Archive for Retirement Savings

Ideas to protect yourself from a stock market drop

stock market drop, denver financial planner

This 9-year rise in the stock market has been called “the most hated stock rally ever.”  Maybe people are so scarred by the Great Recession that they can’t believe good news will ever happen again in the stock market.  Even though it’s been happening (at least in the U.S. with only minor hiccups) for 9 years.

Here’s the reality.

People are always telling me the stock market is getting ready to drop.  “It CAN’T go any higher,” the people tell me.  Well, guess what – it CAN go higher, and in fact historically, it HAS always gone higher.  In general.  And with some recessions along the way.

 

stock market drop, denver financial planner

 

Hey, I’m not suggesting we will never have another recession.  We will, and they will happen about every 7-8 years and last about 12-18 months.  For the REST of your LIFE.  So stop being so hysterical.

Is this fluctuation normal??

Just like summers are followed by hurricane seasons, the economy is cyclical.  Do you quit enjoying summers because it may rain later?  No!  The best thing to do is get your portfolio ready, and be prepared to ride out the rough seas to get to the lovely tropical island on the other side.

Get your portfolio ready.

The first method to getting your portfolio ready for the next U.S. recession is good old-fashioned diversification.  By that, I mean owning investments that don’t behave the same as the U.S. stock market.  These can be things like bonds, real estate, international stocks.  Even small and medium sized U.S. companies have different price swings that large U.S. companies.  Work with your financial advisor (or even online tools) to come up with a mix of investment types that makes sense for your time horizon.

 

Another old idea is called the Anchor Strategy.  This is useful for money that you’d like to see grow, but have a very specific time horizon for it’s use.  For example, let’s say you want to buy a second home in 10 years and you have $50,000 saved.  You don’t want to put your $50,000 at risk, but you’d like to see some growth.

 

The Anchor Strategy has you buying enough Zero-Coupon Bonds to grow back to your original $50,000 in 10 years.  You could buy 50 10-year maturity zero-coupon Coca Cola bonds at $948.00 each or $49,200 (quote from Fidelity.com on January 17, 2018).  That investment should grow back to the original $50,000 in 10 years, assuming Coca Cola stays in business.

 

The remaining $10,100, you could put into an S&P 500 index fund.  Say, you averaged 7%/year over the next 10 years on the Index Fund investment.  You’d have $19,800 from that part of the investment pool. The total investment in this example would grow to just under $70,000 with very low risk.  Granted, the return isn’t all that great, either, but the peace of mind is there.

 

Again, none of this is personalized investment advice to you, but could provide some talking points the next time you meet with your financial adviser.

Do you REALLY know the difference between tax-free and tax-deferred?

tax-deferred

What’s the difference?

 

Often people need help deciding whether to save for retirement in a Traditional or Roth-type of account; another way to put that is do you want tax-free or tax-deferred?  This question can come up when you are signing up for your retirement plan at work or when you are deciding to open your own Individual IRA.

The brick wall is that most people don’t understand the difference, so how can they make an informed decision?  I am here to help!

Taxes and Savings

Cast your memory back to when your savings account at the bank earned something called “interest.”  Yes, I know it was long ago. But, do you remember that at the end of the year, you would get a 1099 for interest earned? You would add that dollar amount to your income for the year and pay taxes on it.

The same process happens in your non-retirement and non-college investment accounts.  Every year you get a 1099 from your investment company reporting dividends, interest, and capital gains earned in the account.  That income is taxable to you in that year.  These are called “taxable” accounts.

Retirement accounts give us a break from those pesky annual 1099s and tax payments.  This is to encourage us to save for our old age by giving us tax incentives.

 

Tax-Deferred

In a tax-deferred account (Traditional IRAs, Traditional 401(k)s), you get to shelter your annual contribution from income taxes and not pay yearly taxes on interest/dividends/capital gains.  When you take the money out for retirement spending, you will owe income taxes on the withdrawals you make each year from the accounts.

Tax-Free

In a tax-free account (Roth IRAs, Roth 401(k)s), you do NOT get a tax deduction for the amounts you add to the account each year.  The account grows without annual taxes like the Traditional accounts above.  The big difference here is on the withdrawals.  When you take money out of Roth accounts in retirement, you will owe NO income taxes.

The difference.

So, the difference in a nutshell is do you want a tax break now (Traditional) or tax break in retirement (Roth)?  There is no right or wrong answer since we don’t know if your taxes are higher now or later.  Sometimes the best solution is to diversify – use a little of both.

Mid-Year Financial Check-Up: 4 things you should think about now

financial check-up

It’s July already????

 

Yikes, 2017 has gone by quickly!  Time to do a financial check-up on those New Year’s Resolutions to see how you are doing.  I don’t know what your resolutions were, so here are a few common ones that there is still time to tackle.  BEFORE you are making your resolutions for 2018, that is.

 

College

 

  1. Starting a 529 plan for your kids’ college. It doesn’t have to be much.  Just $50 to start and $25/month can get you going in a Colorado Direct Investment portfolio managed by Vanguard.

Retirement

 

  1. Increasing your 401(k) contribution at least 1% from last year. Most plans let you go online and change your savings amount any time during the year.  Don’t delay!  Save more today!

Health Benefits

 

  1. Use your Flexible Benefits Account money. Did you set aside pre-tax money this year to finally get those glasses, map those moles, fix that tooth, or other medical procedures you’ve been putting off?  That money has to be spent by year-end, so get those appointments made!

Budget

 

  1. Use an app to see how much you are really spending on…clothes, liquor, lunches out, fishing gear, workout clothes, kids’ sports, whatever! Try mint.com, youneedabudget.com, mvelopes.com for free and easy ways to track spending.

 

Okay, that’s enough for now.  If you do even two of those four items before the Fourth of July fireworks, I’ll consider it a victory.

How much should I have saved for at my age?

saved

What’s the magic number?

 

Forgive me if I’m like the drunk at a party and I’ve already said this to you before.  But it’s come up in a bunch of client meetings lately, so I’m going to tell you again.  And again.  And again.

 

Americans really like to compete when it comes to material wealth.  If you are surprised by this, look no further than our current president.  As such, I get asked often, “Do I have more or less than the average amount saved for someone my age?”

 

The answer is, there is no magic number that every 30-year old, 45-year old, or 70-year old should have in the bank.  There are too many variables to come up with a pat answer.  Everyone has different earnings histories, different plans for when they want to retire, different amounts of home equity, different goals, different everything!

 

But this might help.

The good news is, I found this handy article that gives a nice guideline of how much a person should have saved by various ages.  It’s tied to income (makes sense!) and anyone can use it as a benchmark; it says you should have the equivalent of your salary saved by age 30.  This includes retirement savings, emergency funds, other investments, but not home equity. (Click here for more.)

 

By 35, you should have 2 times your salary saved and up it goes like this every 5 years.  By age 65 (traditional retirement age) you should have 10 times your salary saved.

 

The beauty of this guideline is that it is income based.  If you earn more, you should be saving more.  If you earn less you will be able to save less, but then, you’re used to living on less and don’t need such a big retirement nest egg.

 

 Article Links:

 

Want more info on reverse mortgages without the sales pitch?  Check out this guide from your friendly Federal Trade Commission:  https://www.consumer.ftc.gov/articles/0192-reverse-mortgages

 

This is a very handy chart comparing different small business retirement plans side-by-side:

https://www.fidelity.com/retirement-ira/small-business/compare-plans

 

This article comparing Roth and Traditional IRAs from Nerdwallet has some handy calculators built right in.  https://www.nerdwallet.com/blog/investing/roth-or-traditional-ira-account/

 

Here is another guide to different nest egg goals for different ages and incomes.  http://www.financialsamurai.com/how-much-should-one-have-in-their-401k-at-different-ages/

 

Roth IRA vs. Traditional – Which Is Right For You?

Roth IRA

Have you saved for 2016?

 

April 15th looms and for those of you who haven’t saved for 2016, time is running out.  As if that pressure isn’t enough, you have to decide what kind of retirement account to use.

 

Roth IRA

Roth IRAs allow you to put up to $5,500/year in ($6,500 if you are 50 or over).  The money you put in has no tax write off today, but the growth is tax free when you withdraw at retirement.   You need to have the money in the account for a minimum of 5 years or until age 59 ½, whichever is longer in order to access the growth tax and penalty free.

 

Money you contribute to a Roth can be accessed at any time with no taxes or penalties. So, if you put $10,000 in a Roth IRA and the account is worth $20,000, you can withdraw the first $10,000 without taxes or penalties regardless of your age.

 

Not everyone can contribute to a Roth IRA.  Like any benefit the IRS gives, there are income limits on who gets to enjoy them.  The income limits start at $117,000/year for single folks and go up to $187,000/year for married couples in 2016.  (Click here for more details.)

 

Traditional IRA

Traditional IRAs are the original players in the retirement account game.  The money you contribute (same limits as above) can be deducted from your income taxes as long as you don’t have access to a workplace retirement plan and fall under IRS income limits.  (Visit the the IRS website for the income limitations.)

 

Growth in the Traditional IRA does not generate a current tax bill, but you will pay taxes at your regular income tax rate when you withdraw the money at retirement.

 

Which is best?

It’s hard to say because we don’t know what your tax rate in retirement will be compared to now.  If you know you tax rate is higher now than in retirement, go for the tax-deferred option.  If you suspect you will have same or tax rates in general will be higher in your retirement, you might like the Roth better.

 

Since we don’t know future tax rates any more than future investment returns, it’s a good idea to have a mix of both Traditional and Roth retirement accounts.  That way, you are ready for anything!

 

Retirement Plans for the Small Business Owner

small business owner

Want to sell your business for $1billion?

 

At the heart of the small business owner is the hope that someone will come along and buy his business for exactly the right amount of money to retire to the Caribbean.  Just in case that doesn’t pan out, how you will support yourself when your business no longer does?

 

You need to save for retirement.  Every year.  Unglamorous, but your 65-year-old self will thank you.  And, your lower-income-tax-paying self today will be happy, too.

How to do it?

Individual Retirement Account (IRA): 

These can be used by anybody with earned income. The money you put into a Traditional IRA can be deducted from your income taxes if you don’t have access to a workplace retirement plan and fall under certain income thresholds.

 

The growth is tax-deferred, meaning you don’t pay taxes on the earnings of the account until you withdraw at retirement when taxes are owed at the rate of your taxes in retirement.  The maximum amount you can put in each year is $5,500 and you have until April 15th following the tax filing year to contribute.  Anywhere that handles money (your bank, credit union, brokerage company) will open an IRA for you.

 

A variation is the Roth IRA where you contribute up to $5,500/year, but do NOT take a tax deduction for the contribution.  Why bother?  Tax-FREE growth!  When you take the money out at retirement, you don’t owe any taxes withdrawal.

 

SEP IRA: 

This IRA is meant for small businesses. You can deposit 25% of compensation to a max of $54,000 in 2017.  The contribution is deductible from your taxes and the growth is tax-deferred like a Traditional IRA.

 

The catch is that you must put the same percentage of compensation for any eligible employees as you do yourself.   Accounts must be set up and funded by April 15th of the year following the tax year for which you are contributing.

 

Self-Employed 401(k): 

This is account is available only to small business owners who have no employees other than their spouse.  The SE 401(k) allows you to put 100% of compensation up to $18,000 ($24,000 if you are age 50 +) plus 25% of eligible compensation as a profit-sharing match.  The contributions are pre-tax and the growth is tax-deferred.  The maximum dollar amount allowed is $54,000 for 2017.

 

This plan allows those with less net income to put more away than a SEP IRA.  The plan must be established by December 31st of the tax year the contribution is for, but can be funded up until April 15th of the following year.

 

Simple IRA: 

These accounts let businesses with less than 100 employees open a low-cost retirement plan where employees can contribute their own money.  You are required to offer a small match for contributing employees, but it’s not as much as the SEP IRA.  The maximum employee contribution is $12,500 for 2017.

 

Please, do not take this as personal tax advice.  Consult your CPA before deciding which plan is right for you.

 

Reverse Mortgage – Not a Dirty Phrase Anymore

reverse mortgage

The Reverse Mortgage

 

Chances are high that when I mention the idea of a reverse mortgage to clients, I’ll be met with a very sour expression.  I think this is because of the impression that these instruments are expensive and that you give up ownership of your home to use them.

 

Now, I am NO expert in these products, but for clients who have most of their net worth tied up in their homes, finding a way to use that equity to pay bills is a must.

 

Brainiacs who are way smarter than me have been modelling the use of a reverse mortgage in the overall retirement plan.  The numbers show that using home equity for income, especially when retirement investments are down, can lengthen the time your nest egg will last.

 

What are the benefits?

 

Wade Pfau has been doing research on the use of reverse mortgages in retirement income plans says there are two big benefits:

 

  1. Using reverse mortgage early in retirement can reduce the stress of market volatility on the invested portfolio by allowing people to live off of their home equity rather than selling investments when values are down to pay bills.
  2. The second benefit is that opening a reverse mortgage now (especially with current low interest rates) can allow for the principal that you can borrow against to grow for a longer time.

Who qualifies?

 

Not everyone can get a reverse mortgage.  You must be at least 62 years old, live in an “eligible” home, and there is a limit to how much debt can be against the home.

 

I’m not saying this is for everyone. Reverse mortgages are more expensive than conventional loans and they may tempt you to spend your home equity on dumb stuff instead of using it prudently.  However, if you are feeling your retirement income is too tight and you meet the eligibility requirements, it could be worth investigating.

 

Check out more from Wade Pfau in this Forbes article.  There is also a link to his website at the bottom of the piece.

Do You Know When You’re Going to Die?

retirement

How long will your savings last?

 

What an uplifting question!

 

But in retirement planning, it is probably the MOST IMPORTANT question and the most impossible to answer.  If we all knew how long our savings would need to last, it would be so easy to determine how much we could afford to spend during retirement, what age to retire, how much risk to take for growth, and on and on.

 

Just for fun (I know, an odd idea of fun), I went onto a website I’d heard about for years.  It’s called The Death Clock (www.deathclock.com) and by filling out just a few fields, I got my exact date of death.  I’m reluctant to tell you in a public forum because then thieves will know when my funeral will be and take the opportunity to rob my house.

 

Oh, what the heck! I’m not using that stuff anymore so let them have it.  My estimated date of death is September 30, 2073.  Wow.  Those would have to be some old thieves, too, so I guess my house is safe.

Here are a few areas of perspective this gave me:

 

  • That is age 101. I hope I don’t look a day over 80.
  • At today’s standard retirement age of 65, I’ll need my savings to support me for 36 years. Sounds like a reason to work until at least 70.
  • If my sons have kids by age 30 and their kids have kids by age 30, I’ll live to see my first great-grandchild enter his pre-teen years.
  • If my husband lives as long as I do (and he has 3 living grandparents, so why wouldn’t he) we will be married for 77 years.

 

And the last item of perspective I will share is this:  If I make on average 2 major decisions per week (where to send my kid to middle school, how to invest my savings) and 50 small ones (what to wear to a meeting, what to cook for dinner, People Magazine or Us Weekly), I will make over 154,000 decisions between now and my appointment with Mr. Reaper.  Some will be good, some not so great, but since I have until 2073 to see the ultimate results, I think I’ll try to chill out a little.

Kristi’s Quotes: The Chicago Tribune Asks Kristi about Retirement!

Financial Planner

Working for yourself means giving up certain benefits, like a workplace retirement plan. But when it comes to saving for old age, you still have plenty of choices.

 

Which retirement account you choose depends on how much you earn and the amount you want to contribute in any given year, financial planners say. Here are your best options (assuming you work solo and don’t have employees).

 

What if you can afford to stash away more than $5,500 this year? Consider opening a simplified employee pension plan, or SEP-IRA.

 

SEPs are available through brokerages, such as Fidelity Investments and The Vanguard Group. And you can put away a significant amount, as much as 20 percent of your net self-employment income, up to a maximum of $53,000 in 2015.

 

“SEP-IRAs are easy and inexpensive to set up, and you can put in a good chunk,” said Kristi Sullivan, a financial planner in Denver….

 

Click here for more….

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