IRAs & 401(k)s

By | 2019, Money Moxie, Newsletter | No Comments

Planning for retirement is daunting, especially if you don’t know where to start. In this article, we’ll walk through the basics of two common retirement accounts and two different ways you can contribute to them so you can make a more informed decision.

An IRA (individual retirement accounts) and a 401(k) serve similar purposes. They are both accounts that are used for retirement. They both have penalties for withdrawing money before age 59½ and the option to make traditional or Roth contributions.

So, which should you choose? If you don’t have the option to contribute to a 401(k) then, of course, an IRA is the better choice. However, if you have the 401(k) as an option, that is usually a good option, especially if the company is matching part of your contributions, it is always a good idea to take advantage of an employer match. It’s basically free money!

Another thing to consider is whether to contribute to a traditional account or a Roth account.

The primary difference between traditional contributions and Roth contributions is when they are taxed. Traditional contributions go into the account pre-tax, and everything is taxed as ordinary income when distributions are taken. In Roth accounts, the money is taxed before it is contributed, and the distributions are taken tax-free. Another bonus to Roth accounts, you can pass them to your heirs tax-free as well.

Depending on your personal situation, one account or the other may be more advantageous to you. In simple terms, if you are in a low tax bracket now, contributing to the Roth is a good idea. Tax rates are relatively low right now, and it’s likely that they will be higher in the future. If you pay tax now, while in a low tax bracket, you will benefit from it because you won’t have to pay taxes at the possibly higher rate in the future.

On the other hand, if you are in a high tax bracket now and expect to be in a lower tax bracket in the future, it would be prudent to make traditional contributions. The money will avoid taxes now and will be taxed later when your tax rate is lower.

Now that you’re armed with information, you can make a better decision as to when, where, and how to contribute! Please call us with any questions.

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Don’t Miss Out On Your ESPP

By | 2019, Money Moxie | No Comments

If you have an Employee Stock Purchase Plan (ESPP), you might wonder if it is a good value. An ESPP can be very beneficial, depending on how the plan is written. Check the plan rules to see if it lines up in your favor. If so, then you should (1) participate as much as you comfortably can and (2) cash out each year as soon as you can. Here’s why an ESPP is usually a good deal.

An ESPP allows you to contribute a percentage of your income each paycheck towards the purchase of company stock. The payroll deductions go into an account and are held until the end of the purchase period, typically yearly. At that point, you “purchase” company stock usually at a 15% discount, which is a nice benefit by itself.

If your plan has a “look back” provision, it is a bonus. A “look back” provision gives you the price on either the offering date or the purchase date, whichever is lower. So, even if the company stock is down from the offering price, you still get it at a 15% discount from its lowest price. If the stock is up, you purchase at the lower price and may have significant gains.

These potential gains may make the transaction attractive, but you shouldn’t sink all your money into the ESPP. Participate at a rate that is comfortable and that doesn’t rob your other buckets.

You should always have short-term, intermediate-term, and long-term buckets. Your short-term bucket should be your emergency fund, preferably in a Money Market or short-term CD (i.e. 1 year or less). We like to see an emergency fund of 3-6 months of living expenses.

Your 401(k) and other retirement savings are your long-term bucket. We prefer that clients save 10-15% per year for retirement. If you already have 1-2 months of living expenses in the bank and you are saving for retirement, you could use the ESPP to build the emergency fund and then to build the intermediate bucket for expenses like new cars, buying a home, etc. Once your short-term bucket is full, then participate more fully in the ESPP.

Cashing out immediately when the stock is available is the safest choice because you lock in guaranteed gains. Just be aware that the distribution will be taxable as ordinary income, unless your plan is qualified, which may have a more favorable tax treatment.

You can choose to hold the stock to lower your taxes. However, you must keep it for one year from the purchase date, and two years after the beginning of the offering period. At that point, the gain above the purchase price will be taxed at a long-term capital gain rate, which is always lower than your ordinary income rate. However, it may not be wise to wait a year. Saving taxes doesn’t help if the stock value goes down by more than your tax savings. That is why the safest bet is to sell the stock as soon as it is available. Only hold on to the stock if your other buckets are filled and you are just investing for the future.

ESPP’s can be a great way to save for the future. If you have any questions about your specific situation, please contact one of our wealth managers.

This article is not a solicitation, offer, or recommendation to buy or sell any security. Financial advisory services are only provided to investors who become Smedley Financial clients. Projected returns are not a guarantee of actual performance. There is a potential for loss as well as gain that is not reflected in the information presented. Past performance is no guarantee of future results. This article is not intended as tax advice, and Smedley Financial does not represent in any manner that the outcomes described herein will result in any particular tax consequence. Prospective investors should confer with their personal tax advisors regarding the tax consequences based on their particular circumstances. Smedley Financial assumes no responsibility for the tax consequences to any investor of any transaction.

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Deceitful Guise of Financial Demise

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Grace Groner was born in Lake County, Illinois, in 1909. She was orphaned at the age of twelve. Although she lived to be 100 years old, Grace never married or had children. Most of her life was lived in a small one-bedroom cottage. She shopped at rummage sales and never owned a car. She worked her entire career as a secretary, earning a modest income.

When Grace Groner passed away in 2010, she left over $7 million dollars to a foundation established for the benefit of students at Lake Forest College. How did she become so wealthy? She invested in stocks at a young age, reinvested her dividends, and stayed invested so compounding interest could work its magic.

Richard Fuscone was an ambitious man. He received an education at Harvard and the University of Chicago. He then went on to become a vice chairman for Merrill Lynch. He was so successful in the investment industry that he retired at the age of 40 to pursue other interests.
Richard owned two homes, one of which carried a mortgage of $66,000 a month. Richard Fuscone declared bankruptcy in the same year Grace Groner donated millions to charity.
Richard had a top-shelf education and an impressive background in finance. Grace had neither. How is that possible?

The answer is behavioral finance. Financial knowledge does not prevent bad financial decisions. Richard had an expert understanding of how markets and investments work, but behavioral finance is an entirely different animal, one he did not understand.

We, as wealth managers, are often judged by our investment management. However, that is only part of our service. The financial and behavioral advice we offer can make a more significant economic impact than people realize.

We work hard to ensure sound financial decisions are made and protect against bad ones, which are not always obvious and are usually made unknowingly.

We wouldn’t suggest one live like Grace, but we certainly wouldn’t recommend one live like Richard, who might have saved millions with a behavioral financial advisor and some quality advice.

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Your Personal Inflation Rate Versus Published Inflation Rates

By | 2019, Executive Message, Money Moxie, Newsletter | No Comments

The cost of daily living, especially health care and long-term care, are not going down. But your ability to pay for them will drop once you retire. In fact, the longer you live, the higher the impact of inflation will be.

A case in point: The cost of a first-class forever stamp jumped 10 percent from 50 cents to 55 cents on January 27, 2019. On January 1, 1952, a first-class stamp only cost 3 cents for the first ounce.

People are living longer, much longer. A couple, both age 65, have a 50 percent chance that at least one of them will live to age 92.1 The government’s published CPI is for everything and everyone in general. Your personal inflation rate will be higher because, as you age, rising health care and long-term care costs will be a more significant proportion of your spending.

Health care costs are escalating. According to the U.S. Bureau of Labor Statistics, health insurance experienced an average inflation rate of 2.63 percent between 2005 and 2019. The overall inflation rate was 1.84 percent during this same period. What cost $20.00 in 2005, cost $28.76 in 2019. That’s 43.78 percent higher 14 years later.

Seventy percent of people 65 and older will need long-term care.2 However, Medicare will only pay for a limited number of days of skilled nursing care and only after hospitalization.

Unfortunately, these long-term care costs are rising at historic levels–much faster than other expenses. While the cost of living increased by 1.7 percent, long-term care rose 4.5 percent.3

Early planning for a longer life and a higher personal inflation rate is critically important. That’s why we at Smedley Financial create and build plans for our clients to live to age 95 as well as develop a realistic, personal inflation rate for you to help you prepare for the coming surprises of retirement.

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Is Your Heart Making the Decision?

By | 2019, Money Matters, Newsletter | No Comments

Women generally have huge hearts and can sometimes let their hearts lead their financial decisions. Even the most educated and most successful women can let their hearts influence their financial decisions. Here are some examples of how women may be dealing with financial situations:

–    Children ask for money for the latest thing(s), and mothers usually say yes. When mothers spend too much money on their children, they may not be saving enough for retirement.

–    Women who allow their husbands to handle every aspect of financial decisions may find themselves in crisis when a spouse is injured, they are divorced or widowed and discover they are unprepared to manage all facets of their financial life.

–    Single women – those who never marry or who are divorced – are often uncomfortable with finances and may even be bored with financial matters. Still, they are anxious about being financially secure now and in the future.

As women, we need to take control of our financial life and be honest with ourselves and others in our relationships.  We are generous with our love, time and money and we shouldn’t stop being kind, generous people, but we must be sure that our acts of generosity are not depleting our financial future and retirement plans.  We must learn to say “NO” out of love, not out of fear. If you pay for a child’s college education, will it jeopardize your future retirement? This act of generosity could potentially create financial stress for years into the future. Your act of charity should never put you at financial risk.

Women need to set financial limits. Our goal should be to raise financially independent, successful children. While it may seem reasonable to help a family member, continuing to pay expenses for grown children will not help them become financially successful adults. It might feel like tough love, but in the big picture, it truly helps everyone. 

Make financial decisions that support your financial goals and secure your financial future by taking time to think through the situation and process the outcome. Lead with your head, not your heart. Being financially smart will help you secure your goals and achieve financial success.

If you are faced with a decision and need additional information or maybe just a sounding board, reach out to us and let us help you think through your options. Together we can find the right solution for you.

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From Investing FOMO to FEAR

By | 2019, Money Moxie, Newsletter | No Comments

My daily commute often leaves me sitting in traffic on State Street in Salt Lake City. Sometimes it can take 10 minutes to move 3 blocks. During these seemingly hopeless times, I often see a cyclist pass me. I consider the wisdom of selling my car and riding my bike. However, no matter how bad the traffic, I eventually pass the biker–no exception. (As a biking enthusiast, I regularly commute on a bike, but it is not faster.)

As investors, we faced similar thoughts in 2018. Should we make a short-term decision even though we know which vehicle will get us where we want to go quicker?

Investors entered 2018 with a Fear Of Missing Out (FOMO). The stock market had just completed a year where every month was positive. A tax cut had just been passed to stimulate greater consumer and corporate spending. Around the world, growth seemed synchronized, and expectations were rising.

Here is a review of my three predictions for 2018 with commentary on how things turned out.

U.S. growth exceeds 3 percent. The impact of the tax cut, which I referred to as a “sugar rush,” temporarily lifted U.S. growth to make the first forecast correct. The benefits of the cut were so short-lived that investor excitement quickly turned to concern.

The Federal Reserve finally has an impact. Interest rate increases by the Federal Reserve in recent years had largely been ignored by the stock market. This prediction also came true, especially in December when a rate increase was done despite all the problems going on in financial markets.

Investors would be disappointed with the market, but positive economic growth would help the market end the year positive. This prediction seemed to be correct for much of the year. However, it failed in the part that mattered most.

The stock market ended 2018 in an absolute panic! Oil prices were plummeting. The White House could not get a deal done on trade with China. The federal government had its third shutdown in just one year. And, despite all this, the Federal Reserve raised interest rates stating that nothing had changed; the economy was strong.

The stock market sell-off intensified, and the bull market arguably came to an end on Christmas Eve. December performance of the S&P 500 stocks was the worst since 1931. Historically, that makes some sense. The Great Depression began in 1929.

But we were not in the midst of a depression — quite the opposite. Corporate earnings were at record levels. The real GDP growth in this country was around 3 percent. Consumer spending, which represents 70 percent of the U.S. economy, rose in December by 4.5 percent!

What is an investor to do when the economic data is positive, and the market is so negative? At times like this, it is critically important to stay focused on your long-term goals.

It is our job at SFS to help you develop these goals and keep you on track to achieve them. We have tools to provide the necessary clarity and strategies to implement to help you keep moving forward.

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Tax Scams Oh My!

By | 2019, Money Moxie, Newsletter | No Comments

The tax season is upon us, and there is no shortage of nefarious individuals looking to make money. Here is a list of potential scams to watch out for–not only during tax season but all of the time:

(1) Phishing emails – these are typically unsolicited emails sent to you posing as legitimate IRS emails. They may contain links taking you to fake websites that ask you to provide personal information. The IRS will never initiate contact with you via email or social media.

(2) Phone – beware of individuals calling and claiming they’re from the IRS. They may threaten you that you owe money and that you will be arrested. They may even say you are entitled to a large refund from the IRS.

Don’t be fooled if the Caller ID on your phone even says the IRS. They can spoof that information. These bad guys are that good. Don’t give them any information. Reach out to the IRS for assistance at IRS.gov.

(3) Tax return preparer fraud – during tax season these scammers pose as legitimate tax preparers. They often promise unreasonably large refunds. They take advantage of unsuspecting taxpayers by committing refund fraud or identity theft.

(4) Fake charities – scam artists sometimes pose as a charity in order to solicit donations. Often these appear after a natural disaster hoping to capitalize on the tragedy.

(5) Tax-related identity theft – this happens when an individual uses your Social Security number to claim your refund. This may not even be discovered until you try to file your return. The IRS may even send a letter to you indicating that they’ve identified a suspicious return.

If you or a loved one has been a victim of identity theft, the Identity Theft Resource Center offers free help and information to consumers at idtheftcenter.org.

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Financial Basics

By | 2019, Money Moxie, Newsletter | No Comments

The world of credit can be a mysterious one, to say the least. There is a lot of misinformation when it comes to credit and how to build it. Here are three things you need to know:

How Credit Scores Are Determined
(1) Your payment history makes up the most significant percentage of your credit score, so it is imperative that you make payments on time!
(2) Credit bureaus also look at the amount of money you owe compared to how much credit is available to you. The smaller the amount you owe, the better your credit score will be.
(3) The other, smaller portions pertain to the types of credit you have, like installment loans such as a car loan or mortgage, and revolving credit like credit card debt. (4) Any new credit you’ve applied for is also examined.

Your credit score can range anywhere from 300-850 and can affect many things, like the interest rate you can get on loans and mortgages, and it can even determine whether you are accepted to rent a place to live.

Credit Cards Aren’t Bad, but You Need to be Careful
I have heard many times that credit is bad and you should never use it. That simply isn’t true, but credit does need to be used wisely.

If misused, credit can get you into trouble. Instead, make sure you are paying off your entire credit card balance on time each month. If you only make the minimum payments, you will be charged interest and it will become a never-ending cycle of payments and even higher debt. Making the minimum payment will not make a dent in what you owe.

How to Check Your Credit Report
It is important to check your credit report a few times a year to make sure it is correct. There are three credit bureaus: Equifax, Experian, and TransUnion. Each one is required to give you one free report every year. The easiest way to request your report is at annualcreditreport.com. If your report is not correct, reach out to the credit bureau. Its representatives should help you with the process of correcting it.

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Market Fear and a New Approach

By | 2019, Money Moxie, Newsletter | No Comments
A sad businessman stands on a red decreasing arrow while another man runs up a green upwards arrow. Corporate ladder. Competition rules. Winners and losers.

The Dow is down 600 points! The S&P falls 7 percent! Five straight days of market decline! Sell! Sell! Sell!

During times of volatility, we see headlines like this on the news, read them on the Internet, and hear them on the radio. But before we buy the fear and sell the stock, let’s take a step back.

The most obvious fact about the stock market is this: Buy low and sell high. This gem of information is simple to understand and promises positive returns. Yet, it is during tough times that investors often forget what they know is best. Instead of buying low and selling high, investors often buy fear and sell stock.

A focus on negative market movement can cause worry, even panic. This leads investors to act irrationally and break the second rule of investing, which is: Don’t let emotion overpower logic.

Times of smooth appreciation are the exception and not the rule. In fact, 2017 was the first year in history that the S&P index closed higher every month. Volatility is the norm. Sometimes markets are up. Sometimes they’re down. Historically, the long-term trend, is up.

The average annualized return on the S&P 500 since its beginning in 1928 is approximately 10 percent. This means that those who stayed invested in diversified portfolios long-term made money.

Despite all the positive statistics I could type, watching your investment accounts decline is scary. Maybe the key to investment comfort (and success) is not a change in investments, but a change in paradigm.

My advice is this: Hire a qualified financial advisor whom you trust. Then shift your focus from market performance (something you can’t control) to your financial goals (something you can control).

When we create a plan for a client, we base it on their goals. Goal-based investing puts the emphasis on the objective, not the performance. This offers advantages.

First, it gives us a target. When we know what we’re aiming for, it becomes much easier to determine the probability of success. Changes we need to make to improve the likelihood of success also come into focus.

Second, it can produce higher returns. Focusing on the goals rather than the short-term performance can reduce emotional overreactions to market volatility. It also decreases the temptation to chase high returns, which often leads to poor performance.

Third, it brings stability and creates confidence in your financial future. Knowing you’re on track to meet your goals brings comfort regardless of which direction the market is moving.

I believe goal-based investing is a favorable approach to planning for your future. It will also consider your current financial situation, risk tolerance, and time horizon. Make sure to meet with your financial advisor regularly to review your goals and update your financial plan.

Before you buy the fear and sell the stock, please call us. We would love to talk more about goal-based investing and how it can benefit you.

*Data from public sources. Investing involves risk, including potential loss of principal. The S&P 500 index is widely considered to represent the overall U.S. stock market. One cannot invest directly in an index. Diversification does not guarantee positive results. Past performance does not guarantee future results. The opinions and forecasts expressed are those of the author.

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