How To Secure a Happy Retirement Life

One of the most asked questions from our new clients is “How much wealth do I need to last my lifetime?” The obvious answer is “depends.” To help you quantify your needed savings for lifetime income, we will provide you three areas of life that must master to live the life you choose.

First, you must become a saver, not continue as a consumer. The highest savings rate in U.S. history was reached during the pandemic. Not surprising as most people did not feel safe shopping at local stores and malls but rather ordered online. Granted the online experience for shopping has improved exponentially, it is still not the experience most shoppers seek when a day is planned for the exchange of goods and currency (that is the phrase I use when my wife and daughters go shopping).

The savings rate for U.S. citizens in 2021 was a whopping 13.7% (www.statista.com)! This level of savings exceeds the 11% experienced in 1960. Is it enough to meet the demands of rising costs of living for most people? Perhaps if this savings trend were to continue for a period of 40 years representing the work life of most people, their post-career years would be sufficiently funded.

To bring another statistic into this discussion, the total savings of U.S. citizen in 2021 exceeded $2.3 trillion. This is a staggering amount of money considering the U.S. Government has distributed $4 trillion dollars during the pandemic. The average balance maintained in the 401(k) plan of a 65 years of age and older person is $216,720 according to www.personalcapital.com.

If you seek a lifetime of income, in the realm of reasonable support, it is important that you become a saver on a consistent basis to allow the compounding of investments to perform over a significant period of time.

Second, you must determine what happiness is for you in life. One of our clients was an older woman whose husband predeceased her while she was in her career. Her position was mostly clerical, and she enjoyed her work. During her career, she had the opportunity to invest in the company’s stock through a plan where the employer matched her contributions to buy the stock. The highest salary she earned during her career was $51,000, which was two years before her retirement from the company. Granted she worked for a good company and was fortunate to begin her career with the company while it was a fledgling start up organization.

At the age of 66 and 4 months, coincidentally her full retirement age for Social Security Benefits, we assisted her in filing for her benefits and prepared her for retirement. When we opened the most recent envelope containing her statement from the employee stock ownership plan, she could not help but grin at my expression. Her stock value was $1.5 million! She also was prudent and saved money through her employee retirement plan. The sum of this account exceeded $700,000. She looked at me and asked, “Is this enough for me to retire and keep my lifestyle?” Of course, we needed to perform our analysis and testing but offered her some probabilities that she would be simply fine in retirement.

The moral of the story is that time, once again, is the greatest impact on lifetime savings. Start early, be consistent with contributions and treat the account as your next income stream by never borrowing from the account for current lifestyle needs. Happiness for her was continuing to live in her home, travel to worldly destinations and help her grandchildren with college expenses. She, by thoughtfully planning, is still doing all the things that make her most happy in life.

Lastly, you must protect your health as you prepare for an active retirement. My father was one of those people that worked hard all his life and genuinely enjoyed his career. He suffered a heart attack in his early 40’s that opened his eyes to better care for himself so his future would be enjoyable. After finally retiring at 72 years of age, he has lived a wonderful life in retirement. He is reasonably healthy, has enjoyed cruises to Alaska and continues to do whatever he chooses to keep a smile on his face. 

His father, my grandfather, died in his early 60’s. I always told dad that he would need to take advantage of the opportunities to maintain his health so that he could break the average mortality for males in our family. He smiled that sheepish grin and said, “I am setting a new bar for the Williams men!” 

Exercise regularly, save consistently and find your happiness in life. By preparing prudently today, your tomorrows will be most enjoyable!

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More Than Numbers

Your personal physician gives you honest and candid information to help improve your physical health. A Certified Financial PlannerTM professional provides you the same type of consultation about your financial health. You are more than a number to a wealth advisor. Your family’s current financial state, future security and transition of assets are the focal points to a sound financial plan.

The basic level of fiscal management is the utilization of your annual household income in a manner that provides for your needs today while saving for your future. In a utopian world, we could simply spend all that we earn, and the retirement phase of life would be funded by someone else. The problem with this thought is that the “someone else” is you!

By applying guidance of cash flow management, your family will enjoy a lifestyle that creates happiness today. The physiological needs such as food, shelter and clothing are the very primal items that help your family simply survive. By appropriately allocating your resources to allow for current living needs and accommodating for your future will instill confidence in your capabilities.

While working through life, you become clearer on what you seek after your career. It is vital that you properly fund your retirement or the pleasure you see in all those vacation posters will evade you. Time value of money is an accounting concept that states, “a dollar today is worth more than a dollar tomorrow.” To maximize the probabilities of accumulating sufficient capital to fund retirement, it is critical to work with a wealth advisor to, first, determine what is the target amount of funds you should save and, second, what is the most efficient approach to saving these funds.

This approach is illustrated with our older daughter’s lifestyle. Our daughter is working in her first career position after graduating with her master’s degree. While helping her with a budget for this new paradigm she is living in, I will never forget her comment of “Wow! It takes too much money to live the way I wish.” After I realized she was being serious, I started the “dad talk” and reminisced about 1987, my first year out of college and working in my career. As her eyes rolled, I could literally hear her think – “Not another “back in the old days” story.”

After a brief discussion, I gave her the secret formula to accumulating wealth for the future while living a happy life today. In remarkably simple terms, invest 10% of your earnings for the future, give 10% away to qualified charities and/or church, invest 10% in yourself through education and other skill-building programs and, lastly, live on the remaining 70%. When she received her first performance bonus, she was so excited! The amount of money she earned was more than she had imagined. Immediately, she began talking about a new car or furniture for her townhouse. I interjected the 10/10/10/70 formula she is currently using to help her live an abundant life. After convincing her that she may not wish to expand her lifestyle with funds that are not consistent, she did something that made my chest swell with fatherly pride – she invested the money in her future

Do not assume that a Certified Financial PlannerTM professional only works with investments. Many of us possess expertise in behavioral finance and other psychological functions of wealth. Just like your doctor, we examine your total picture and provide advice and coaching to reach your highest goals in life in a manner that you choose. With a short conversation, you will discover that a wealth advisor is far more than numbers – you will find a lifelong advisor and friend.

It is an honor to share stories, tax laws and other financial information with you each week. Most importantly, it is critical that each of us share the blessings we possess with those in need. This Christmas Season focus your energy and resources on others and you will receive the most valuable gift on this planet – joy! 

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IRA Planning for 2021

The pandemic of the past two years has brought a tremendous amount of pain to many lives but there is a positive aspect in that dark cloud of gloom. One of the best attitudes, when performing tax and financial planning for your family, is to seize opportunities that are given you. In other words, capitalize on the negatives that impact your life and make the proverbial “lemonade from lemons.”

Many businesses are suffering net operating losses during 2021. If you are an owner of the business and the operation is conducted as a sole-proprietorship, partnership or S-Corporation, you may have a valuable tax saving asset in your future. The net operating losses of these entities are claimed on the tax returns of the owners. For example, if you were a fifty percent (50%) partner in a partnership that lost $100,000 in ordinary income for 2021, you would receive the benefit of $50,000 loss to be reported on your personal return. 

With your personal return reporting a loss, or much lower income than you otherwise typically report, your Traditional IRA is holding a great value in it beyond its balance. Consider the conversion of your Traditional IRA, in whole or in part, to a Roth IRA prior to the end of 2021. A taxable event will be triggered when the conversion is performed but your tax computation is based on your taxable income which, when claiming your share of the net operating loss, may be lower than your typical year sheltering the income from the conversion from taxation.

The purpose for converting your Traditional IRA to a Roth IRA is to change the future taxability of the account. You will be taxed on distributions received from the Traditional IRA in the future. The Roth IRA does not mandate required minimum distributions to you at age 72 as a Traditional IRA. Also, you may use the benefits of the Roth IRA to accumulate tax-free income streams from a very young age.

If you believe tax rates are going down in the future, you may wish to contribute to a Traditional IRA to enjoy the current tax savings. However, if you think tax rates will be higher in the future, you may wish to forgo the tax deduction of today and contribute to a Roth IRA.

Both types of IRA may invest in many different types of investments – stocks, bonds, mutual funds, etc. The structure and taxation of the two IRA types are the distinguishing benefits each allows for a taxpayer. The IRS continues to close loopholes such as “back door” Roth IRA conversions and other planning opportunities. 

To maximize your opportunities for most challenges in life, it is always an innovative idea to allocate your investments between qualified and nonqualified accounts. Qualified accounts such as IRAs and 401(k) plans are generally taxable upon distribution of the assets to the owner. However, nonqualified accounts such as transfer on death accounts and joint accounts pay taxes during the growth of the assets. When you wish to retire, the type of account may play heavily in your financial plan design.

IRAs are tremendous tools for tax planning. Don’t assume that you simply invest in the IRA every April to save taxes. There are so many other uses of IRAs for estate planning, gifting and lifetime income planning that are often overlooked. As retirement planning experts, we have witnessed a tremendous number of people who fail to maximize the benefits of IRAs. 

Proper allocation of your assets is necessary to stage a retirement plan that will serve you well in life. Seek out the assistance of a CERTIFIED FINANCIAL PLANNERTM professional to help you plan for the future that you wish to achieve. Remember, when you fail to plan, you plan to fail. Be the exception. Take a pragmatic approach to your lifetime of income and enjoy the best of life on your terms. See you on the walking trail! 

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Your Future Depends on It

Life consists of many different, and small, actions that create outcomes in a desired manner. This is a double-edged sword for many of us. Should we wish to purchase a new car or save for the future education of our children? Can we live in the current home or should be buy a much larger one?

The biggest challenge that American citizens face is one of priorities. Our country offers so much in potential personal and financial growth opportunities it becomes overwhelming for many people causing difficulties. Do I wish we had a different system than the current capitalistic markets? No way! However, I do wish to help people make more sound decisions with their hard-earned money.

An analysis of the savings rate, defined as the ration of money saved by individuals or families to their disposable income (income after taxes), reflects periods of time in which savings diminishes far below the required level to sustain the futures of the savers. Based on a review of the personal savings rate in the United States for the years 1960 – 2020, savings ranges were a low of 3.6% in 2007 and a high of 13.7% in 2020. 

The explanations for the differences in savings rates could be many different reasons – concern for the future due to the pandemic as in 2020 or loss of a job due to economic downturn effects. One obvious impact for savings is the need for short-term may be the purchase of large, durable goods such as cars, appliances for the home, etc. Savings for long-term needs may be for the purchase of a home, college education for the children, retirement funding needs as well as many other purposes.

According to research performed by Jack Caporal of The Motley Fool, 40% of Americans are afraid they won’t be able to retire because of setbacks caused by the pandemic. One method of mitigating the impact of economic emergencies beyond your control is save more money. I know, this is simply said and difficult to accomplish.

To reach your goal of saving more for the future, you must be honest with yourself and know exactly where you are today. If you are saving 3% of your after-tax income and wish to be saving 10% of after-tax income, this is quite a large difference in your lifestyle. One of the best means of saving for the future is the pre-tax contributions to your employer’s retirement plan. If you don’t receive the money in hand, the likelihood that your lifestyle will not conflate to a higher level is remote. My mother’s old adage of, “Out of sight, out of mind,” bears out this truth about money.

Second, record and analyze every penny of after-tax dollars that you spend over a two-week period. Earnestly think about the future and how you might be able to limit your spending in areas that aren’t positive in your life such as smoking or tobacco use. By saving the money he would have spent on cigarettes, my older brother informed me that he had an additional $3,118 in his savings and, as a bonus, felt better about himself. If that isn’t a win-win situation, I don’t know that I could think of one!

Cash flow management is the foundation to financial success. All things spring from the flow of cash and assets in our lives. Live your life as you wish; however, if you want to live longer, quit worrying about the daily costs of life and truly enjoy your senior years, you must start today. One of the best actions to start saving and stay focused on the long-term perspectives you wish to achieve is to seek out a coach or someone that can give you honest advice for your best interest. A CERTIFIED FINANCIAL PLANNER™ professional can help you plan for the best outcomes in your life. What you do today is critical for your life. Your future depends on it.

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Basic Economics; Complex World

There have been times when the world around us seemed like it was always a sunny day and when it wasn’t rainbows appeared boldly in the sky. Recently, most Americans are feeling isolated and anxious because of factors beyond their control. The pandemic has forced us to abruptly change our lifestyle from one of hope to one of despair and desperation.

I have some good news and bad news. First, the good news is that the world is never bad in and of itself. Your interpretation of the world’s events causes you to perceive your current situation as bad. The bad news is that many of us lack the will, vision and desire to turn the current events into positive ones.

One of my favorite pastimes is watching people. I don’t mean watching them for purposes of finding humor but rather to understand why and how they may be feeling about life. Too often the hard times are written on their faces, hands and the gait of their walk. Life has a method of breaking people based on outcomes from poor decisions. 

A young mother and her very small daughter were in a convenience store recently while I was purchasing gasoline for my car. As I watched the little girl, of maybe three or four years of age, relentlessly asking her mother for some food to eat, the resounding decline of her mother rang loudly in my ears. She was told that they didn’t have any money for food. As I thought about this situation, I quickly decided to act by purchasing some food and drinks for the little girl. When I reached the counter to pay for the food and hand it to the little girl, I noticed the mother was ordering cigarettes and slowly found the money to pay the attendant.

This simple, yet excellent, example of economics popped into my mind. When faced with a decision that impacted them both – the buying of food to eat – the individual purchased something that only the mother could utilize for satiation. Addictions of all types are experienced, and holding captive, too many people in world. Poor choices with money cause even greater harm to the family unit when more wholesome choices were obvious.

After asking the mother if I could give the little girl the food and drinks, I saw a smile radiate on the little girl’s face like the noon-day sun! The two of them made their way out the door and a stranger came up to me and, with a haughty tone in his voice, said, “I wouldn’t have bought them food! Didn’t you see her buy the cigarettes?” I smiled and simply replied, “For me, it was only economics and kindness to buy the little girl some food. For her, it was the difference between going hungry and losing hope. You see, we live in a complex world that functions on simple, basic economics.”

The moral of this story is that each of us has limited means. What we choice to do with this resource can be an investment (buying a little girl food to help and provide hope) or simply an expense (cigarettes). The former pays dividends many times over. The latter causes greater pain when the goods are used up.

Before making spontaneous purchases for items, you may not have the means to buy, think about the type of use of your funds. Are you making an investment or simply spending money? The difference is enormous.

It takes producers and consumer to maintain an economy. Next week we will investigate the savings rate in the United States and provide you some strategies to help you become an exponential, economic saver.

Until next week, be a help to someone in need. Help change their life by applying this simple lesson in economics. You will be the one who receives the dividends of goodwill!

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Primed and Ready to Spend

For the past year-and-a-half, scientists raced to develop effective COVID-19 vaccines and governments and companies worked to make vaccines available. Today, seven vaccines are approved in 176 countries. More than 2 billion doses have been administered, and about 14 percent of the world’s population has been vaccinated. It’s a remarkable achievement.

While there is a lot of work left to do, the Centers for Disease Control offered new and more lenient guidance for fully-vaccinated people in May, and restrictions across the country are being lifted. The result has been a surge in social activities we used to take for granted. According to the latest Axios-Ipsos Coronavirus Index:

“…Americans’ reemergence is moving full steam ahead. A majority have dined in a restaurant or visited friends and relatives in the past week – and these numbers continue to climb each week…At the same time, Americans are reporting small improvements to their mental and emotional health.”

One unexpected side effect of the pandemic is Americans spent less and saved more than normal. As a result, credit card balances are lower and personal finances have improved.

You know what they say about money burning a hole in your pocket.

Americans are ready to spend some of their savings. While some remain reluctant to venture far from home, others are ready to travel. The 2021 Summer Travel Index showed:

  • 63% of survey participants planned to take a trip in the next three months
  • 74% planned to travel in the United States
  • 13% will travel abroad
  • 29% have weekend jaunts planned 
  • 28% will be traveling for 10 or more days

People who aren’t ready to travel are spending, too. Morning Consult asked Americans what they were excited about doing as the economy reopens and found that 46% were ‘very excited’ to return to a ‘normal’ routine. The list of activities includes eating at a restaurant, socializing, attending parties or weddings, going to the movies, visiting amusement parks or museums, and attending concerts and sporting events.

While having extra money inspires many people to splurge, it’s important to keep a level head. Spending has risen sharply during 2021. According to the Bureau of Economic Analysis, spending increased:

  • 20.6% in January
  • 14.7% in February
  • 27.7% in March
  • 14.9% in April

While the idea of ‘revenge spending’ may be appealing, very few household budgets can withstand sustained increases in spending without significant increases in income. So, as you break free from pandemic restrictions, it may help to keep some basic principles in mind:

  1. Decide which savings habits you’d like to keep. During the pandemic, Americans saved a lot of money. The average household saved about $245 by not going out to eat, $1,400 by not vacationing, and almost $5,700 by not making major purchases, according to the Covid-19 & Finances Survey. Consider whether and how much to continue saving.
  2. Be aware of how much you are spending. When people have extra money saved, it’s just fine to splurge on something fun, especially after a long stretch of missing out on traditional everyday activities. Decide the amount to spend and then track how much has been spent. 
  3. Eliminate things that are not needed. During the last year, many people prioritized spending differently. Optional expenses, like dry cleaning, house cleaning, commuting, and happy hours, were eliminated. In some cases, the result was an increase in savings. Review your financial priorities to see if they have changed. 

Many people experienced financial insecurity during the pandemic lockdown. As a result, emergency savings accounts and other types of saving have become more important. If your financial priorities have shifted, be sure to talk to a CERTIFIED FINANCIAL PLANNER™. Spending less and saving more may help you build wealth and improve financial security.

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Managing Risk In Your Portfolio

Risk is one of the most difficult investment variables for individuals to control. All aspects of life have a risk component. A friend of mine attempted to prove his strategy for removing all risk was valid. He simply stated that he could bury his money in his backyard. When I reminded him, that thieves may discover his hiding spot, he may forget where he hid the money or environmental changes, such as a flood, may prohibit him from accessing his funds, he quickly withdrew his comment about safety.

When you invest your money in an investment account, the custodian bank will provide you coverage using membership in SIPC or the Securities Investor Protection Corporation. This type of insurance protects you in case of a bank failure in a similar process as FDIC, or Federal Deposit Insurance Corporation. Limits are higher for securities investors at $500,000 per investor and accounts insured under FDIC are limited to $250,000 per account. These coverages are only available if the custodian bank is insolvent.

Another form of risk is market risk. The probability of losing value in the markets may be reduced by implementing a systematic approach to investing. For example, a portfolio’s inherent risk will rise when the total investment positions within a portfolio consists of more equities than bonds or cash. However, based on the current economy of the United States, bond yields are below inflation. Simply put, your bond investments, particularly those that are rated investment grade or better, provide interest yields that will not sustain the purchasing power of your dollar. Gasoline, food and other necessary staples of life are rising faster in cost than bonds can create income.

To mitigate risk in your portfolio it is critical that you understand the purpose of diversifying your positions. Do not allow current market conditions to impact your allocation of investments within your portfolio. This action will lead to greater risk in your retirement assets than you may be willing to accept. 

Investment advisers utilize two methods of rebalancing portfolios to maintain an acceptable level of risk: 1) percentage and 2) time. When a certain asset class of a portfolio increases in value, the remaining asset classes lose the same percentage of their weighting. Remember, your portfolio is a pie chart. You can only have one hundred percent of the pie at any given time. If your equity positions increase in value by 10%, then remaining positions of the portfolio will have been reduced by 10%. The best means of reducing this increased risk level is to sell the equity positions back to their original percentage in the portfolio. This action is known as rebalancing based on asset allocation.

The second method of rebalancing is based on time. For example, rebalancing the portfolio based on set periods of time passing. Continuing with the previous facts presented about percentage of asset allocation rebalancing, the growth of the portfolio would cause you to rebalance to your original allocation every quarter, semiannually or annually. Again, you would sell the positions that are growing and buy the positions that have performed less. Keep in mind that you are controlling risk in the portfolio not simply maximizing return of the portfolio.

Investing is a long-term process. To create a portfolio that will meet your long-term needs such as retirement, you will need to consistently invest in a balanced portfolio that accepts the level of risk you wish to tolerate. Remember, nothing ventured, nothing gained. By consistently rebalancing your portfolio, whether using the percentage of asset allocation method or the time method, you may control the inherent risk within your investments at a level you feel is acceptable.

Managing your future is difficult. Seek out a CERTIFIED FINANCIAL PLANNER™ professional to guide you in establishing, monitoring and rebalancing your retirement portfolio to gain a higher probability of reaching your long-term goals. You may qualify for a complimentary stress test for your portfolio. To live the type of life you desire, without excessive risk, may just be the plan you need for success. See you on the jogging trail!

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Small Mistakes, Big Consequences

As humans, we make mistakes all the time. Some mistakes may relate to your career choice. Other mistakes may relate to the location of your home. However, some of us make, seemingly, small mistakes and don’t realize the impact the outcomes will bring to our lives.

Small mistake #1: Failing to save for retirement early in your career. When a person is 23 years of age, the future seems so distant. Their entire career is just launching from the starting gates of their recent college graduation and time is their friend. Fast forward twenty-five years and the person is looking at their future with a different lens. Kids, mortgage, car payments, and other living expenses caused by the choices made many years earlier has redirected their otherwise retirement savings to current expenses of life.

The obvious outcome is one that none of us wishes to realize – working until we are much older than we would prefer. By initiating your future savings at the beginning of your career, time and compounding of money will help you realize your financial goals later in life. Start with your employer’s plan and contribute at least the amount the company will match. For example, if your employer matches 5% of your salary then you should seek a goal of contributing 5% of your salary. The math is easy on this one. You will have doubled your contribution amount annually with the employer’s matching contribution. Let’s assume the markets treated you favorable and the investment in your employer’s plan grew by 8% for the year. Now, you can experience growth far beyond your 5% initial deferral from your salary. 

Small mistake #2: Failing to live within your means. A philosophy practiced in our retirement planning business is one of “pay yourself first” for our clients. You want to do things differently in your life than most of your friends – save first, spend second. What this means is that you will treat your retirement contributions as a priority before incurring and spending your earnings on current pleasures of life. Too often we experience clients that meet with us that have all the toys of the day but lack any liquid savings or future investments.

Maximize your probability for retirement success by implementing a budget and focus on “paying yourself first”. By taking a more realistic approach to your future, you will continue to enjoy life and enjoy it more abundantly when you retire. Of course, prudent investment selection and monitoring are critical during the accumulation phase of life. You may wish to seek the guidance of a Certified Financial Planner practitioner to initiate your plan and provide you annual feedback on your progress.

Small mistake #3: Allowing your credit card balance to remain unpaid after one month. This is something that too many of us fall victim to early in life and it is a difficult problem to solve if left unattended. Based on a survey performed by Nerdwallet in January, 2021, the average balance carried on a credit card is $7,149 and the U.S. household will pay interest charges of $1,155 on average for 2021. Further, the survey discovered 63% of the responses indicated that they feel their household finances have worsened from that of the previous year.

The best method of controlling the interest accruing on credit card balances is to remember the card is for emergency purposes only. Do not use a credit card for a purchase that can’t be paid in full with your current savings or income. To be obvious, the use of a credit card is a means to live outside your current means. 

To resolve this mistake, use a debit card that immediately withdraws the funds from your bank account. Another method of solving the credit card debt issue is to ask your credit card issuer to draft the full payment each month from your checking account. This is a critical step since you must be certain the funds are available for the payment each month.

Lastly, place your credit card in a small plastic bowl of water. Place the bowl in the freezer and leave it there for about 3 days. Remove the bowl and note the credit card is safely stored in a block of ice that requires thought and effort to free the card. I know this sounds silly, but it is effective for those people who are impulse buyers with their credit cards.

Don’t wait to improve your life by eliminating or resolving these three little mistakes from your life. Seek out a CERTIFIED FINANCIAL PLANNER™ professional to guide you in managing your cash flow to maximize your future savings. What have you got to lose? Worry, anxiety, stress, etc. See you on the golf course!

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Extra Time to Fund IRA For 2020

Whenever someone tells you something that seems too good to be true, often your presumption is correct. However, since 1974, individuals have enjoyed the opportunity to “keep their money and report a tax deduction” which seems too good to be true. Sure, there are some rules and caveats that must be observed to take the deduction but overall, the Individual Retirement Account (IRA) is a powerful planning tool for your future.

Many changes have been enacted that impact IRA investors. The basic premise of “having your cake and eating it, too” continues for these types of accounts. Due to the recent IRS announcement of postponing the original due date of individual returns, you have another month to contribute to your IRA and take a tax deduction for 2020. Further, if you live in a declared disaster area, such as the State of Oklahoma, the President’s declaration postpones the filing due date for individuals to June 15, 2021. Ultimately, you can fund your IRA on or before June 15, 2021, and take a tax deduction for 2020. 

Too many individuals fail to take advantage of IRA benefits. Some misconceptions are often the cause of this misunderstanding. Many people think they are too old to contribute to an IRA. The SECURE Act of 2019 eliminated the age limit for traditional IRA contributions. No longer are you limited to contributing to your IRA at age 70½. Many of our citizens continue to work during their retirement years. By earning income, the taxpayer may be eligible to contribute to their IRA until such time they no longer work. This is a game-changer for second career individuals!

Another misunderstanding is that single-earner family inability to contribute for the non-working spouse. Assume one spouse, age 30, is working outside the home while the other is caring for the children. If the working spouse earns income, and meets other criteria, she can contribute $6,000 to her own IRA and her spouse can make a spousal IRA contribution of $6,000 to a traditional or Roth IRA based on his spouse’s income.

One of the most common excuses or misconceptions I hear from individuals when talking about saving for their future by contributing to their IRA is that they simply can’t afford it. You are not required to contribute the maximum each year to your IRA to achieve tax benefits. Every dollar you contribute to your IRA is a possible reduction to your taxable income. A little unknown is of the tax law known as the Saver’s Credit may be helpful to you in reducing your tax burden. Lower income workers who make IRA contributions may claim the credit.

If you are single and earned $32,500 or less for 2020, you may qualify for this credit against your income tax burden. The maximum amount of credit is limited to the first $2,000 of your IRA contribution and you may claim a 50% credit for a maximum of $1,000 against your income tax liability. One of the best methods of teaching your children the power of investing and allowing compound interest to help them accumulate is the gifting of funds to their traditional IRA, or better yet, a Roth IRA.

Assume your granddaughter has landed her first job as a teenager and it pays her $10,000 for 2020. Being a wonderful grandfather, and noting this is an excellent teaching moment, you gift to your granddaughter $2,000 to her Roth IRA. She will receive a Saver’s Credit of $1,000 on her 2020 income tax return. 

Individual Retirement Accounts are powerful tools that can yield tremendous tax-deferred savings over time. Start early and teach your children the power of compound interest. Albert Einstein, the famous theoretical physicist, is reputed to have said, “Compound interest is the 8th wonder of the world. He who understands it, earns it… he who doesn’t, pays it.”

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The Millennial Perspective: Climbing Everest

Do you ever feel like the weight of the world is on your shoulders? Do you wonder how much of that weight may be lifted without the stress of growing debt? Me too! I’ve always said, “We live in America so we will always carry debt. That’s just the way it is.” But should it be? It doesn’t feel like the mindset I or anyone should have when looking at our lives. A vast majority of our country has some sort of debt. With all of the factors of life that affect Millennials differently than other generations, this can feel especially defeating.

If you combine the average student loan debt, credit card debt, mortgage debt, and car loan debt among millennials you’re looking at about $285,000 total. That’s a big, and kind of scary number. This isn’t to say that every millennial has debt in each of these categories. So, let’s break that number down. On average, millennials have about $30,000 in student loan debt, $5,000 of credit card debt, $232,000 in mortgage debt, and $18,000 of car loan debt. 

Let’s imagine you have debt in each of these categories. If you had a car loan with a balance of $2,000 with a low interest rate, the average amount of student loans, a credit card balance of $7,000 with a high interest rate, and you just bought a new home. Which of these debts would you want to pay down the fastest? Your first thought may be to pay the credit card off first because it has the highest interest. However, let’s imagine you have enough in your bank account to pay off your car immediately. Even though it has a lower interest rate, you are most likely paying more each month on your car payment versus your credit card payment. One of the best ways to handle this situation is to pay off the car and rather than adding the additional money you now have each month to your cash flow, stick to your budget and stack the extra funds on top of what you are already paying on your credit cards. Now you have eliminated one debt and you will be paying more on your principal balance of your credit cards and will be able to eliminate that debt much faster than you would have originally.

If you can continue to stack your debt, AKA snowball your debt, then you may find that a mountain that once felt like an endless Mount Everest now feels more manageable. Setting a plan to help you start that exhibition and properly manage your money is the key to success. There’s no need to change your entire budget and live off Ramen until your debts are paid. This is just one of the philosophies when it comes to paying off debt. Several others exist, but the important thing is to pick a plan and go. 

Living slightly below your means is a good way to pay off debts, but living very far below your means just because of debt may tarnish your quality of life and your relationship with money. Money is a means to an end, not the end all, be all. It is always wise to seek the advice of professionals, such as a CERTIFIED FINANCIAL PLANNER™ to help you create a plan that works for you and ensures you maintain your quality of life. You don’t have to be uncomfortable to be comfortable. 

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