advisor that puts your best interests first and helps you compose a written personalized and holistic financial strategy with the goals of protecting your retirement investments and securing the next chapter of your financial future. To learn more about the topics above, please attend Lawrence’s seminars held at the King of Prussia, PA, and Parsippany, NJ, Ideal-LIVING Real Estates Shows in January and February. In the meantime, if you have any questions, feel free to contact Lawrence at LawrenceT@VoyaFA.com.
Investment adviser representative and registered representative of, and securities and investment advisory services offered through Voya Financial Advisors, Inc. (member SPIC). Neither Voya Financial Advisors nor its representatives offer tax or legal advice. Please consult with your tax and legal advisors regarding your individual situation. Tundidor & Weiss is not a subsidiary of nor controlled by Voya Financial Advisors. 37310919_IAR_102D
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The Stories of Seven Couples Who Lowered Their Taxes & Improved Their Lives
By Kelly Godbey
“What we saved in taxes, we now use to fund our lifestyle.”
~ Leslie Jacobson of Dataw Island, SC
In 2018, the number one reason people were considering a move was to save money in taxes, followed closely by moving to a better
climate. So, we interviewed people to see how much they saved in taxes when they relocated to a low tax state. As I spoke with each one of them, their lifestyles simply overpowered the amount that they saved. While saving money in taxes was wonderful for them all, their stories were more about the new lives they lead. Meet these joyous people who moved from a high tax state and improved their lifestyles.
Leslie and Bill Jacobson of Dataw Island and Logan Homes
Saved $6,000 a year in property taxes
“If you had told me in 2016 that I would be living in South Carolina, I would have told you that you were crazy,” said Leslie Jacobson, formerly from Montgomery County, PA. In the Spring of 2016, they mapped out a trip from Williamsburg, VA, to Savannah, GA, and toured developments down the coast. Leslie says: “On this trip a light bulb went off for me … This is what my life could be? …This is what my taxes could be? … This is what the weather would be? Then Bill said, ‘I want to look at this place I saw in Ideal-Living magazine, Dataw Island,’ so we went there and stayed with a Discovery package. We narrowed it down to two places, then we bought a lot at Dataw Island in the spring of 2017. And, we moved in May 2018.”
The Jacobson’s knew they wanted Logan Homes to build their home. The Jacobson’s home has a pond view and a golf view. “Logan Homes were in our price range, and we love the product. Logan builds quality homes and they have a great design center. They have really streamlined the process. We used one of their floor plans and customized it the way we wanted it. We made a lot of modifications in the kitchen. I tell everyone we live in paradise,” says Leslie.
“The people who we have met have been so wonderful and gracious. We have become a part of ‘Island Friends.’ Dataw Island puts together groups of nine to 12 couples who rotate dinners at their homes once a month that gives us a chance to get to know new people. We were social before, but this was even easier to meet people.”
Leslie loves the beach and Bill loves golf. Bill (64) plays golf three to four times a week and Leslie (56) just isn’t ready to retire yet. Their taxes were in excess of $11,000 prior to moving, not to mention the new SALT tax legislation that would have eaten up all of their $10,000 deduction for state and local taxes. They encourage others to do their due diligence by attending an Ideal-LIVING Real Estate Show, just as they had done. Bill says, “You’ll know the place is right when you see it.”
Larry and Sherry Sherman of the Villages at Citrus Hills
Saved $5,000 a year in property taxes
As an accountant, Larry Sherman did his homework before moving from a small town in Connecticut to Citrus Hills, FL. The Shermans were tired of fighting all of the snow and ice, so climate was a big factor, but so was saving money. By moving to Florida, they saved seven percent in state income tax, as Florida is known for NO STATE INCOME TAX. And, even saved a couple thousand dollars on property tax for cars every year. Larry still works part-time as a CPA and keeps himself busy along with going outside everyday and exercising. They both take much better care of themselves living in Florida than they did previously. He says, “Sometimes I have to pinch myself to see if this is real.” He now loves to golf, as does his wife, Sherry, who has just taken up golf in addition to donating time to various charities. The Shermans are busy every day, from day trips to kayaking and socializing. He says, “Don’t wait too long in life. You only get one shot at life, so don’t hesitate; come down and try. I used to work 80 hours a week during tax season, and you have to think of yourself. You have to enjoy life while you can, even if you have to take a loss in selling your home today.”
Pam Avila of Hot Springs Village, AR
Saved $9,000 a year in property taxes
Relocating from California a year and a half ago to Hot Springs, AR, was a big change and culture shock for Pam Avila, and she loves it! At 75 years young, Pam still runs a consulting business, now working with marketing. She has always been an entrepreneur. In California, she had a tech consulting business that worked with companies such as Microsoft and Apple.
When it was time to partially “retire” Pam knew that there was no way she could afford to stay in California, so she looked at places around the country and found a wonderful cost of living and tax situation in Arkansas. “It’s been an adventure!” Pam says. “I came here on a Monday and bought on a Wednesday. It just felt right! You hear about ‘Southern Hospitality,’ but you really don’t know until you experience it.” Pam now goes to dance fitness classes twice a week, enjoys kayaking, and even goes line dancing.
Just by relocating, Pam saved $9,000 a year in real estate taxes, not to mention a lower cost of living. The home costs in California were approximately three times what she paid for a home in Hot Springs Village. And, all of the costs for services like landscapers, plumbers, and electricians are much lower. And, the property tax for the same car went from $450/year to $27 per year.
Spread across 26,000 acres in the Oachita Mountains, Hot Springs Village is the largest gated community in the U.S. with all of the amenities you can imagine, including nine golf courses, 12 lakes, two marinas, fitness centers, country clubs, and over 20 miles of trails. It’s easy to see why Pam fell in love.
Peter and Susanne Lividini of Heritage Shores, Bridgeville, DE
Saved $15,000 a year in property taxes
When the Lividini’s retired, they made a lateral move from a 2,700 sq. ft. home in New York to a 2,600 sq. ft. home with property taxes of $1,877 a year. Peter says that living in Putnam Valley was just too expensive with high taxes and a high cost of living. He was a school teacher in Harrison, NY, where the average costs for monthly taxes are between $16,000 and $60,000 a year.
The Lividinis now live the epitome of the active lifestyle. Peter retired at age 62 for a different way of life. He says, “When I was working, I had 45 to 50 minutes a day commute, and now I have so much time. The best part of retirement is that I didn’t expect retirement to be like this! At Heritage Shores, there are so many amenities. I bowl every week, play pickleball three days a week, bocce ball on Mondays, every other week there’s water volleyball, and I bike to the gym. This place is scheduled like a cruiseship with something different to do all of the time. I even started golfing and play nine holes two to three times a week.”
According to Peter, living at Heritage Shores is like being at “Cheers,” where everybody knows your name. There are many clubs where residents show up to learn about anything from history to science fiction. They even have groups where homeowners plan trips to various destinations for groups.
In addition, Peter is an artist who works on commissions and has set their new home up like a gallery. But, it’s not all about Peter, Susanne is very active too. They still make time for each other, like going for bike rides, and social gatherings. The pair loves to hang out at the Sugar Beet Market, where you’ll find lots of Heritage Shores residents listening to music or grabbing a bite to eat. Susanne participates in co-ed water volleyball, plays mahjong, and is a member of the “Red Hat Society” that raises money for charities and social issues.
Peter says, “It’s fun! It’s everything we’ve always wanted.”
Jere and Jill Hassberger of Fairfield Glade, TN
Saved $6,000 a year in property taxes
In July 2017, Jere and Jill relocated to Fairfield Glade, TN, from Ann Arbor, MI, for a better climate with four seasons of moderate temperatures with a lower cost of living. While Jere is now retired, Jill still works remotely. They have found their new life in Fairfield Glade quite enjoyable, as have many other Midwesterners. In addition to saving approximately $6,000 a year in property taxes, they have also saved his pension from being taxed, as there is no state income tax in Tennessee. (His pension was taxed in Michigan). Jere says, “When you put it all together, Fairfield Glade was great from the golfing and hiking to the community to the weather to the cost of living.”
The weather is so conducive to outdoor living that Jere now tries to play golf at least two to three days a week on one of the 90 holes and five courses available at Fairfield Glade. They also enjoy hiking and being closer to their daughter in Nashville. Many residents also enjoy boating and fishing on one of the 11 lakes in the community or enjoying the racquet sports from pickleball to tennis.
The Hassbergers had looked at planned communities in Georgia, North Carolina, and Tennessee, and recommend that others spend time in a community and take advantage of discovery travel to help them make a decision.
Dodie and Gary Koch of Waterways, Richmond Hill, GA
Saved over $8,000 a year in property taxes
The primary reason the Kochs decided to relocate was that living in Connecticut was cost prohibitive, in addition to cold winters. They both said, “We don’t have to suffer through this!” And, they didn’t. The Kochs relocated to Waterways in Richmond Hill, just outside of Savannah, GA, in January 2016, and they still have a summer place in Vermont. They started looking in northern Florida, but decided on Savannah for the great culture and food.
Dodie takes classes at the Savannah Learning Center and even works with the Dolphin Project where she counts dolphins in the estuaries around Savannah. Every morning they walk for three miles around Waterways, a 2,300 acre development with boat access. “The community looks like it has been here forever; they love the trees. There’s no clearcutting here!” says Dodie. They also love to cycle around the 12 miles of paved roads and talk to their neighbors.
According to the Kochs, the community is very friendly with new families, young couples, and retirees. It keeps them young at heart. It’s a melting pot with people from all over. Their new home is so well-built that it is incredibly efficient, costing less than half of what they paid in Connecticut for their utilities (they save $1,000/year just for utilities).
“As a New Englander, I always thought of Georgia as the deep South. But, I have embraced the South. I really enjoy the Southern culture,” Dodie says. And, the Kochs agree,“You are never too old to try something new. Don’t be afraid to take the leap!”
Gerard and Jane Sunderland of Brunswick Forest, Wilmington, NC
Reduced taxes by two thirds
Wilmington, NC attracts thousands of retirees each year, and three and a half years ago, it snared Gerry and Jane Sunderland from Wooster, MA. Jane was ready to retire from nursing and Gerry’s job was flexible, so they could move anywhere. Although they already had a second home in Vermont, they wanted to get closer to the sea. They knew immediately it was the right place for them when they reached Brunswick Forest.
The Sunderlands were looking for a lifestyle near a city. They thought they would downsize when they relocated, and did, but then after they built, they decided to add on a huge sunroom with air conditioning and a fireplace so they could host more parties for all of their new friends.
They now have many more friends than when they lived in Wooster, MA.
Jane had never golfed before and now is a self-acclaimed golf-aholic. They enjoy golf, tennis, pickleball, biking, and walking; they are active all day long. They love all the culture that the Wilmington area has to offer, including seeing shows at Thalian Hall and the Wilson Center.
Their taxes are now at least a third of what they were, and their cost of living is so much less, including entertainment and dining options. Even the parking is significantly cheaper than in the Boston area.
The Sunderlands advise, “Try everything at least once. Reach out and meet people. We’ve never regretted it.”
Rebecca Meares, CFP®, AWMA®, & Justin Caudle, CFP®, AWMA®
A carefully planned retirement can be derailed due to an untimely death, a stock market crash, and a variety of other unforeseen events.
While it is impossible to control the market or predict what curveballs life may throw your way, you can prepare for some of the more common retirement risks to put your mind at ease.
Don’t get blindsided! Have a plan in place to combat these five retirement risks and you’ll be on your way to retirement success.
Outliving your money
Thanks to improvements in science, health, and technology, Americans are living longer than ever. According to the Social Security Administration, a man turning 65 today can expect to live until age 84 on average, and a woman until age 86. One in four will live past age 90, and one in 10, past 95.
A longer life could mean a longer retirement. Are you prepared to fund a 30+ year retirement? The reality is that most Americans are not.
What can you do to be sure you won’t outlive your money? Consider extending work, delaying Social Security for a higher payout, or saving more today. The financial implications of underestimating your retirement years could be devastating.
Inflation is a hidden enemy that causes your retirement dollars to lose value over time. While not as dramatic as a market crash, inflation can be just as dangerous to your nest egg as it slowly eats away at your purchasing power. Although inflation has been relatively low, even a modest 3% would cause the value of your $1,000,000 portfolio to be cut in half in about 23 years – that means your million-dollar nest egg could only buy what $500,000 could get you today. With retirements lasting longer than ever before, and retirees generally being invested in more conservative portfolios, the exposure to inflation risk in retirement could be monumental.
So how do you keep up with the rising cost of living? Consider the overall constitution of your portfolio and what kind of investments may help you outpace inflation. Consult your advisor to determine how much you need to allocate to stocks or stock funds. Consider investing in alternative asset classes – like commodities or real estate – that tend to rise along with inflation. Most importantly, start planning today! Find out if your pension is adjusted for inflation, determine if it makes sense to delay Social Security to get a higher benefit, and be aware of your retirement lifestyle and expenses so inflation doesn’t sneak up on you.
Unforeseen Medical Costs
It’s no surprise that healthcare costs are the number one concern of the Baby Boomer generation. According to a recent Vanguard study, a 65-year old female in average health is expected to pay $5,200/year for retirement healthcare. An 85-year old female in average health would pay about $10,100/year. And these costs are increasing at a dramatic rate.
Medicare is a primary component of many retirees’ health plans, yet it can be challenging to navigate the alphabet soup of Medicare plan options. Factors like health status, geography, and income must be considered when choosing a plan that is right for you.
Additionally, when it comes to Medicare, timing is critical – make sure you understand your window to enroll to avoid potentially lifelong penalties.
Also, don’t forget about the possible need for long- term healthcare if you have a chronic illness or require assistance with things like bathing or eating independently. This type of care can set you back hundreds of thousands of dollars.
Talk to a financial planner and educate yourself on the options you have to hedge against expensive medical care. Underestimated healthcare costs can completely destroy an otherwise thoughtful retirement plan.
Imagine you are on the cusp of living out your dream retirement. Everything is coming together – you’ve picked a date to give your two weeks’ notice, decided where you will live, and what country club you will join. A few of your friends beat you there and are living their best life. Now imagine your portfolio declines by 10, 20, or even 30%. How would this impact you? Would it push back or destroy your retirement vision? How would this impact your friends who have already retired? Would they need to try to find work to supplement their income? This was the reality for many during the financial crisis – we in the industry know because they sought our help after the fact – and of course, there wasn’t much that could be done. This doesn’t have to be you. Whether retirement is in your sights or you are already sipping cocktails on the beach, you can protect yourself from some, if not all, of this risk.
One sound strategy you have is to beef up your cash position. In a low interest rate environment, it is easy to forget that cash is an important part of an overall portfolio. It is wise to have enough cash to be able to ride out a market downturn without having to touch your stock/bond portfolio.
Depleting your portfolio
Ask yourself this, how much money can I confidently withdraw from my portfolio every year without running a high risk of depleting it prematurely? The old school of thought was 4% per year, if retiring at age 65. In other words, if you have a $1,000,000 portfolio, $40,000 (before taxes) per year is what would have been a recommended withdrawal amount. But times have changed, and due to historically low interest rates, the recommended withdrawal rate has decreased to 2.8% for the most conservative of investors. These are just rules of thumb, however, and your safe withdrawal rate may be very different.
How can you determine where you stand? It is important to run a projection of your retirement cash flows, determine your sources of income, and understand that flexibility is key. You should think about where your income will come from, how you will handle withdrawals during down markets, and if you will be adjusting for inflation every year.
It is important to understand that although there are a variety of risks that can impact your ideal retirement, there are proactive measures you can take to dampen or eliminate their impact. We suggest thinking through these scenarios and developing a plan of action as to how you will handle these risks BEFORE they occur. You can also seek out the help of a qualified CERTIFIED FINANCIAL PLANNER™ who can run simulations and help you make informed decisions. Remember, it’s easier and more effective to take preventive steps now than corrective steps later!
The Caudle Meares Group at McAdam has one simple mission: to help their clients achieve financial confidence through expert advice and authentic relationships. The team champions their roles as fiduciaries as they design thoughtful plans to help their clients retire and stay retired. Come by and say hello if you attend the DC Ideal Living Show.