Age Matters

Many of us think of retirement happening at the age of 65. It’s important to be aware of many decision points along the way.

Age 50: If you have an active retirement plan, be it a 401(k), an IRA, a 457 plan or others, you can add more funds every year than those under 50. (Known as the catch- up provision)

Age 55: If you have an employer sponsored plan like a 401(k) and you retire between 55 and 59½, you can take withdrawals from your plan without having to pay a 10% IRS penalty. These must be taken over the first five years and must be the same amount every year. It is tricky, so see a tax advisor.

Age 59½: Yay, no 10% tax penalty on withdraws from any of your retirement plans (except the Roth which you must have first funded five years previous). If you funded your retirement plan with pre-tax money, taxes are still due but no penalty for early withdrawal. Of course, if you have an employer sponsored plan and are still working, there may be constraints on withdrawals.

Age 62: The first age you are eligible to take a Social Security retirement benefit. This may be based on your own working record or that of your spouse, your ex-spouse or your divorced spouse. Be aware that if you start at age 62, your benefits will be lower and will remain low throughout your lifetime.

Age 65: Medicare Eligibility Enrollment into this health insurance starts three months before your birthday and continues for three months after for a total of seven months. If you miss this window, generally your premiums will be higher forever.

Age 67: This is the Full Retirement Age (FRA) for Social Security retirement benefits for those born in 1960 and later. For those born before 1960, it will be some age between 65 and 67. FRA is used as the age that the Social Security Administration decides the base of your benefit, and thus how much less it will be if you file for benefits before this age, and how much more it will if you start your retirement benefit after this age. Your benefit has a cost of living increase built in.

Age 70: Welcome to the age that your Social Security benefit is the maximum if you have not yet started. Every year you wait until your FRA up to 70 to start your benefit, it increases 8%.

Age 70 ½: The IRS has decided that now you must start withdrawing funds from your retirement plans. This is called the Required Minimum Distribution (RMD). Generally, the first year the withdrawal amount is about 3.5% of the funds, and that percentage increases every year. If you do not take your RMD, the penalty is hefty – 50% of what you should have taken out.

Mid-Year Tune Up

The year is half over which means it is an excellent time to do a little financial clean up and catch up!

401(k), 457 or 403(b) Contributions: Make sure you are on track to fully fund your employer sponsored retirement plan for 2019, especially if you have a company match. Who doesn’t like free money?

Take a little time to look at the options that are available and confirm they still work for your investment strategy.

If you want to put in even more than $19,000, check with your plan sponsor to see if you have a non-deductible, non-Roth contribution available to you. If so, this is a great addition and may be able to be converted to a Roth 401(k) with an in-plan conversion. As a reminder, these plans can only be funded through payroll contributions.

Retirement Plan Investments: Take a little time to look at the options that are available and confirm they still work for your investment strategy. No strategy? Use your retirement plan provider resources to help you to create an investment strategy.

Flexible Spending Account: As this account has a limit to the amount of funds you can carry forward to 2020, ensure you are on track to use all the funds you would have saved by the end of the year.

Open Enrollment: Find out when your open enrollment period begins. This is the time to compare health plans and choose the most appropriate one for you and your family’s needs. In addition, look at the flexible spending plan (FSA) and decide how much to contribute. A Health Savings Account (HSA) may also be available depending on your choice of health plan.

Non- Retirement Investment Accounts: You have probably been looking at your investment accounts recently and consider selling off some holdings that have lost money – not just this year but since you bought them. This loss can be used to offset any gains in investment accounts, drop your taxable income by $3,000 and even carry forward to 2020; if the loss is large enough.

Holiday Expenses: Get a jump start on saving for the holiday season by putting away a little money every month. Include in your budget not just gifts and decorations but anticipated entertaining costs, costs of traveling to see relatives or having them come to you and any other expenses you may incur. This way, you are more prepared for when December rolls around and you will not have the dreaded debt hangover in 2020.

Financial Planning for Women

Back in March we celebrated Women’s History month and now we at Financial Knowledge have more reason to celebrate.

Our new class Financial Planning for Women is live and available.

We all know that there are many financial challenges women face from longer life spans to family obligations so financial planning is especially important for women.

Help your employees become more informed financial consumers by signing up to be a Financial Knowledge client and offering this class (and many more) to your employees.

This new class is designed to help participants understand their money mindset, set financial goals, and create effective spending, saving, and debt reduction plans. Participants will also start planning for the long term through better understanding of investing and retirement planning.

Women are great long-term investors and more likely to stick to their plan. Everyone needs education on starting the process to financial independence and being financially worry free. Help your employees become more informed financial consumers by signing up to be a Financial Knowledge client and offering this class (and many more) to your employees.

Dividends and Capital Gains

When a company makes a profit, they can do one of three things: 1. Reinvest the profit back into the company, 2. Pay out the profit to shareholders in the form of a dividend or a combination of 1 and 2.

If the stock is in a non-retirement account, the quarterly dividends are taxable to you.

If you have dividend paying stock, you get a quarterly dividend. It will be pennies per share, and many pay the same amount every quarter. You have two options: 1. Reinvest the dividend, thus buy more of the stock or 2. Take the dividends as cash. Either way, if the stock is in a non-retirement account, the quarterly dividends are taxable to you. You are paying income tax on all those dividends every year.

Mutual funds holding stock, may also hold dividend paying stock. If this case, those dividends are passed on to you quarterly as a shareholder of the mutual funds. Some funds hold exclusively dividend paying stock while others have a mix. Again, you have the choice of reinvesting the dividend and buying more of the mutual fund or taking the dividend in cash. You will be paying tax on the dividends received if the fund is in the non-retirement account, no matter what your choice.

Mutual funds also have a capital gains pay out, normally in December. This happens when the fund management team has decided to sell a stock that has had a gain. That gain is handed on to you as the shareholder. It is a capital gain, not from you personally selling a stock or the mutual fund, but the fund itself selling a stock holding. Paying out a capital gain does not mean the fund’s value has increased.

With a capital gain from a mutual fund, you again have the choice of reinvesting it back into the fund or taking it as cash. You are taxed on the gain, no matter which decision you make if it is a non-retirement account.

In a retirement plan, dividends and capital gains are generally reinvested, buying more stock or mutual funds. Even if they are paid out in cash, no tax is due until money is withdrawal from the retirement plan.

No matter what you decided to do with your dividends or capital gains, remember that in a non-retirement plan, you will be paying taxes on that income.

June is Pride Month!

June is the traditional month to celebrate all things LGBTQ in the US. There are generally parades, followed by gatherings with rainbow paraphernalia, health and wellness information, good food, live music and most important – mingling with friends and family to show support for the community.

Financial Knowledge is proud to debut our latest class: “Financial Planning for Same-Sex Couples.”

In honor of Pride Month this year, Financial Knowledge is proud to debut a new class: “Financial Planning for Same-Sex Couples.” Whether you are married or not, our class covers important information on naming beneficiaries, starting a family, keeping the family together and creating an estate plan.

The world is changing and can still be unkind. This wonderful class empowers same-sex couples to protect themselves, their family and what is important to them.

In the immortal words of the bard of our time, Lin-Manual Miranda, “Love is Love is Love is Love….” Whether you are in San Francisco, New York City or Columbus, show the love by attending a parade, offering this class to your employees, and supporting your own friends and family.

How Much Are You Worth?

One of the first things a professional financial planner does with a client is to create a balance sheet or statement of net worth.  You can do this yourself!

List all your assets including your retirement plans, your investment accounts, your home, personal assets, vehicles, bank accounts, cash in life insurance policies, cash under the mattress, value of jewelry, and anything else you value as a financial asset. 

Then, list your financial liabilities (debts) such as mortgage, credit cards, student loans, car loans and personal debts. The difference is your financial net worth. This is the number you want to grow every year.  The goal is to have your debts decrease and the value of your assets increase.  Updating this on a annual basis is an excellent idea. Get started today!

Updating a Will

Once in while it makes sense to review your will. Why? A will is not just a do once, pay the attorney, stick it in a drawer and forget it situation.

Families change as grandparents or parents pass on, divorces happen, children are born and beneficiary needs change. There are many reasons to pull out your will and make updates:

  • Minor children (under 18) become major adults (18 and older)
  • Friends move out of town or out of your friendship circle
  • You have moved to a different state or a different state of mind
  • The person you named as Executor when you wrote (executed) your will may no longer be able to perform the duties when you pass on
  • The charity you named no longer meets your expectations
  • A child or grandchild requires their own trust now – maybe a Special Needs Trust or a Spendthrift Trust
  • You no longer own an asset you were leaving to a beneficiary
  • The value of your assets have changed dramatically
  • A remarriage means a blended family with different needs
  • Your beneficiaries no longer need your assets
  • Your “I love you” will no longer is relevant

There are so many reasons. Spring is often a good time for cleaning out which may mean taking a look at things you have done in the past and making sure they are still relevant now.

Does your will reflect your wishes now? If not, it is time to update.

Are You Estimating Your Retirement Income Annually?

It is good to run a retirement calculator annually, and more often if you are close to retirement aka financial independence.

Most retirement calculators work in a similar fashion. You go onto a financial services site; your 401(k) provider, brokerage, bank or even AARP and enter information:

  • your date of birth or age and perhaps your name
  • when you would like to retire, either a year or an age (Some plans will automatically use 65)
  • Your current income 
  • The income you will have in retirement– Enter all income sources expected in retirement, including rental income, social security and pensions.  Make sure you have already visited to get an estimate of your social security income.
  • Enter the assets you will be using in retirement– Examples would be your 401(k) from work, IRAs, stock, bank and brokerage accounts.  
  • How those funds are invested – in broad brush strokes such as percentage stocks, bonds and cash. 
  • Lastly is your mortality age – how long do you want the money to last? Which is generally your death, euphemistically called “end of plan.”

Next you will click on the button at the bottom that says “Calculate” or something similar. 

The output, depending on the plan, will give you red light (you need to make changes), amber (consider tweaking some things) or green (good to go with the current plan. It may also give you a percentage of success for reaching your goal. 

Here are the things you can change:

  • How much you save
  • How you invest those retirement savings
  • When you will be retiring 
  • How much you will be spending in retirement
  • Your mortality age (make sure you run out of time rather than money)

Most plans build in an inflation rate of 4-5%, which you can also tweak. They use Monte Carlo Simulation to back test how well your current portfolio would have done in the last 90 years of investing. 

It is good to run a retirement calculator annually, and more often if you are close to retirement aka financial independence. It is even better if you try three to confirm the results. 

We wish you a happy, healthy and wealthy retirement!

Do You Pay “Foolish Tax?”

We all pay taxes, whether it is sales tax, income tax, self-employment tax, property tax or capital gains tax, to name a few. However, some of us also pay Foolish Tax. You know the one: where you do something foolish and have to pay money to fix the mistake. Don’t read the parking sign and park in a residential district that is not yours? $50 Foolish Tax. Forget to pay a bill even though you have the money? Boom! $25 late fee of Foolish Tax. You turn suddenly with coffee in your hand and spill it on the person behind you. Instead of the romantic meet and greet, you get Foolish Tax of a dry-cleaning bill.

There are a couple of ways to account for Foolish Tax when you are looking at your finances.

Why do we talk about this? When you are creating a Spending Plan (aka budget), it is important to include money for those unexpected items. It could be you expect the costs next year like buying new tires but get them this year because you ran over a curb (true story). Foolish Tax.

There are a couple of ways to account for Foolish Tax when you are looking at your finances. The first is to have an emergency reserve to withdraw from for Foolish Tax payments. An emergency reserve is generally three to six months of expenses in case of a job loss, a financial emergency, or having to pay Foolish Tax. Think of it as a bucket of water in the corner that you fill up drop by drop and occasionally have to dip into. When the bucket is full, there is no need to add to it, but it should be maintained and kept in a safe place.

The second way to account for Foolish Tax is to build it into your Spending Plan. Whether you call it Miscellaneous, Foolish Tax or any other name, it is always good to have some cushion in your spending plan for items that may cost more than you expect or for things you don’t expect.

We all pay Foolish Tax during parts of our lives. Although you can take steps to minimize it (thoroughly read parking signs, pay bills on time, or drive carefully), paying Foolish Tax is part of being human.

April 22nd is Teach Your Child to Save Day

Life is full of teachable moments especially when it comes to children and money. April 22 is Teach Your Child to Save Day, a special day to encourage your children to develop good financial habits early.

It is important for children to know how you make your money and the sacrifices you might be making to get them what they want, all without making them feel bad or guilty.

Teaching children about money need not be a daunting task. Try to use cash when you shop with them. Let them see the money and have them use cash to buy their own purchases. When they spend their own money, have them count back the change. Discuss that the bank is where you keep the money until you take it out of the ATM.

Pay them in cash for their allowance and talk about having the bank (piggy or otherwise) take care of the money they are not spending. Encourage them to save, perhaps using the ATM or going into the bank to put money into their own account. This is how they learn to budget their own money – when they hear you talk about monthly savings towards a goal, they too can do that.

Discuss the cost of items they want with them. The cost of a game for the Xbox or monthly internet fees should be something they are aware of especially as tweens. It is important for children to know how you make your money and the sacrifices you might be making to get them what they want, all without making them feel bad or guilty. If they want something outside of their budget, a parental loan may be suitable along with a
payment agreement.

Planning and taking a vacation provides lots of fodder for teaching children about money. It is great to have the trip to Tahiti to play in the sun or the drive to camp at a National Park during summer. If your vacation decisions are based on cost, share that concern with the children to the best of their understanding or how fortunate you are to be able to take the vacation of their dreams. You want to avoid having them worry about money – that is the job of the adult.

Do you remember your first paycheck? That knowledge that you can make your own money using your abilities? It is important that your children also learn that amazing feeling. Yes, it might be minimum wage, but it is theirs and everyone starts somewhere. Share with your children how you started on the working ladder and have their grandparents also tell their story. It helps children to know that it takes time, knowledge and expertise to reach financial well-being.

As you wave your children off to college, they may have taken out a loan to get there. Now they feel rich. And now is the time to discuss loan payments and using the loan for the school expenses it is designed for. Adult children often stay on the parental payroll through cell phone plans, and health and car insurance plans. Often, they are not aware of those costs. Without making them feel guilty, it helps for them to understand the costs of standing on their own and being an adult. You had to learn, and your lessons will help them.