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Educate parents and young adults in practical money matters

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A Good Lead

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I recognized the importance of a good lead on the dance floor at my niece’s wedding.  Even though I like to dance, I was grossly out-matched by my brother-in-law, who dances at a level worthy of Dancing with the Stars.

When we first stepped on to the floor, I scrambled to keep up with him, unsure of what was coming.  But the longer we stayed out there, the easier it became to anticipate what the next move was going to be.

A good advisor is like that strong lead that makes the difficult steps seem natural and effortless.  And the right lead can change the body’s initial response from flailing to swaying along.

How do I know this? Because in spite of the recent stomach-turning market volatility, these are the questions clients have been asking:

  • Should we change anything? When I explain the plan doesn’t change unless the time horizon, the goals or the money being contributed into the plan has radically changed I’m told, “That’s what I thought, just checking.”
  • Should I increase my contributions? Great thinking!  Several clients were highly motivated and upped their contributions this week, including many skittish teachers who kept putting off contributing more to their 403(b) plans.
  • Is now a good time to make a contribution to my IRA? Absolutely!
  • Should I start funding (or increase funding) my child’s 529 College Savings Plan? Yes, buying at lower prices means owning more shares.  And, if you receive a state tax benefit for funding the account, even better!

It’s not easy to think this way during uncertain times.  But there have always been tumultuous occurrences in our history.  Pearl Harbor and September 11 are but two of said moments and the world adjusted, adapted and moved onwards.  Always.

Following headlines and sound bites (designed for readership and views) is a sure-fire way to create a plan to shoot yourself in the foot.   Such a misstep might take years to recover from.

Investing is not easy because staying focused on the end goal requires tuning out near-term calamities. That is where the value of a good advisor and a thorough financial plan shines.

Some people may be panicking (and rightfully so) because they have no plan in place.  At the most basic level, make sure you have accounted for:

– Shorter-term needs (five years or less) by having cash/fixed income positions that can easily satisfy these expenses.  Why? Because having adequate cash reserves eliminates the need to sell stocks in a volatile market.

– Longer term goals (10 years away or more) require being invested in stocks, but there is no need to take on more risk than is needed.  None of our clients has a 100% allocation to stocks.  Why?  Because having a portion invested in fixed income (cash, bonds) can reduce some volatility without compromising the ability of the portfolio to grow.  It can help maintain a cool head and keep cash ready to rebalance the portfolio back to its original allocation (by buying asset classes that have gone down in value).   Needless to say, the longer one’s time frame, the higher the allocation to stocks (and vice versa).

While a plan may not eliminate the queasiness caused by a bumpy market, I saw it prevent our clients from being deterred by the noise of the moment. The leap made in the minds of our clients was to view volatility as an opportunity to pivot; not to panic.  The question became what is the best move given this situation?

There are opportunities; namely:

  • If you are contributing to a retirement plan every paycheck, take comfort in the fact that volatility means cheaper prices/more shares. If you are not contributing the maximum to your plan, now would be a good time to increase what you are contributing.  For 401(k)s and 403(b)s you can contribute up to $19,500 ($26,000 for those age 50 or older).  For Simple IRAs the limits are $13,500 ($16,500, for those 50 and over).
  • If you have maxed out your retirement plan, now would be a good time to contribute to an IRA or Roth IRA (you have until April 15, 2020 to fund an account for 2019). Maximum contribution amounts are $6,000; or $7,000, for those age 50 or older.
  • Consider refinancing your mortgage. 30-year and 15-year rates have come down nearly a full percentage point from just last year.  A reduced monthly payment can increase monthly cash flow (and enable more savings to be put into retirement accounts).

The big choice you need to make is whose lead to follow. An advisor who puts your interests first has made it his/her life’s work to keep you making the right steps.

This relationship may change the way you approach challenging times, and help you to be nimble when others are tripping over their own feet, dancing to the noise of someone else’s tune.

 

 

 

 

Simple Does It

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Henry David Thoreau Quote

There are a few things that immediately make me more relaxed and happy to face the day:  a strong cup of coffee, a nice walk, and a hot shower.  It’s nice to know that I can guarantee myself a good start to the day with such simple things.

It got me thinking that people rarely do this with their finances.  Instead, financial matters are treated like an overstuffed, messy closet that needs to be dealt with but remains closed (and avoided).

Make no mistake, procrastination weighs on the brain.  Putting things off just makes it difficult to enjoy “down time” because there is this nagging sense that something needs to be addressed.

The good news is that a few quick changes can immediately get your finances moving in the right direction.  I have intentionally picked three things that you can (and should) do right away (and it will take less time than cleaning out a closet).  Tackle those three, and you might just become motivated to do more.

The best part is there is a deadline because there is no better motivator than a sense of urgency.

With less than three months left in the year, these changes may help you save on your federal and (if applicable) state taxes if you act quickly.

  1. Contribute the maximum to your employer-sponsored retirement plan. If you can’t afford to do that, get as close to the maximum as you can.  Remember, this lowers your taxable income.  The maximum contribution amounts are as follows:
  •  $18,500 ($24,500 for those ages 50 or older) for 401(k), 457 and 403(b) plans;
  • $12,500 ($15,500 for those ages 50 or older) for Simple IRA plans; and
  • For those with a 403(b) AND a 457 plan, you can contribute the maximum amounts into each plan for a total maximum of $37,000 or $49,000 (if 50 or older).

 2.  If you can’t contribute the maximum to your 401(k) plan, but your employer offers a match, contribute at least enough to get the match.  That is free money.

3.  If you are saving for college expenses, many states offer tax benefits for contributions made to in-state 529 plans. And some, like Arizona, Kansas, Missouri, Montana and Pennsylvania allow for tax benefits for contributions made to any state’s plan.  To learn more about tax deductions or 529 plans, visit Savingforcollege.com.  As always, fees matter, so be sure to look at your options from a fee perspective.

Even if taxes are not an issue for you, you can still fortify your retirement account by participating in your employer-sponsored plan (some even offer Roth 401(k) or Roth 403(b) plans).

If you do not have access to a company-sponsored retirement plan, remember you can still contribute to a Traditional IRA or Roth IRA ($5,500, or $6,500 for those age 50 or older).  Click here to learn more about the differences between the two accounts and the eligibility requirements.

You don’t need to completely overhaul your life to strengthen your finances; a few easy changes can get you on the right path, and, more important, can ease that nagging feeling that you are neglecting something important.

Sometimes the smallest of actions can give you the greatest peace of mind.

Attention, Shoppers!

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It’s a great paradox of life that people will clip coupons, or drive out of their way to save $5 at a sale and yet, when it comes to their personal finances, they ignore the chance to save thousands of dollars.  This opportunity is real: it is the employer-sponsored retirement plan.

Participating in – or increasing contributions to – a 401(k), 403(b), 457(b), Simple IRA, SARSEP, or a Single K reduces taxable income.  To quantify the value of this on a federal and state tax level let’s look at a NY resident earning $50,000.

After-tax income on this salary would be $38,856.  Now, if a 10% contribution is made into the retirement account (or $5,000) the federal and NY tax savings would amount to $1,560, making the real cost of the contribution just $3,440.

In other words:  $5,000 of investments would actually cost just $3,440.

Assuming a 24-paycheck year, this contribution would only cost $143 per check.

I am not even factoring in the value of the account compounding without the effect of taxes until retirement, or the added benefit some people get in the way of an employer match.

My last two blog posts, A Plan to Overcome Panic Paralysis and Destination Unknown? highlight the importance of defining your goals and making a financial plan to get there.  Contributing as much as you can to your retirement is a critical first step.

If you are suffering from a tax-day hangover, take special note. Making a large contribution to your employer-sponsored retirement account can be particularly beneficial to you.  Remember: income, not wealth, is taxed.

Even if your tax bracket isn’t a main concern, the truth is paying less for something worth considerably more (and that can appreciate in value) is a bargain too good to pass on.

Destination Unknown?

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Imagine you’re about to set out on a road trip.  You would absolutely need to have an idea of where you wanted to go – north, south, east, or west.  You would have to work within the confines of how much time you had for this trip – that would determine how far you could go.

Your financial goals are no different than that road trip; failing to plan means planning to fail.

Even if you haven’t given retirement much thought, in terms of what it looks like and feels like, chances are you have an idea of when you would like to have the freedom to walk away.  For those of you bemoaning that you will need to work until you die, it’s time to see if that is really true or simply your worst fear taking over and freezing you in your tracks.

But, you have to set your goals.  You have to make this a priority.

The trouble is, unlike the mortgage payment or electric bill, there are no immediate ramifications if you don’t take the time to do this.  It is important, but it is not urgent. The consequences of your inaction won’t be felt for decades.  That is why it is easy to procrastinate – especially if you are suffering from paralysis.

There are a number of helpful calculators on line that can gauge where you are and where you need to be in order to meet your goals, such as the ones at Vanguard.

What I like about these calculators, is that they help you nail down the answers to the questions I raised in my last blog, A Plan to Overcome Paralysis.

If you are tired of worrying about the great unknown, here are your starting steps:

  • Determine how much will you need. The retirement expenses worksheet will help you get a handle on what your living expenses will be in retirement.  You may not have a mortgage payment in retirement, but perhaps travel or hobbies may constitute more of your budget in retirement then it currently does.
  • Take inventory of the money you will live off of every month from fixed sources (e.g., pension, social security, rental income etc.) and plug it into a retirement income worksheet. The end result of this exercise is you will have a better sense of how much you will need to draw from your investments in order bridge any gap from your fixed income sources.
  • Find out when you can retire. Vanguard’s calculator is easy to use:
    • Plug in how long you plan on living in retirement.  It is not unreasonable to expect to live into your nineties, so don’t short-change your life expectancy.
    • Enter how much you currently have saved and how much you want to be able to withdraw annually to supplement social security, pensions or other sources of income (see your retirement income worksheet).
    • Don’t forget to adjust the pie chart to the side, which asks for how your portfolio is currently invested (stocks, bonds, cash).
    • Once all that data is plugged in,  you can run a simulation to see the probability of achieving your goals and not outliving your money based on the amount/type of assets you have, and the time frame you need the money to last over.

In the event the results that you get are unsatisfactory, don’t get discouraged.  The numbers may not work, but you then can explore what it might take to reach that goal. You may need to invest more money, increase your allocation to stocks (if that risk level is appropriate), delay retirement, or plan on working a part-time job in retirement (or some combination of things).  Then you can decide which sacrifices you are willing to make and whether these actions are enough to move the needle in the right direction. The control is yours; you get to decide.

Once you have a sense of the parameters you are working with, you will no longer randomly throw money into an account without rhyme or reason.   You will know what you are working towards. Most important, this will free you up to actually envision what you want your retirement to be so you can begin to enjoy the process of planning with purpose.  Then, you will confidently know what your destination is and how to get there.