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retirement

Are You Retired and Have a 401(k)? Read This!

By | 2019, Money Moxie, Newsletter | No Comments

As financial advisors, our job is to help clients create wealth. Most people expect us to accomplish this through market investments. Although that does play an important role, advice regarding financial decisions outside of the market can often amount to significant savings and wealth creation. The topic covered here is one that has amounted to significant savings for many of our clients. If you are currently retired or are approaching retirement and have a 401(k), this article is for you.

When talking about financial planning, there are two main phases of life: the accumulation phase (pre-retirement) and the distribution phase (post-retirement). The 401(k) is a fantastic savings vehicle for those in the accumulation phase. If you are currently working, a 401(k) is great! Employers often contribute to this type of account by way of a company match or profit-sharing because the 401(k) annual contribution limit is higher than that of other retirement accounts. Plus, paycheck deductions make saving easy.

If you are already retired, a 401(k) has some weaknesses that you should be aware of. The cost associated with these may be a lot more than you realize.

• When you take a distribution from a 401(k), you do not have the ability to choose which assets you sell. A distribution will require selling from all investments equally. This is a huge disadvantage as you may be forced to sell from the wrong investment at the wrong time. Proper distribution planning requires one to analyze the individual investments and sell those that make sense based on current market conditions and performance expectations. Unfortunately, the 401(k) does not give you this ability.

• If you have Roth 401(k) contributions, you will be forced to take a distribution at age 70.5. This can have large negative consequences to both future tax-free earnings and your ability to pass on wealth tax free. Roth IRA accounts will not force a distribution regardless of age.

• If you are over age 70.5 and donate to 501(c)(3) organizations, you cannot take advantage of a great tax-savings strategy called a Qualified Charitable Distribution (QCD). The tax savings from QCD’s can be thousands of dollars every year. Examples of qualified organizations are churches, universities, humane societies, hospitals, etc.

In many cases, we recommend that clients roll their 401(k)’s into IRA’s at retirement. An IRA is a much better retirement distribution vehicle given its flexibility and its greater selection of investment options. It also does not suffer from the weaknesses mentioned above. 401(k) rollovers are tax-free and easy.

We work hard to ensure our clients make good financial decisions. Often, small changes have a large impact. We have seen investors greatly benefit from a 401(k) rollover. If you have a 401(k) that you can’t contribute to due to separation of service or retirement, we highly recommend you meet with us to discuss if a rollover is in your best interest.

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Early Retirement: A Lifestyle Change

By | 2019, Money Moxie, Newsletter | No Comments

Retiring early has a whole new meaning for Financial Independence, Retire Early (FIRE) adopters. With a goal to retire from the 9 to 5 rat race, those willing to make sacrifices can transition to a new lifestyle as early as
age 35.

The idea behind FIRE is living a frugal lifestyle so that you can create financial independence. This means living on much less and saving 50% to 70% of your income for the future. At the same time, the money you live on is focused on paying off debt as quickly as possible. Frugal habits would include eating in, shopping at thrift stores, buying food and supplies on sale, and enjoying at-home entertainment. It’s not as easy as it sounds.

Truth be told, most FIREs have had high-paying careers or were entrepreneurs. Their high incomes allowed them to save a great deal of money and still live comfortably while preparing for an early retirement. Not easy for the average American worker earning $60,000 or someone who lives in an area with high cost of living.

FIRE adopters are not retiring in the traditional sense. They are merely focusing their time on things that they enjoy and making a difference in the world. The majority have created income by blogging, teaching, or keeping a part-time job that offers lifestyle flexibility and health insurance benefits.

You may think this sounds great. How do you get started? Before you jump on board, there are things to consider. Most of us get insurance through a group plan where some of the cost is paid by an employer. For most, leaving the workforce before age 65 (Medicare age) means finding insurance in the marketplace. This can be costly because you pick up the full tab.

Leaving a lucrative job early also means you are missing out on your peak earning years. As we immerse ourselves in a career, we gain knowledge and experience, making us more valuable to employers and increasing our income over time. FIRE’s take the employer out of the picture. Their value is based on what they can market and deliver.

Saving for the future is also a concern. Without continued contributions to retirement-type accounts, like 401(k), IRA, or Roth IRA, your future income and lifestyle can be at risk. Forfeiting an employer match or profit-sharing contribution means you will need to bump up saving for future needs.
This can all be overcome with good planning and meticulous monitoring.
If you think the FIRE idea is for you, here are ideas to get you started:

(1) Determine why you want to achieve Financial Independence and Retire Early. What does that look like once you reach the goal?

(2) Figure out where you stand now. What is your net worth (total assets minus liabilities)?

(3) Where is your money going? You need to track how you spend every dollar.

(4) What expenses can be cut to reach a 50 percent savings rate?

(5) Pay off high-cost debts first.

(6) Build an emergency fund – six months’ worth of net expenses – in case you get in a financial bind.

(7) Take full advantage of tax advantaged savings accounts: IRAs and Roth IRAs.

(8) Find a side job to bring in extra money that can help pay off debt and build savings.

(9) Get advice from a Smedley Advisor to help develop a plan and track your progress.

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A New Housing Paradigm

By | 2019, Money Moxie, Newsletter | No Comments

Since the housing crisis and recession of 2008, the American dream of homeownership has changed. Younger generations are weighing the benefits of owning their own home with the freedom that renting provides–flexibility to move for work and to avoid responsibilities and expenses that come with ownership. Plus, they are weighing the additional amenities that can be enjoyed from some rental communities: pool, fitness center, dog park, common use areas, etc.

Aging boomers are also considering changes. They are also interested in reducing responsibility, as well as downsizing their homes. Having someone care for the lawn and shovel the snow is enticing. Not to mention the fun of living among neighbors near their own ages.

5 things to consider before purchasing a home:

(1) Your monthly mortgage payment should not equal more than 28% of your gross monthly income. This includes principal, interest, taxes, and insurance.

(2) Avoid mortgage insurance. It does not benefit you. You can do this by making a down payment of 20 percent or more. If you can’t put down at least 20 percent, then once you have 20 percent equity, check on removing the mortgage insurance.

(3) Plan for extra expenses! If your home is new, this will include window coverings, appliances, and landscaping. If buying an existing home, plan on costs for updating and fixing known and unknown problems.

4) Keep the loan term as short as possible without financially boxing yourself in. A 15-year mortgage should have a lower rate than a 30-year mortgage. Always try paying extra principal each month.

(5) Keep money available for emergencies in a dedicated savings account. Using a credit card or a loan for emergencies will compound your problems.

5 things to know before downsizing:

(1) Ask yourself if your current home can be modified or updated to accommodate your needs as you age. You can always pay for someone to care for the yard.

(2) Increased demand for patio-style homes and planned living communities has driven up the prices. You may find that selling your large home to downsize may not be worth the price.

(3) Determine what you want. Some retirees want to be close to family or need a place to host family. Others are looking to get away or want an adult community.

(4) Understand the additional costs of Home Owners Association (HOA) fees that cover the services, upkeep, and common areas. Get a copy of the HOA contract and consider asking about its current financial condition.

(5) Protect your retirement. Avoid debt. Remember, using savings to purchase a retirement home may create future liquidity problems.

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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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The Life of a Centenarian

By | 2018, Money Moxie | No Comments

We are experiencing a longevity wave; worldwide more people are living to age 100 and beyond – and Americans are leading the pack. Today’s centenarians are living relatively active lives. The secret may be preparing physically, mentally, and financially.

Physical mobility does not begin at retirement. It’s something you have to work on throughout life. Centenarians who enjoy an active lifestyle do so because they adopted an active lifestyle early on that includes regular physical activity. Finding a like-minded community gives these active seniors a sense of purpose and a reason to make an effort each day. Activities such as pickleball, swimming, and dancing have gained popularity among retirees.

Mental outlook has a significant bearing on a centenarian’s sense of wellbeing. You have met them; these are the people who seem to have an endless smile and a consistent, positive outlook on life – regardless of their personal situation. Keeping an active mind is every bit as important as staying physically active. Staying involved in a community and regularly getting together with friends provide a sense of belonging and help prevent feelings of isolation and loneliness.

Financially, these folks have weathered many changes. Most receive some type of pension along with Social Security benefits, which provide an income base, and investments help supplement their income needs. However, they are facing a challenge they may not have believed would occur. Longevity. The longer they live, the more difficult it will be to maintain their standard of living as inflation takes its toll.

Cost of living increases (COLA) are built-in to Social Security benefits, but many pensions do not provide COLAs. Inflation’s impact steadily eats away at the purchasing power of money. For someone who will be retired for 30 to 40 years, the reality can be disheartening. And while general inflation over a long period of time averages 3 percent, retirees face an even steeper inflation trend when it comes to medical costs, which increase between 5 and 6 percent annually.

You have heard us say it before, but the statistic warrants repeating. A married couple age 65 today has a 50 percent chance that one of them will live to age 92. That is both exciting and alarming. What can you do to prepare financially? Save as much as you can – then save some more!

Pensions are becoming obsolete for future retirees. In 1979, 30 percent of retirees had pension benefits. In 2014, that number had dropped to 2 percent, and the downslide continues. Without a pension to help provide a portion of retirement income, we have to pick up the slack. Rather than living only for today, we must look to the future. This is difficult, especially when faced with “present bias” – weighing today twice as heavy as the future. Planning for a longer life is essential, and it requires a balanced perspective now.

While we cannot make up for lost time, we can start saving more today. Adopt a mindset of preparing for the future. Each year increase the amount you are saving, even if by just one percent. When you reach centenarian status, you will appreciate every dollar you saved. Not sure you are saving enough or what to expect when you reach retirement age? Let us help you determine your retirement goals and map out a plan to get started. If you are closing in on retirement, let us help you create a retirement income plan. We can determine your sources of income when you retire and how to make your nest egg last as long as you do.

 

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You Can Contribute More to Your Retirement in 2019

By | 2018, Money Moxie, Newsletter | No Comments

Good news is coming for those looking to max out their retirement plans. In 2019, the contribution limits will be raised on most retirement accounts. This opens the door to higher tax deductions, more tax-deferred growth, and better savings ratios.

Employee contribution limits for the 401(k), 403(b), and 457 plans will be raised to $19,000 annually. For those individuals age 50 and older, an extra $6,000 contribution is allowed. The ceiling on SIMPLEs climbs to $13,000 with an additional $3,000 for those 50 and older. Both traditional IRAs and Roth IRAs will jump to a $6,000 annual limit with a $1,000 extra contribution for those born before 1970.

Deduction phaseouts for traditional IRAs of active plan participants will also start at higher levels in 2019, from adjusted gross incomes of $103,000 – $123,000 for married couples filing jointly and $64,000 – $74,000 for single filers. Roth IRA AGI phaseouts will increase to $193,000 – $203,000 for couples and $122,000 – $137,000 for individuals.

If you have questions about how these changes can impact your financial plan, please call us to schedule a review with one of our Wealth Managers.

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Your Leading Indicators

By | 2018, Executive Message, Money Moxie | No Comments

Dear Financial Partners and Friends!

Leading economic indicators are predictive changes that give us clues about the future direction of the economy. Lagging indicators are after the fact. They confirm what has already happened.

Just as the economy has leading and lagging indicators, so does your personal financial preparedness. Regardless of your age, or alternatively, your personal lifecycle, ask yourself where you are in the following questions.

  1. Do you have a three-to-six-month emergency fund that matches your net income?
  2. Are you free of all debt?
  3. If you were to die suddenly, would your family have enough money to live now and through retirement?
  4. Do you have enough money saved for retirement? (See graph below.)
  5. Are the beneficiaries and contingent beneficiaries on your retirement accounts, life insurance policies, etc., the way you desire?
  6. Have you created will(s) and trust(s) and ensured they are up to date?

If you answered “Yes,” to all of these leading indicators, then you are financially prepared for the future. If you answered “Yes,” to most of these, then you are on the right path. If you answered “No,” to most of these, then you should take immediate action. Please come and talk with one of our expert wealth managers who have the experience, credentials, and training to get you to and through your retirement years.

So many changes can take place within a year’s time, that when it comes to your personal finances, it is better to be safe than sorry. The most important people in your life depend on you. Will they be harmed or helped by your preparation or lack thereof?

Bullish Best Wishes,

Roger M. Smedley, CFP®
CEO

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How Much Money Will You Need in Retirement?

By | 2018, Executive Message, Money Moxie | No Comments

Dear Financial Partners and Friends!

If we were to ask what percentage of your final salary you will need in retirement, you could probably come up with an answer off the top of your head. In reality, determining what you will need to live on and making sure you have enough to meet that need is extremely complex.

A front-page article in the Wall Street Journal’s Wealth Management section on September 4, 2018, by Dan Ariely & Aline Holzwarth, made this astute observation: “Answering a question as complex as this requires knowledge far beyond most people’s grasp—and far beyond the grasp of many professionals.”

Why is retirement planning so difficult? Because it’s all about longevity, the future cost of federal and state taxes, cost of property taxes, cost of health care, cost of long-term care, the opportunity cost of being too conservative or the penalty cost of being too aggressive, cost of living, as well as daily living and possible travel expenses, just to name a few. Retirement cash-flow planning is not for the faint of heart.

While many think that health care cost will be the largest expense in retirement, the surprise is that for most folks, taxes are the single, largest expense. It’s impossible to generalize for everyone, but taxes are levied on withdrawals from qualified retirement accounts such as IRAs, 401(k)s, and pensions. If you have too much income, your Social Security benefits may also be taxed during retirement.

Integrating tax planning with cash-flow planning may help bring considerable and tangible benefits. Preserving your hard-earned dollars through tax planning is crucial in delivering and providing a sustainable cash flow during your retirement years. Having said this, melding tax planning and cash-flow planning is very complicated.

The great news is that you don’t have to go it alone. At Smedley, we can help you navigate the white waters of retirement tax planning and cash-flow planning. Please come and talk with one of our expert wealth managers who have the experience, credentials, and training to guide you to and through your retirement years. Your financial success is our passion at Smedley Financial.

Best Wishes,

Roger M. Smedley, CFP®
CEO

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Retire without Debt

By | 2018, Newsletter | No Comments

Only 38% of American retirees are debt free. The type of debt may surprise you—mortgage, credit card, auto loan, and even student loan. The impact of debt on a fixed income can be distressing as it reduces discretionary spending and, in some cases, forces retirees to cut their standard of living.

Source: Society of Actuaries® 2017 Risks and Process of Retirement Survey – Report of Findings

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