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retirement planning

A Newlywed’s Guide to Financial Success

By | 2020, Money Moxie, Newsletter | No Comments

I’m sure most people reading this article have heard that money is one of the leading causes of divorce. That can be disheartening to hear when you’re planning a wedding. Being a newlywed myself, I have thought a lot about myself and my husband’s financial success and how to achieve our personal financial goals. I also know from observing friends and former classmates that young people often don’t even know where to start when it comes to making good money choices, especially when you add another person to the picture. As I’ve thought about all of this, I have come up with a list of things that will help newlyweds be successful in their financial endeavors.

1. Talk about it – This first one is arguably the most important. Money is often a taboo subject, but it is important to have open communication about money, especially in marriage. It is best to talk about money before you get married, but if you haven’t, talk about it as soon as possible. Make sure you both understand each other’s expectations for your money. For example, let your spouse know if you expect them to talk to you before making purchases over a certain amount. It is essential to be honest with your spouse, especially about any debt you may have.

2. Build an emergency fund – Having an emergency fund should be a top priority for newly married couples. The general rule of thumb is to have 3-6 months’ worth of living expenses saved up for emergencies such as a lost job, family illness, natural disaster, or major home repairs. This will bring security in case disaster strikes.

3. Design and track a budget – Start by reviewing your joint budget for the last few months and assigning dollar limits to each spending category. Remember, a budget is a work in progress. It is okay to make adjustments, especially in the first few months. Tracking your spending after creating a budget is just as important as making the budget. There are many ways to track your spending. Some people use apps; some people use spreadsheets; some people use the envelope method. The envelope method is primarily just using cash for your budget, and once the cash is gone, you’re done spending in that category for the month. This is especially helpful in areas in which you tend to overspend. Try out a few different methods and find the one you like best.

4. Save for retirement – This one is not something newlyweds often think about. Retirement can seem like it is so far in the future you don’t need to worry about it. However, starting to save for retirement when you are young really gives you a leg up. Having time on your side helps you take advantage of compounding interest. Even if you start small, saving something toward your retirement early on can have a big impact. Contributing to your employer-sponsored 401k plan is an excellent place to start.

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Investing Is Not Like Buying A Refrigerator

By | 2020, Executive Message, Money Moxie, Newsletter | No Comments

Some people think that investing has been simplified so much that it is like buying a refrigerator: You spend a few hours researching the options and then select a product that will last for 10 years. While there have been significant improvements to simplify investments, there is still a world of knowledge that is needed to select the right investments for your personal goals and time horizon. Buying the wrong refrigerator won’t wreck your retirement, but buying the wrong investment might.

Inside of a 401(k), the participant is the money manager. Because of this, the options had to be simplified. This has given rise to retirement-ready investments that have target dates based on when a participant will retire. We applaud this because most investors don’t know the nuances of investing in large-cap companies vs. small-cap companies, etc. The closer you get to retirement, and the more assets you have, the more important investment selection becomes.

Investment selection is less like picking out a fridge and more like being the forecaster for a home improvement store. That forecaster must determine beforehand how much is needed of each product, for each department, at the right time of year. If the quantity or timing is significantly off, then it puts the store in jeopardy of decreasing revenue and potential bankruptcy. Because of this complexity, a forecaster needs to have advanced training, education, and experience.

With investments, not only do you have to understand the individual investment, but you also must understand how it is impacted by the different market sectors, business cycle movements, politics, and the world economic environment.

At SFS, we are lucky to have a chief investment strategist, James Derrick, who has his MBA, CFA, and two decades of money management experience. He managed investments through the downturns of 2000-2003 and 2007-2009 when the S&P 500 lost 55% and 57%, respectively.* In fact, other financial advisors hire James and SFS to manage their clients’ money.

Don’t risk your retirement nest egg. You aren’t buying a refrigerator. Choose a money manager with the foresight, knowledge, and experience to help protect you against the downturns while allowing your assets to grow in the good times.

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The Biggest Threat To Your Retirement

By | 2019, Money Moxie, Newsletter | No Comments

Admit it. Your adult children still live in your basement. Talking about the effects of caring “too much” for adult children by financially supporting them is an uncomfortable conversation, but it is an important one.

When there are no financial boundaries set between parents and adult children, the ensuing relational volatility could be a far greater threat to retirement than market volatility. Now, I’m not talking about helping fund a child’s education or paying for a wedding. The real problem begins when parents pay for their adult children’s cars, insurance, food, or even vacations. This may sound ridiculous to some, but studies suggest that 79% of parents provide some form of financial support to their adult children. In fact, just over 50% of parents say they have even sacrificed their own retirement savings to help their adult children.

So, what should you do??

(1) Separate your retirement money from your other money. Keep it off-limits. Retirement money should only be used for retirement! Try to think about retirement money as untouchable.

(2) Try changing up the way you are helping your adult child. Try to figure out ways to help that don’t include giving money, like helping with a resumé or reviewing their budget with them. Don’t come to the rescue too quickly. Rushing in to fix or solve your adult child’s challenges will hinder their opportunities to develop and practice independent problem-solving skills.

(3) Set clear expectations. Helping your adult children get on their feet when they’re down and out is not a bad thing. Just make sure they know what is expected of them. You could tell your children you will help them for a certain amount of time and during that time you expect them to do things to improve their life situation. Keep reminding them of the deadline, talk with them often about their progress, and keep them accountable.

(4) Don’t take on the blame for their struggles. Irrationally blaming yourself for your child’s struggles will likely lead you to enable them by impulsively solving their problems. Parents, of course, are not perfect, but most try their hardest to be supportive and provide their children with a loving home. It is not uncommon to see children who were raised with many advantages end up struggling to thrive as adults, just as it’s not uncommon to see children who have had adverse family lives achieve impressive things.

(5) Remember to take care of yourself too. Parents of struggling adult children are often wracked by guilt and worry, which leads to poor sleep, unhealthy eating, and problems focusing. Worrying yourself sick will not help your child. Don’t be afraid to reach out for help from a professional counselor, friends, family, or support groups for family members of people with addictions or mental illness.

References for studies mentioned:
https://www.cnbc.com/2018/10/02/parents-spend-twice-as-much-on-adult-children-than-saving-for-retirement.html
https://www.bankrate.com/personal-finance/financial-independence-survey-april-2019/

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Medicare Open Enrollment

By | 2019, Money Moxie, Newsletter | No Comments

Medicare open enrollment is right around the corner. If you are already using a Medigap Plan or a Medicare Advantage Plan, now is the time to make a change if you want. The open enrollment period is October 15th through December 7th every year.

Who needs to pay attention?
Those currently using a Medigap Plan, Medicare Advantage Plan, prescription drug plan, or if during your initial enrollment period, you opted not to purchase additional coverage up and above traditional Medicare Parts A & B.

What is Medicare?
Traditional Medicare is composed of three parts: A, B, and D. Part A is coverage for hospitals and doesn’t have monthly premiums. Part B is coverage for doctor visits, etc. and the base cost is $135.50 per month for most people. This typically comes out of your monthly Social Security check. Part D is prescription drug coverage, which is purchased through a third party and costs around $35 per month.

What is the difference between a Medigap and Medicare Advantage Plan?
Medigap is a supplemental insurance that complements traditional Medicare. It covers most of the “gaps” or holes that are not covered by parts A & B. You can go to any doctor that accepts Medicare.

Medicare Advantage Plans combine Parts A, B, D, and Medigap into one package. They operate like traditional insurance where you are tied to a specific network.

What else should I know about Medigap?
Medigap Plans are lettered from A-N with costs that vary depending on the benefits provided. The most popular plan has been F. However, Plans F and C are being phased out in 2020 as plans are no longer allowed to cover the Part B deductible of $185. If you are currently on one of those plans, you can stay on it, but new enrollees will have to choose a different plan. Plan G is gaining in popularity because it covers everything Plan F covers, except for the Part B deductible. In many instances, the Plan G costs are lower and can be a better value than Plan F anyway.

People that have comprehensive Medigap Plans typically pay more on a monthly basis, but usually don’t have to pay very much out of pocket. If your health is ok to poor and you see a doctor regularly, then this may be a good option for you.

What else should I know about Medicare Advantage plans?
Medicare Advantage Plans, also called Part C, will often cost less than Medigap Plans. It typically has deductibles and co-insurance like traditional insurance through an employer. How it works is Medicare gives an insurance provider a certain amount per year to manage your expenses. If the insurance provider manages your expenses for less, then they make money. Because of that, monthly costs vary significantly with some plans as low as $0 per month.

People that use Medicare Advantage Plans usually pay less monthly, but typically have more out of pocket expenses. If you are in good health and don’t regularly see a doctor, then this may be a good option for you.

What resources could help me research my options?
The website www.medicare.gov has a plethora of information. You can use it to sign up for Medicare or any of its Parts A, B, C, or D. You can also find contact information for Medigap providers. If you would like to speak to a person, you can call 1-800-Medicare (1-800-633-4227).

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5 Things You Need to Know About Social Security

By | 2019, Money Moxie, Newsletter | No Comments

1) The age you start taking benefits matters

You can start Social Security benefits as early as age 62, but that may not be your best option. If you take Social Security before your full retirement age, the amount you get per month will be reduced. For most people, full retirement age is between ages 66 and 67, depending on when you were born. If you take benefits at age 62, you will only get about 70% of your full benefit. This also works the other way around. If you wait until 70, your benefit will grow 8% per year until age 70. This can be a great way to maximize the benefit you get from Social Security.

2) You may be eligible for a benefit under your spouse’s record

If you don’t qualify for Social Security benefits from your own work record, you may qualify for a spousal benefit. If you are married and your spouse qualifies for Social Security, you are eligible to receive half of your spouse’s Social Security amount along with your spouse receiving their own full amount.

3) Your Social Security may be taxed

Up to 85% of your Social Security could be taxable, depending on what your income is. To figure this out, take half of your Social Security and add that amount to any other taxable income you may have. That includes any money you’re taking out of tax-deferred retirement accounts. If that number is above $34,000 for single filers or $44,000 for married filing jointly, then 85% of your Social Security will be taxed.

4) Social Security was not meant to be the main source of retirement income

The government did not originally intend Social Security to fully replace income for every retiree. It was only ever meant to be a supplement and cover less than half of your income needs. This means you need to make sure your savings for retirement are adequate, so you have enough income in retirement.

5)Social Security is not going bankrupt

Social Security isn’t going bankrupt, but things will likely be changing. Estimations say the Social Security trust fund reserves will be depleted by 2034 unless changes are made. There have been many proposed solutions. None of them are particularly attractive, but something must be done. While nothing is official yet, here are some possible solutions:
-Raising the full retirement age
-Raising the amount of income subject to Social Security tax (currently at $132,900)
-Raising the Social Security tax rate
-Reducing cost of living adjustments, which help Social Security keep pace with inflation
-Reducing benefit amounts

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Your Success Is Our Success

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

I was asked by a prospective client why it was so hard to find a good financial advisor. They had been around the valley visiting several of the financial advisors they heard on the radio. They heard about us through a friend and decided to give us a chance.

My response was, “Just because someone screams the loudest, doesn’t mean they’re the best.” Many firms rely on high marketing budgets to keep new people coming in the door. However, these large expenses can often lead to higher expenses for the clients and often leads to high turnover.

We strive to keep our costs low and to maintain our client relationships for the long run. With this intent we don’t spend a lot of money on marketing. We strive to provide incredible service, holistic financial plans, and elite active management. We realize that if we take great care of our clients, they may tell their friends about us, and those friends may become clients. Ninety percent of our growth comes from client referrals.

We realize that trust is not easily earned and harder to keep. Thank you for choosing Smedley Financial as your private wealth manager.

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Should You Sell Your RSUs?

By | 2018, Money Moxie | No Comments

Companies often give Restricted Stock Units (RSUs) to their employees as compensation for hard work and to retain talent. RSUs are a promise of actual company stock, as opposed to stock options, which are just the option to buy the stock at a future date and have no intrinsic value. The significant RSU restriction is that you aren’t vested until a future date, typically over four years. If you leave the company, the company will retain the unvested shares. The main question is should you sell your RSUs immediately as each segment (or tranche) vests or should you hold on to the shares?

As with all planning, you should look at this as a piece of your financial puzzle, which includes short-term, intermediate, and long-term goals.

On the vesting date, the restricted stock units are converted into actual shares. You don’t pay anything. However, the conversion creates a taxable event and your income for the year will be increased by the value of the shares – REGARDLESS OF WHETHER YOU SELL THEM OR NOT.

Let’s say Sally works for XYZ company making $100k. She is given $200k in RSUs vesting over four years. This year, $50k in RSUs are available. When the RSUs are converted, her Adjusted Gross Income (AGI) will be increased by $50k, making her total AGI $150k. Sally may have to pay around $14k more in taxes. (Tax will vary depending on many factors: marital status, spousal income, deductions, etc.). If Sally doesn’t have the $14k in the bank, how will she pay the extra taxes?

In many cases, employees end up selling their RSUs to pay the taxes unless the company’s plan allows some shares to be sold to pay the taxes. As a rule of thumb, an individual shouldn’t have more than 20 percent in their company stock. So, even if employees can sell shares to pay the taxes, you may still want to sell your vested shares. Selling allows you to diversify away from having too much in one investment. You may also sell to use the proceeds for other beneficial purposes, like building an emergency fund, funding your children’s education, or paying down your mortgage.

When the first block of RSUs becomes available, there is typically some downward pressure on the stock price. A growing company can overcome this, but it is also a question of how long you are willing to wait.

If you hold the shares for longer than one year from the vesting date, your growth will qualify for long-term capital gains rates. So, if an RSU was given to you at $20 per share and after one year you sell at $25 per share, you will pay tax on the $5 in growth at the long-term capital gains rate. The risk in waiting is the stock price could go down.

Deciding to sell or hold your shares depends on a myriad of factors including taxes, diversification, company performance, market conditions, and the purpose of the money. Your decision should be based on your overall financial plan that includes short-term, intermediate, and long-term goals. If you need help creating your financial plan or even if you have questions about how to handle Restricted Stock Units, please contact one of our Wealth Managers that can help you navigate the waters of life.

*SFS and its representatives do not provide tax advice; it is important to coordinate with your tax advisor regarding your specific situation.

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After 35 Years, the 401(k) Dominates Retirement Savings

By | 2017, Money Moxie | No Comments

The people who helped start the 401(k) revolution in 1981 lament what has become of it. At the time, the hope was just to help supplement a traditional pension program. The reality is that 401(k)s have replaced pension plans as the main retirement savings vehicle.

Herbert Whitehouse, a Human Resources executive for Johnson & Johnson, was one of the first to recommend his executives use a 401(k) as a tax-free way to defer compensation. “We weren’t social visionaries,” he says. They were looking for ways to cut expenses and retain top workers. However, because many companies have jumped on the bandwagon, pensions are becoming a thing of the past.

Traditional pension plans do have their weaknesses: bankruptcies could weaken or wipe out the plan, and it is difficult for employees to transfer the plan to a new company.

Enter the 401(k) with the promise that an employee could have enough savings for retirement. Teresa Ghilarducci, who directed the Schwartz Center for Economic Policy Analysis offered assurances to Union Boards and even to Congress that 3 percent savings would be enough. She now admits the first calculations were a little “too rosy.”

There were other issues policy makers didn’t take into account, such as workers yanking the money out of the 401(k) or choosing investments unsuitable for their ages.

Only 61 percent of eligible workers are currently saving. A whopping 52 percent of households are at risk of running low on money during retirement.4 These are scary numbers. It is no wonder people fear running out of money more than they fear death.5

The nation’s policy makers and some states have made proposals or started initiatives to help change the behaviors of savers and companies. One proposal would mandate retirement savings and the system would be run by the Social Security Administration. However, we are a ways off from having a solution to a societal problem that could be compounded by the Social Security trust fund running dry by 2034.6

The onus is on each one of us to save for retirement and implore our parents, children, friends, and even neighbors to help patch the holes in a sinking ship by saving for retirement.

The bright spots are the people that have benefited from the 401(k). For example, Robert Reynolds could retire comfortably at age 64 after saving for 3 decades. He says the formula is very simple, “If you save at 10 percent plus a year and participate in your plan, you will have more than 100 percent of your annual income for retirement.”7

Like it or not, we live in a world where 401(k) accounts have nearly eliminated pensions. Your financial future is your responsibility. So, make a personal commitment to save for your future.

 

1. The Champions of the 401(k) Lament the Revolution They Started, Wall Street Journal, Jan 2, 2017
2. The Champions of the 401(k) Lament the Revolution They Started, Wall Street Journal, Jan 2, 2017
3. The Champions of the 401(k) Lament the Revolution They Started, Wall Street Journal, Jan 2, 2017
4. The Champions of the 401(k) Lament the Revolution They Started, Wall Street Journal, Jan 2, 2017
5. http://www.marketwatch.com/story/older-people-fear-this-more-than-death-2016-07-18
6. http://money.cnn.com/2016/06/22/pf/social-security-medicare/
7. The Champions of the 401(k) Lament the Revolution They Started, Wall Street Journal, Jan 2, 2017

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Unexpected Retirement Expenses

By | 2017, Money Moxie, Newsletter | No Comments

Preparing for a successful retirement takes years of planning, saving, and dreaming about the years when you will no longer be working. When planning for retirement we recommend you think about the amount of monthly income you need to maintain your lifestyle.

However, there are some expenses you may not think of before retiring.

1. Home Repairs: Before retiring take inventory of the age of your house. What are some of the items that may need to be updated? Then come up with a plan for how to have cash on hand to pay for each of those repairs.

Some of the most expensive items include your home’s: HVAC, roof, pipes, septic system, deck, siding, and plumbing.

Planning for home repairs can alleviate a lot of financial burden by either repairing items before retirement or by creating a reserve home repair fund, in addition to an emergency fund.

2. Healthcare Costs: Did you know the average couple will spend about $250,000 on healthcare during their retirement? Even if you believe you will not spend that much on healthcare, it is a good idea to plan for the unexpected, especially with the rising cost of healthcare.

Although Medicare is available at the age of 65, it does not cover all medical expenses. There are additional premiums and expenses for prescription coverage. Dental and vision insurance is not covered by Medicare, so private insurance will be needed if you would like this coverage.

If you are planning to retire before the age of 65, be sure to know how much the cost of private healthcare will be. The premiums are a lot more than individuals think.

3. Purchasing Power: The average price of a movie ticket in 1974 was $2.00. Fast-forward to 2015, the average price was $8.50! That is a 3.4 percent increase in cost per year and a good example of the power of inflation.

Inflation is hard to see as it happens slowly over time, yet it is crucial to plan for in retirement.

• If you retired today with a monthly income of $3,000 and an inflation rate of 3 percent, in the year 2040 you would need about $6,000 per month to maintain the same standard of living.

• Outpacing inflation with a risk appropriate, diversified portfolio can help to minimize the risk of purchasing power.

4. Spending too much early on in retirement: Yay! You made it to retirement. You’ll have more free time, which often means spending more money. It might be spent on visiting loved ones, traveling, golfing, lunching, or starting new hobbies.

Before you retire, make sure to have a realistic amount of money you will spend each month. Make sure to include your day to day expenses, healthcare costs, taxes, home repairs, utilities, travel expenses, and any other items that may be important to you.

5. Longevity: If you know the exact day you will pass away, planning for retirement is easy. That’s not the way life goes. If we plan based solely on previous generations’ life spans, we may not plan for a long enough lifespan.

Planning beyond age 90 is a more conservative plan. Although you may need to reduce your monthly income, you will have a well-rounded plan that will help your income last for your lifetime.

Planning for retirement can be a daunting task, yet with the right team on your side you can be set up for success and live out the retirement of your dreams.

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