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Money Matters

Women and Retirement Challenges

By | 2021, Money Matters, Newsletter | No Comments

The pandemic expanded the chasm women face when planning for retirement. Many women put their careers on hold or significantly reduced their work hours to stay at home becoming educators, primary caregivers, and much more. This has left many feeling ill-prepared for retirement.

Many women, fortunately, had the option to continue working from home. However, according to a report by Qualtrics, only 13% of women working remotely with children at home say they received a pay increase compared to 26% of men. This has only widened the pay gap observed by many working women.

Why is this so important? Women already face many challenges in planning for retirement. Typically, they have shorter career spans, entering the workforce later or working fewer hours while raising a family. They also leave the workforce early to care for aging parents. In both instances, their earning power is impacted and reduces their overall retirement savings and the benefit of long-term compounded growth.

Longevity is another challenge. Women outlive men on average by 5-6 years. When planning for retirement, this means more money is required to provide for those additional years. It is no surprise that 6 women in 10 do not expect their income to last their lifetime. To say it another way, 60% of women expect to run out of money during retirement. It is no wonder women are concerned.

Luckily, it is not all doom and gloom. Women can feel confident about retirement with some advanced planning. A plan will help you understand how your current saving and investing habits will impact your financial goals and can uncover potential shortfalls in retirement income. It will help you determine how to plan for specific milestones and at retirement when to access Social Security to maximize your benefits. It will provide a strategy to manage risk and allocate your assets to outpace inflation. All of this is done with a focus on your personal financial values and goals. Over the following few issues of our Money Matters newsletter, we will dive into some of these planning concerns.

For today, we will start with the most important: saving and investing habits. In the popular book, The Richest Man in Babylon, author George S. Clason points out that a part of everything you earn is yours to keep. This means you need to pay yourself first. Just like you pay your mortgage, utilities, auto loans, etc., start by putting yourself at the top of the budget list. If you are at the top, it is more likely you will get paid. On the other hand, if you put saving at the end of the list, you may not get paid when the money runs thin.   

To have money for future needs, you must love your future self as much as you love yourself today. This might mean giving up a few of the things you enjoy so you can save money for later. However, it is not an all-or-nothing choice. Take, for instance, your retirement savings. Employers provide 401(k), 403(b), or other types of plans where you contribute directly from your paycheck. The employer might sweeten the deal by matching what you put in up to a specific limit. If you are currently saving a percentage of your income, increase that percentage annually or each time you receive a pay increase. Saving 10% to 15% of your income annually will help you prepare for the future and allow you to maintain and enjoy your retirement years.

If you do not have an employer-sponsored plan, do not worry. You can contribute to an IRA or Roth IRA. Here, you can make an annual contribution or, even better, make a monthly contribution. Put everything on autopilot, so you do not have to think about it every month.

The sooner you begin saving and investing, the more compounded growth you will receive. Over time, this can amount to a large part of your nest egg. If you are just out of college with your first job, sign up for your company-sponsored plan. If you are behind the curve and retirement is not too far off, augment your retirement saving with non-retirement accounts. There is no limit on how much you can save in a non-retirement account. There is also no requirement on when or how much money you must take out of the account. You are in complete control.

Now, think about your personal situation. Do you have a plan for the future? Are you saving enough to meet your goals and maintain an enjoyable lifestyle in your retirement years? If you answer these questions with anything other than yes, give us a call. We can help assure you are on track for a successful financial future.

In the next issue of Money Matters, we will cover how inflation impacts retirement income.

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Taxing Times

By | 2021, Money Matters, Newsletter | No Comments

It is that time of the year! Tax season is upon us. As you gather your tax documents together, you may be wondering how you are taxed on investments. This is a good time to review how taxes apply to different account types.

Tax-deferred

Most everyone has some type of tax-deferred account, generally thought of as a retirement account(s). Money is invested in these accounts before taxes are paid. It grows over the years and is taxed when you take it out of the account through withdrawals and distributions. These accounts include Individual Retirement Account (IRA), 401(k), 403(b), SIMPLE IRA, SEP IRA, etc. It can also include non-qualified tax-deferred annuities where the initial investment has been taxed, but the tax on the growth is deferred until you take a withdrawal from the account.

Money taken from tax-deferred accounts is taxed as ordinary income. That means it is taxed at your marginal-income tax rate.

Restrictions apply to these accounts. For instance, the amount of money you can invest each year is limited based on the account type and your age. If you take money out before you are age 59 ½, you will pay an early withdrawal penalty of 10%. Furthermore, you must begin taking money out of these accounts by age 72. This is known as a Required Minimum Distribution (RMD), and you will be subject to a penalty if you miss the deadline.

Taxable

Taxable investment accounts can be accessed at any time without restriction. They are often used to reach a specific goal or increase savings that will be used to supplement income during retirement. The initial investment has already been taxed, and you will only pay tax on the growth.

The tax rate is determined by the length of time you hold the investment. If you hold a specific investment within a taxable account for more than one year and one day, you will be taxed at lower capital gains rates. If you sell an investment in less than one year, taxes are calculated at your ordinary income-tax rate. Dividends received are generally taxed as ordinary income as well.

You can manage taxes within the account by offsetting gains and losses. This strategy can be helpful in reducing taxes.

You are free to add as much money as you want to a taxable account, and there are no requirements to take money out of this type of account regardless of your age.

Tax-free

Growing money without taxes is a wonderful way to plan for retirement. This can be done in a Roth IRA or Roth 401(k). Money is invested in the account after taxes have been paid. Any growth earned over the years is tax-free. It does not get better than that!

There are differences between the two types of Roth accounts. The amount of money you can contribute is limited by the type of account and your age. A Roth IRA has no required distribution date. You can leave the money in the account until you are ready to use it or pass it to your heirs tax-free. Unfortunately, the Roth 401(k) is subject to Required Minimum Distributions at age 72. This can be avoided by rolling the Roth 401(k) to a Roth IRA before the year you will turn 72.

For details on marginal tax rates, capital gains rates, and contribution limits, visit us at SmedleyFinancial.com and browse the updated 2021 tax information. You can also call us at 800-748-4788. Happy tax season!

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What is in a name?

By | 2020, Money Matters, Newsletter | No Comments

When it comes to designating a beneficiary – everything!

It is hard to remember how many times we have named a beneficiary on a document or account. I would say it is even harder to remember who we named. The phrase “out of sight, out of mind” rings true.

The reality is the person or entity named as the beneficiary can trump your plans. Even after spending time and money creating a will and trust, you may have missed an important step. If the beneficiary is not named correctly or updated to meet changes in your plans, your desires will not be met.

Last month our Just for Women webinar focused on Wills and Trusts and featured Kent Brown of Strong & Hanni Law Firm. He shared several threats that can wreck an estate plan. One of those threats was naming beneficiaries. If you missed the webinar, you can view it on our website under Just for Women.

Here are some things to keep in mind when naming a beneficiary.

Naming one child as the beneficiary – We have experienced situations where a single child was named as a beneficiary. The intent was that the named child would split the money among the other children of the deceased. Unfortunately, the child often feels strongly that the money was intended for them alone and therefore does not distribute any money to their siblings. Do not assume a child will feel inclined to distribute the money as you wanted. If you intend that all your children will receive a portion of the account, name them all as a beneficiary and specify their portion. If your child splits the money as intended, they may have a problem with taxation. If the account was a qualified account, the full tax burden falls on the named child. This could push them into a higher tax bracket, reducing the amount distributed to siblings.

Naming a spouse and a child as primary beneficiaries – This often happens in error or because you believe your spouse will need help handling the money at your demise. Naming a spouse as the primary beneficiary gives them full access to the account. Including a child as an additional primary beneficiary does not make them a joint owner in the asset. Instead, it transfers the portion or share listed directly to them as an owner. They are under no obligation to share the money with the surviving parent. This can lead to serious financial consequences for the surviving spouse.

Naming a special needs child or adult Receiving money as a beneficiary can impede a special needs individual from receiving benefits from assistance programs. A special needs trust can help ensure the individual gets the money intended for them and names someone to handle the money on their behalf, creating a layer of protection.

Not naming a contingent beneficiary – Unfortunately, your primary beneficiary may predecease you, or you may die in a common accident. If there is not a contingent beneficiary listed, the assets will have to go through probate. In essence, you have decided the asset will be handled according to your will, if you have one, or that the courts will decide how your assets will be divided. This can cost the executor of your estate a great deal of time and expense.

Not naming your trust – A common mistake after establishing a trust is neglecting to name the trust as the beneficiary or assuming the attorney has taken care of the change. You are the only one who can sign the document naming beneficiaries on your accounts.

Not updating beneficiary designations – There are so many accounts that require a beneficiary designation that is it easy to overlook an account when you have a significant life change. This could be marriage, divorce, death of a spouse, the birth of a child or newly adopted child, or the death of a named beneficiary. We have uncovered too many instances where the divorce took place years prior. However, the ex-spouse was still listed as the primary beneficiary on the retirement account at the employer. This type of error can cause unintended heartache and financial trouble for a surviving spouse.

Make it a priority to review the beneficiaries on your accounts now. Then each year, take a few minutes to review the current beneficiaries and make changes if needed.

Here are some of the accounts to consider when reviewing your beneficiaries:

  • Retirement accounts: IRAs, Roth IRAs, 401(k), 403(b), 457, SIMPLE IRA, SEP IRA
  • Employer’s pension plan
  • Annuities
  • Life Insurance: Individual policies and group policies

Understanding when to name an individual and when to name a trust can be challenging. If you have questions or need assistance, please contact the SFS Wealth Management Team at 800-748-4788.

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Get in the Right Lane

By | 2019, Money Matters, Newsletter | No Comments

Missing a freeway exit can be extremely aggravating. Once missed, you are required to drive farther away from your destination. It can happen for many reasons; being in the wrong lane, missing an exit sign, or heavy traffic preventing you from getting over. Once you realize you have missed the exit, you immediately begin making corrections so you can exit at the next opportunity.

Financial success can be like the freeway. You may be headed in the right direction, but are you making the right decisions? Here are some behaviors that may keep you from reaching your financial destination:

  1. Spending more than your planned budget. One of the greatest concerns of retirees is running out of money. The goal of a financial plan is to make sure your money lasts as long as you do, even if you live to 100. If you are depleting your nest egg too quickly, you should change lanes. 

  2. Giving money to kids. When adult children are having financial troubles, giving them money may seem like the right thing to do. That is not the case. In most situations, it just prolongs the problem. If you are bailing out your adult children, you should change lanes.

  3. Paying for things you don’t use. This could be a gym membership, a storage unit to hold more stuff, or the RV and toys that rarely get used. Letting go of these things has financial and psychological benefits. You no longer worry that these items are going unused. You can rent an RV for a vacation if you want, and most of the stuff you are storing is of higher value to you than it may be to your kids. Ask them what they would like to have and get rid of the rest. It’s refreshing! If you are paying for things you don’t need, you should change lanes.

Look at your financial goals. Are you on target to reach your financial destination? If not, I challenge you to make a lane change – make the needed corrections and continue to move forward. Don’t let anything keep you from reaching your financial destination. Having a plan can keep you headed in the right direction and the right lane.

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Your Values Matter

By | 2019, Money Matters | No Comments

When it comes to money, your values matter, why? If what you value most and your goals are not in alignment, you will experience a state of financial and emotional conflict. Your ideals and your actions will not match up, making it difficult to reach your goals.

Here’s an example of a value and a goal that would be in alignment. If family is important to you, then you value time spent together and want to take care of them. Your goal would be to protect your family financially if something should happen to you. Your actions might be to provide money to cover debts, pay for children’s college, replace your income, and provide end of life care. You would make saving for emergencies and retirement a priority, so you are prepared to live a dignified retirement, you would have legal documents and beneficiary designation in good order to protect your loved ones.

There is no right or wrong answer when it comes to personal values. They can be anything from Family, to Independence, to Education. There is no prerequisite to what you value; it is the culmination of your life experiences, education, and beliefs. The trick is which values are most important.

What are your top 5 values? You may be able to name two or three right off. Then you may go into a stupor, wondering “What else do I value”? Sometimes it is not easy to identify our top 5; it takes time and thought. If you find yourself stumped let me know; I can help.

Your decisions and actions have the most significant impact when it comes to reaching your goals. They have more to do with your financial success than the market or the investments you choose.

That’s why your values matter!

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Giving Back

By | 2018, Money Matters | No Comments

Finding opportunities to give back was a consistent theme among the participants at the Just for Women 2018 conference. We agree. Giving has an empowering effect on the giver, the charity that serves a need, and most importantly, on the recipients. The desire to give back is innate – not generally driven by financial benefits. Having said that, there are ways you can give that benefit both you and the charity; financially speaking. Here are two that you may want to consider.

Donation-in-kind. If you have an investment in a non-retirement account, you can donate the investment directly to a qualified charity. By doing this you completely avoid capital gains taxes. Furthermore, if you itemize your taxes, you can claim the value of the investment, on the day it was donated, as a deduction. The key benefit is that the charity receives the full value of the donation tax-free. One caveat; you must have owned the investment for at least one year and one day and it must have increased in value.

Qualified Charitable Distribution. If you have reached the wonderful age of 70½, congratulations! Uncle Sam has been waiting for this day. It is at this age that you are required to take money out of your retirement accounts; i.e. IRA, 401(k), 403(b). This is called a Required Minimum Distribution (RMD) and will occur every year going forward. If your retirement account is an IRA, you can choose to have the money you are required to take out – all or part – go directly to your favorite charity, taking advantage of the Qualified Charitable Distribution (QCD) option. The benefit to you – you do not have to claim the distribution as income or pay tax on the money that comes out. This is valuable because the distribution will not have a negative impact on your Medicare Part B premiums. The benefit to the charity – it receives the full value of your donation; tax-free.

I have the pleasure of working with the Utah Parent Center, a local charity that has served families of people with disabilities for over 35 years. I have been impressed by the positive influence they have on so many lives. While they have served more than 25,000 individuals, there are many more who could benefit from the services they provide. However, they need the support of our community to provide services to those additional people. One family’s story is below.

If you would like more information on making a donation-in-kind or qualified charitable distribution using your investments call our office at 801-355-8888. To donate directly to Utah Parent Center, use this link: https://utahparentcenter.org/donate/.

Together, we can make a difference.

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