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Our advisors are here to give you more of the information you want, and the knowledge you never knew you needed.
Our advisors are here to give you more of the information you want, and the knowledge you never knew you needed.
Our advisors are here to give you more of the information you want, and the knowledge you never knew you needed.
Have you ever woken up one morning and decided to head out for a week’s vacation? It’s highly unlikely, as you usually have to plan for vacation including where you are going, how much money you are going to spend, transportation, and more. The same holds true for the success of your financial future – you have to have a plan which includes setting goals, constructing a budget, and creating an emergency fund. There’s also insurance protection and incorporating credit. You’ll need to understand how pre- or after-tax allocations, along with tax-deferred growth, can help you achieve your goals like saving for college and planning for your retirement.
Making your goals as concrete as possible will help you focus on what’s really important. A goal that’s well defined will be easier to visualize and easier to stick with. To set clear-cut goals, use the smart technique which is an acronym that stands for ‘Specific Measurable Attainable Relevant Timely’. A goal that is specific is one that’s clearly defined and describes, in detail, precisely what you want to accomplish. If you say, ‘I want to save for my kids’ college’, that is not a specific goal, but ‘I want to save the cost of four years by the time my daughter is 17’ is. With a goal that’s measurable, you should be able to track your progress and clearly know when you’ve reached it. For example, ‘I want to retire early’ is not measurable, but ‘I want to retire by my 55th birthday’ is a goal that has a definitive endpoint. An attainable goal is also realistic and reachable.
Goals are challenging, but you should have a fair chance of achieving them. ‘I want to save one million dollars in five years’ is not an attainable goal for most people but ‘I want to save one million dollars in 30 years’ may very well be attainable. A relevant goal is one that makes sense to you and that reflects your specific needs and your values. Goals that are relevant are goals you’ll be excited about because they’ll be important to you. For example ‘I want to save $25,000 for a down payment so I can own my own home’ is an example of a goal that might be relevant. You must be able to set a timeframe or a deadline for reaching your goal too. ‘I want to pay off my credit card debt by the end of next year’ is a goal that’s got a clear deadline. Writing down and prioritizing your goals is an essential first step towards putting that financial plan into action.
The first part of putting any plan into action requires you to control your flow of money and that’s what a budget is all about. A budget tracks your income and expenses and helps you direct the flow the way you want it to go. To construct a budget, first account for all of your income including your paycheck plus any income you might have from other sources like rental income or government benefits, interest on money you have in the bank, or investment income from that. You’ll need to subtract your expenses which can be broken down into two categories. Fixed expenses which are those you pretty much have to pay like rent or mortgage, car payments, insurance, utilities, groceries; while discretionary expenses are more optional items like eating out, entertainment, gifts, and vacations.
To get a better handle, keep track of expenses with a paper and pen or on a computer software program to really find out how much you’re spending. Remember that not all of your expenses will occur on a weekly or monthly basis. Some are seasonal like holiday gift expenses or home heating costs while others are occasional like car repairs or getting a cavity filled, and you might need to track those for quite some time to figure out what they average per month. Subtract your average expenses for a given period of time like a month from your income for that same period. If there is a positive number left, you’re on the right track, possibly even running a surplus which can be converted into savings or an investment for the future. However, if you get a negative number that means you’re in the red or running a deficit and you’re spending more than you’re making. The only thing that’s going to change that equation is either increasing your income or decreasing your expenses, or both.
Looking at the bright side, if you’re running a surplus, one of the first things you want to do with it is to create an emergency fund which is money that’s readily available to meet unexpected expenses. It’s really the foundation for any successful financial plan and without money to fall back on when an unexpected expense crops up, you may be forced to tap into savings that you’ve earmarked for something else like retirement or college. But if you have an emergency fund, it’ll be much easier to handle a job loss, a temporary disability, or other event that might prevent you from saving for the future or even tempt you to pile up more debt.
So, how much should you have in your emergency fund? A popular rule of thumb is you should have three to six months of living expenses, but the amount should actually depend on many factors such as:
• How stable is your income?
• Do you work in an industry where layoffs are common?
• Are you in a growing field?
• Do you have adequate health and disability coverage?
• Do you have other assets that you could tap without the emergency fund?
Where you keep your fund is also important as you’ll want to keep it in an account where it’s readily available, but you’ll also want to try to receive some interest on that as well. Rarely do you write one check equal to six or even three months worth of expenses, so you may only need part of that fund in something liquid like a savings or checking account. The balance of the fund could be held in something that could get you a better return while still available to be accessed within a day or two.
Another important part of a financial plan is identifying and managing the potential risk that can impact your finances. The value of insurance is that it’s cost-effective and it can mitigate or share the frequently overwhelming costs of various risks. Health insurance has now been replaced by health care plans which often provide basic coverage for common medical expenses like doctor visits, preventative care, diagnostic tests, and the like. Meanwhile, auto insurance has two main components: liability insurance and insurance for property damage. Liability insurance provides compensation to persons who would be able to sue you for personal injuries, medical payments, loss of earnings, or damaged property while property damage insurance includes collision and comprehensive which compensate you for damage to your car caused by another auto or by such things as fire, theft, and vandalism. Life insurance offers income replacement to your survivors and it provides a tax-free death benefit and can be used to pay for funeral expenses or even medical expenses
For many of us, our most valuable asset is our home. The most common type of homeowners policy in use today covers a variety of risks which can cause damage to your home and personal property, medical payments for injuries to occupants and to persons injured by accidents while in your home, and the loss or theft of personal property. Liability insurance is often the last line of defense against potential devastating claims for things over which you may have little or no control. It’s often called umbrella insurance because it’s carried over all other liability insurance and generally adds about a million dollars or more in extra coverage to your homeowners and automobile liability policies. If you couldn’t work for an extended period of time because of an injury or an illness, disability income insurance benefits can be used to preserve your independence, maintain your lifestyle, give you time to recover, provide a chance to retain for another job if necessary, and conserve your assets and savings for you and your family. Lastly, long-term care insurance pays benefits if you need extended care such as nursing home care. Like other types of insurance, long-term care insurance protects you against a specific financial risk – in this case, the chance that the need for long-term care would wipe out your savings.
Once you’ve established that emergency fund, you’ve insured yourself against certain risks and how to meet your normal expenses you plan to budget for. But sometimes you need more funds than your budget might cover at the moment and that is where credit comes in. However, don’t rely on credit to cover your normal expenses because if you do, it could lead to financial disaster. If you’re using credit to pay normal living expenses, it should be because it’s convenient to do so, not because you don’t have those expenses planned for in your budget.
Webster’s Dictionary defines credit as “the provision of money, goods, or services with the expectation of future payment”. When it comes to financing big-ticket items like a college education, a home, or a car, most of us will need some sort of loan and likewise, there are many times like shopping for Christmas or going on vacation, when it’s just most convenient to use credit to make purchases. But keep in mind the three C’s – creditors will want to know if you have the capacity to repay the credit they grant you, your income, and your expenses. Once they determine you can repay the loan, the next question is if you will repay the loan. They’ll look at factors that measure your stability like how long you’ve had the same job and lived in the same place and if you used credit before. They’ll also want to look at your repayment track record and whether or not you pay bills on time, particularly for loans of larger amounts like a car loan or a home mortgage. The creditor might also want collateral that is tangible property that secures the credit extended to buy it. If you default on repaying the loan, the creditor would be legally entitled to take possession of the property as a form of compensation.
Creditors determine your credit worthiness primarily by examining these three documents: the credit application, credit report, and credit score. Information gleaned from these three documents will not only determine whether you can get credit, but also what interest rate that credit will be offered at. When you’re granted a loan or use a credit card, you create debt. Some debts may be small like a minor purchase on a credit card and can be repaid quickly while others are large like a home mortgage or a student loan and may take years to repay. How well or poorly that you meet the repayment schedule for the debt will have an ongoing effect on your credit history and your credit score.
Debt can be divided into two types: secured and unsecured. Secured debt is backed by a lien on collateral. Examples include a mortgage or a home equity loan, a car loan or a secured credit card. Unsecured debt does not place a lien on any real or personal property to secure it. Examples of unsecured debt are personal installment loans, student loans, and most credit cards. When you think about taking on a debt, there are a few important considerations. The amount you borrow will have a big impact on the size of your payment, no matter what the term is that you have to repay it or the interest rate you’re charged. You’ll need to consider that when you review your budget when looking at an installment loan. The term of the loan is the length of time that you have to repay it. Generally, larger loans have longer terms while longer terms help make your monthly payment smaller. Remember that a longer-term is also generally resulting in a higher total interest payment over the life of the loan. Revolving credit accounts such as credit cards don’t have a fixed term for payment. Instead, a certain percentage of the balance is expected each month. The smaller that percentage is expected to be, the longer it can take to repay the entire balance. The interest rate you’re charged on a debt also affects the total interest you’ll pay on the loan meaning, the higher the rate, the greater the interest the charge will be.
When it comes to investing and the potential for accumulating wealth, it involves taking a certain amount of risk and it also involves the desire to multiply your money over time. When done properly, investing is a carefully planned and prepared approach to managing your money with a goal of accumulating the funds you need. Planning your investment strategy is really about discipline and patience. When it comes to investing, there’s a direct relationship between risk and return. In general, as the potential for risk increases, so does the return. Likewise, the less risk an investment has, the lower potential for return.
There are two key questions that determine your risk tolerance – first, how comfortable are you personally with taking risks? This depends on many factors including your financial goals, your life stage, your personality, and investment experience. Some investors are very comfortable with a high-degree of risk while others can’t tolerate it very much at all. There are also a lot of people somewhere in between. Secondly, the next question is, how well is your investment plan set up to handle potential losses? The more resilient your overall plan is when faced with losses, the more risk it might be able to take on. For example, time is a powerful ally so the longer you’re invested, the more flexibility that your investment plan might have to survive any setbacks. For example, if you have $20,000 to invest and you put $10,000 on a taxable account that earns six percent per year and you use a portion of these assets each year to pay taxes attributed to the accounts earnings and you put the other $10,000 into a tax-deferred account that also earns six percent a year, your taxable account would be worth $35,565. In the same amount of time, your tax-deferred account will have almost $57,000 in it. While the tax-deferred account might be subject to federal income tax when withdrawn, even if you took the entire amount in the tax-deferred account as a lump sum distribution after 30 years and paid all the tax on the full amount, you would still come out ahead.
For most people, the two biggest events that they need to save for are a college education for their children and funds for their own retirement. When it comes to saving for college, a potential Harvard graduate could still be in diapers but with the high cost of college, you’d be smart to start a systematic savings plan now. This is a 529 plan because it offers the advantage of tax-deferred growth and should be the cornerstone of any college savings program. It’s a savings vehicle that is governed by the federal government but offered by states. Anyone can open a 529 and there are actually two types: a college savings plan and a prepaid tuition plan. The college savings plan is the more popular type and is an individual investment account to which you contribute money. Your money is allocated to your choice of one of the plan’s investment portfolios which generally reign from conservative to aggressive. Returns aren’t guaranteed but funds can be used at any accredited college. Almost every state offers 529 savings plans and you can join any state as well. They’re also now being able to be used even for education pre-college as well. Meanwhile, a second type of 529 is a prepaid tuition plan. When you join this plan, you actually pre-pay for your child’s college tuition at today’s prices. The main benefit of the 529 is that your contributions grow tax-deferred and earnings are completely tax-free at the federal level when they’re withdrawn to pay the beneficiary’s qualified education expenses.
The other major life event you need to save for is your own retirement even if you feel you’re too far away from it. Many people assume they can hold off on saving for retirement and make up the difference later but this is a costly mistake. The further away from retirement you are means more time that your investments have to potentially grow. Waiting too long can make it difficult to catch up and only a few years can make a big difference. For example, if you invest $3,000 every year starting when you’re 20 years old and then retire at 65, you’ve accumulated almost $680,000, assuming a six percent annual growth rate. But if you start saving at 35 with the same amount of money, you only accumulate $254,000. If you wait until you’re 45, you’ll accumulate only $120,000 by the time you retire. This doesn’t mean there’s no hope if you’re 50 years old and you haven’t started yet, it just makes it all the more important that you implement a plan as early as you can.
Before you start planning for retirement, you need to ask yourself some basic questions:
• What kind of retirement do you want to plan for?
• When do you want to retire?
• How long will your retirement last?
Whether you see yourself on a golf course, a yacht, a hammock, or simply in your own living room, most people probably imagine some degree of financial independence. But the earlier that you retire, the shorter the period of time that you have to accumulate funds and the longer those funds need to last. Although you can retire at any time, most people wait until they’re eligible for social security benefits. You can’t start receiving those until you’re at least 62 and the earliest you can receive full social security retirement benefits is ages 65 to 67, depending on the year you were born. Also, if you’re not eligible for Medicare until 65 and you want to retire early, you’ll have to fund your own private health insurance as well. Keep in mind that life expectancy has increased at a steady pace over the years and it’s expected to continue to increase.
One of the best ways to accumulate funds for your retirement is to take advantage of special tax-advantaged retirement saving vehicles. Some of these, such as 401ks, can be very powerful saving tools because your contributions come out of your salary pre-tax, reducing your current taxable income and also grow tax-deferred until withdrawn. 401k plans can include an employer matching contributions which is a form of free money which should make them your first choice in saving for retirement. You might also be able to make Roth contributions to your 401k since they’re after-tax and not pre-tax. Roth 408 contributions don’t provide you with an immediate tax savings but they do allow you to make withdrawals completely tax-free under certain rules and retirement. Traditional IRAs like 401ks feature tax-deferred earnings growth and can lower your current taxable income if you qualify to make those contributions. And like 401k funds and traditional IRAs, they’re not taxed until you make the withdrawals. Roth IRAs and raw 401ks aren’t taxed at all when you get to retirement since these vehicles are intended to help you save for retirement. A ten percent penalty could apply if you take withdrawals before reaching age 59 and a half unless there are some exceptions.
Any complete financial plan should also involve estate planning. If you pass away and leave $50,000 in a savings account, where does your money go without instructions? Depending on who you leave it to, the money would go where your state’s intestacy laws direct it to go and they differ from state to state. The biggest issue with intestacy is that your actual wishes are irrelevant without an estate plan regardless of your wishes. Your estate would be divided between your spouse and your children. The intestacy can be particularly problematic for unmarried couples since intestacy laws generally will not include an unmarried partner in the distribution of property. To avoid that, you will need to create a will which is a legal document in which you will direct how your property will be dispersed when you die. It also allows you to name an executor who will carry out your wishes which are stated in your will. In addition, your will lets you name a guardian for your minor children. You can use your will to accomplish other estate planning goals as well, like tax planning. To be valid, your will must be in writing and signed by you and your signature must also be witnessed. These requirements are important because if you aren’t careful, your will could become invalid. An estate planning attorney can take care of this so you can avoid any of those easy do-it-yourself solutions.
It’s also important to discuss incapacity which describes a condition in which you are legally unable to make your own decisions. If you were to become the victim of an accident that put you in a coma for several months, how would your doctor know what medical treatments you would want or not want if you can’t speak for yourself? How would your personal business be transacted if no one is authorized to sign documents for you? A guardian, usually a close family member such as a spouse or child, would have to go back to court every time for permission. Without any prepared instruction, your guardian might make decisions that would be different from what you would have decided. However, these situations can be avoided with proper planning. Health care directives allow you to leave instructions about the medical care that you would want if the conditions of which were such that you couldn’t express your own wishes, while property management tools ensure that you can have your financial affairs taken care of for you in the event that you do become incapacitated.
Visit the RWS Group website at www.rwsgroup.org for more tips and resources.
If you’ve ever participated in or been a spectator at a foot race, you’ll know that when the runners turn that last corner and start their final sprint, the intensity definitely ratchets up. Known as the “home stretch”, during this critical stage, the last thing that a runner wants to do is stumble to the finish line that’s already in sight. Similarly, as you get to the point in your career where you can start to see the retirement finish line, you want to make sure you don’t stumble.
There are several things you need to do in the decade or so before you retire, which are:
• Determine when the time is right
• Take aim at your target
• Maximize your nest egg
• Get a portfolio checkup
• Create a strategy with social security
• Build a retirement income stream
• Look beyond the money
Taking a closer look, how do you determine when it’s the right time to retire? This critical question is not easy to answer. In fact, when Morningstar asked people in their 40s and 50s to estimate when they would retire, they noticed some surprising results. When someone thought they would retire at 55, the research showed that on average they were most likely to retire later than expected at age 58. This could be due to factors including the cost of healthcare, a smaller nest egg, or unpreparedness with possible unexpected or higher expenses than originally anticipated. On the other hand, for someone who thought they’d retire at 65, the research showed that they were most likely to retire earlier than expected at age 63. This may be a result of things like their own or a loved one’s poor health, unemployment, or on the positive side, meeting a retirement goal early. In all of the research, the common factor was found to be the age 61 and the adjustment was shown to be roughly a half a year for every year above or below 61. Meaning, anyone who thought they’d retire younger was drawn upwards towards 61 and those who plan to work longer were pulled back towards 61.
Ultimately, as you determine the right time to retire, it’s best to think of it as a guidepost versus an absolute. You may have to make adjustments as you’re confronted with life’s twists and turns along the way. Over the coming decade, you’ll encounter many important age-related milestones as well, from starting catch-up contributions at age 50 to taking required minimum distributions at age 72. By working together with a financial professional, you can determine how to prepare as you sprint towards that finish line in the home stretch of retirement.
One of the biggest questions that people have when they decide to retire is how much they need to do so. The general rule of thumb is that you’ll need to save enough to generate about 70 to 90 percent of your pre-retirement income. There are certain costs that are likely to go down once you retire. You may finish paying off your mortgage or you’ll spend less time commuting and dry-cleaning work attire. Many people also spend less on food because they finally have time to prepare meals. These reductions can be countered by other costs that go up in retirement including that many retirees are no longer covered by a workplace medical plan and even with Medicare premiums, co-pays could rise as you age and need more health care. Additionally, you may spend more on travel or if you spend more time at your home, your utility usage will probably go up, not to mention an aging home certainly will require maintenance.
While costs that go up or down once you retire may offset each other, there are two big things that likely reduce your paycheck while working that go away when you retire. First, you won’t need to pay social security and Medicare payroll taxes anymore. And secondly, you’ll no longer be saving for your retirement. But another rule of thumb is that you need enough retirement savings to generate a desired income. Using a four percent rule, there could be several different desired annual income amounts that once retired, you might want to generate. Assuming that when you retire, you’ve got your savings invested in something very conservative that returns about one and a half percent a year to provide the desired annual income amount for 20 years. Including yearly increases for inflation, you’ll need to have a minimum of this much saved when you retire instead of the 1.5 return. However, if you were able to invest your savings and get a 5 percent return, then the minimum amount you need to have saved when you start retirement is much lower. The higher return means that the total savings you need at retirement can be lower as you enter the “home stretch”.
Before retirement, you have the ability to save more than ever before. The U.S. government offers multiple tax advantaged options for you to increase your retirement savings. For example, a couple who are both 50 years old where the husband is an engineer and the wife is a retired teacher who do volunteer work together have a combined income of $150,000. When it comes to saving for retirement, one of the most common ways to do so is through a workplace plan like a 401k. Assuming that the working spouse participates in a 401k, a planned contribution of $19,500 can be made each year. In addition, many employers offer matching contributions with a common company match like 50 cents for every dollar up to six percent of the total salary which means up to $4,500 dollars of additional contributions each year. But if you participate in a workplace plan and are 50 or older, you can do what’s called a catch-up which means for the couple in the example, saving an additional $6,500 dollars per year in a 401k.
Many people also assume that if you participate in a workplace retirement plan, that you’re not eligible to save using a tax advantage individual retirement account or ‘IRA’. But if your income falls within a certain range, you can also participate in a traditional or Roth IRA even if you’ve already maximized your 401k contributions. Because the couple in the example is married and has an income of less than $206,000, the working spouse can contribute $6,000 to a Roth IRA. And just like the 401k, those 50 and older are eligible to make a catch-up contribution of $1,000 a year into their IRA . Additionally, another way to save is through a spousal IRA even if one spouse doesn’t work and hasn’t earned any income, the working spouse could contribute to an IRA on their behalf. Spousal IRA also has income limits, but if the couple’s combined income is less than $206,000, they can add $6,000 to a Roth spousal IRA for her and if the wife is 50, a $1,000 dollar catch-up contribution can also be made on her behalf.
As you get closer to retirement, it’s a good idea to get a portfolio checkup, especially as today’s workforce is more mobile than ever. In a 2017 report, the Bureau of Labor Statistics found that workers born between 1957 and 1964 switched jobs an average of 12 times by age 50. Today, the most common way people save for retirement is through a workplace plan like a 401k . In fact, the recent report showed that 71 percent of jobs include a 401k or a similar retirement plan and many of these retirement plans are structured with automatic enrollment as a way to increase retirement savings. It’s also estimated that over 60 percent of the plans will automatically enroll participants making it beneficial to consolidate any old retirement accounts. Likewise, multiple retirement accounts can make it challenging to get a clear picture of your overall asset. You might think you’ve got a good mix of stocks and bonds in your portfolio, but don’t forget about the accounts you left behind at prior jobs. If they were open when you were younger, they may be more heavily weighted towards stocks as that may have been an appropriate investment when the time was right back then. Lastly, while doing a portfolio checkup, confirm the beneficiary information on all your retirement accounts. If the accounts were established a long time, ago they may need to be updated with a new spouse, younger children, stepchildren, or even a trust.
Additionally, social security may now be a primary income source for retirees. It’s important to understand some of the basics of how social security works so you can maximize this program for your personal situation. One of the first things you need to know is your full retirement age or ‘FRA’ which is the age that you are eligible for full retirement benefits from social security and is determined by the year in which you were born. Regardless of your FRA though, the youngest age that you can receive retirement benefits from social security is 62. You can file for benefits anytime between 62 and 70. With the more time you wait, the more you’ll get the maximum amounts a person could receive in social security retirement benefits from age 62 to 70. Delaying the start of social security benefits would increase the amount monthly that you generate. However, to live on social security alone is not very feasible as you will likely need a combination of income from social security among other sources since there’s no such thing as a “retirement paycheck”.
To convert your retirement savings into an income or a paycheck, one basic strategy is to take your retirement savings and invest it into something that generates interest payments or dividends. One example is to invest the funds in money market accounts or CDs but these assets don’t actually offer much in return. In fact, a half-million dollar investment in a money market savings account would only generate about $58 a month, about enough to cover a bag of groceries. Meanwhile, one-year CDs are only slightly better, generating $83 a month. They might provide enough to pay a cell phone bill but neither of these investments historically generate enough for most people to live on. There are also other income generating investments that have offered higher yields and while these investments do come with additional risk, they also have historically provided significantly more income. Another strategy for creating a stream of retirement income is to take out systematic withdrawals where a small portion of your overall retirement portfolio is sold at regular intervals to generate income. In good months, you’ll sell fewer shares to generate your monthly income but in months where your retirement portfolio goes down in value, you will end up needing to sell more shares.
Every investment strategy has its pros and cons but using a portfolio of income-producing investments may help keep your nest egg intact by only distributing the income rather than your original retirement savings. However, many income-producing investments also vary in the amount they produce on a monthly basis. Creating a systematic withdrawal plan can help ensure that you’ll get consistent income each month, but this type of plan also runs the risk of eating into your original investment, especially when the markets drop.
The last thing you need to do before you retire may also be the most important: look beyond the money. Having money may make retirement easier but as the saying goes “Money doesn’t buy happiness”. Several studies have shown that the most important factors that determine happiness and retirement are health, friendships, and family. It’s important to take steps now to remain in good health like joining a gym, taking more walks, or practicing yoga. It’s been said that all the money in the world does not matter if you’re not healthy enough to enjoy it. Having strong friendships and good relationships with family has been shown to boost both mental and physical health. One study even showed that socially isolated individuals face health risks compared to those of smokers. That means that you don’t just need a retirement plan, you need a retirement living plan with longer life expectancy and better health during those later years. People can do a lot during retirement and new retirees often go through a phase of increased travel and leisure activities, giving themselves a reward for all their hard work. They also may spend more time on their favorite hobbies or do the things that they’ve always wanted to do but simply didn’t have the time before. In short, retirement is wonderful if you have two essentials: much to live on and much to live for.
As you sprint through the “home stretch” before retirement, consider working with a financial professional which can ultimately be one of the best investments that you can make. They can help you address the specific questions and needs you have for each of the seven must-do’s.
Visit the RWS Group website at www.rwsgroup.org for more tips and resources.
For many, the topic of social security can be viewed as very high level. But, to simplify it, there are certain requirements that need to be met before one is eligible to receive social security. You need 40 quarters worth of wages with the benefits then calculated off of the average of your 35 highest years of earning. In the last few years of your career, try to increase that income if possible because it will help increase social security benefits on the sustainability side.
In full disclosure, social security will likely change in the future in terms of how it operates so there are some slight things that the government can change to make sure that the social security income will continue to provide benefits to those in the U.S. It is widely speculated that changes will be coming down the pipeline including that the threshold for taxation on social security will likely increase and the age at which you can receive full benefits will continue to be pushed even higher. For example, the full retirement age for social security is currently 67 years old, a number that could possibly be changed to 70 in the future. Some of these slight changes can drastically improve the longevity of social security for Americans.
It’s important to grasp a basic understanding of social security including that ‘FRA’ stands for ‘full retirement age’. For example, if you were born in 1958, your full retirement age is 66 years old. It’s also crucial to know how much you’re going to be receiving which is called a ‘PIA’ or ‘primary insurance amount’. If you look at your social security statements, you’ll see your PIA on there. You are eligible to take social security prior to your full retirement age, i.e., if your full retirement age is 66 years old, you’ll receive 100 percent of your benefit at $2,000 a month. But that same individual could start taking social security as early as age 62 instead, thus receiving a lower benefit. You also have the ability to take your social security income later. So if you decide to defer social security, you can defer it all the way to age 70. You will receive 32 percent more in your monthly income by deferring it out. To recap, you can take your social security benefits before your full retirement age or after your full retirement age.
With that being said, there are some rules around making changes after you elect to take your social security income but once you do start, it’s generally what people will keep so they break even. For example, if you decide to take your income early at 62, your break-even point is 78 years old. If you take it at your full retirement, your break-even goes all the way out to 82 but at age 70, your break-even is 80. If you do start receiving money earlier, if you live a long life, you’re going to make less money. Therefore, it’s important to consider factors including:
• Your health
• Your family longevity
• Your family history
If your parents both live to be 100 while you and your siblings are all in great health as well, it’s advised to wait until age 70 to start collecting because you’re going to receive far more money in the long run. Back in 1960, the average life expectancy of a male was only 66 years old and for a female, that number was 73. But back then, you couldn’t collect social security income until you were 62 years old so people weren’t presumed to live to age 100. But fast forward to 2019, the life expectancy for a male is 84 years old and for a female, it’s 87. With people generally living much longer with a higher quality of life, some are going to end up being in retirement longer than their working years.
In 2019, 64 million retirees received social security benefits. That means almost half of those in the U.S. who collect social security have decided to collect it early. For those who do so and are still working, the government will withhold that social security income. But after you turn your full retirement age, you can collect social security and still can go to work and make as much money as desired. With that being said, if you are planning on retiring, choose your full retirement age as a good spot to start receiving social security income.
When it comes to taxes on social security income, it depends on an individual’s provisional income which is a combination of a modified adjusted gross income and half of the social security benefits being received. For instance, if you are married and your provisional income is between $32,000 and $44,000, half of your social security income can be taxable. But if your provisional income is more than $44,000, up to 85 percent of your social security income can be taxable. However, if tax rates do start to increase and you already have a pension or a large 401k or 403b and social security is also stacked on, the likelihood of you paying taxes on your social security income is fairly high.
Most people do not solely rely on social security income during retirement as it only makes up about a third of income, so many will turn to part-time or consulting work to still have money coming in. But as an investor and as a saver, it’s important to realize that living solely on social security income is not advised with the average payment being about $1,400 per month. To be proactive, it’s important to be open about your retirement budget and how much you want to spend in retirement. To do so, write it down to keep it top of mind where you can review it a few times a year. Also schedule regular check-ins with an advisor as things do change like moving, buying a new car, etc., so keep the plan up to date. Be sure to visit www.ssa.gov to create a username and password on the social security administration website to view your earnings along with your estimated social security income and your estimated social security disability. Remember that social security isn’t just about income, there are disability and benefits and other sectors.
Visit the RWS Group website at www.rwsgroup.org for more tips and resources.
With one in five Americans reportedly spending more time planning their next vacation than managing their own money, the statistic at first may seem shocking. But upon looking at one’s own life, many find this true for themselves, often prioritizing short-term versus long-term goals. Though retirement may seem far away, there are some things we can do today to help us tomorrow.
When we’re planning a vacation, we often ask a friend’s advice on where we should go or read reviews online or look up locations on Airbnb to see where the best deal is. We have action steps that we take for vacations, so why don’t we translate that over to our own personal finances? When it comes to retirement income, many of us might just assume that social security will do the work for us. If you’re not familiar, social security is a safety net that was set up many years ago to provide us with some level of income replacement in retirement. However, on average, only 40 percent of pre-retirement income will actually be replaced by social security, creating a big gap. This means that the rest of the money needed in retirement is now completely up to the individual. Some people may still have a pension through an employer, however, that number is also dwindling down. We need to focus on saving for ourselves – but, how do we get there?
Similar to planning a trip, there are certain steps that we should take to plan our “trip” into retirement and then through retirement itself. That means that there are two key questions that we want to ask ourselves:
• How much should I be saving?
• Where should I be investing?
Many people have probably thought about how much money that they should contribute to a retirement fund – should it be five percent of your income? Or 10 or 15? There are a lot of different numbers that you can find online now. To answer that, sometimes in the financial industry, if someone is saving 15 percent of their income, they’ll be dubbed a “super saver”. But, if you can’t start at this threshold, it’s important to just remember that as long as you begin saving, you’re already exuding the right behavior to strengthen that muscle.
When it comes to saving, here’s an example to remember that time is on our side. Anthony is a top-earner so if he were to save just six percent of his paycheck, once he turns 65, he’s going to receive an estimated $1,500 a month in retirement income. Opposite that, Sophia is a bottom-earner who has also started out by saving six percent of her salary but increased that savings by one percent each year until she eventually started saving 10 percent of her income. In retirement, Sophia will receive roughly $2,355 each month, making that an $842 difference above Anthony. Oftentimes, if you look at your own retirement plan, many employers have the ability for you to increase your retirement contributions automatically.
When it comes to where one should invest, understand what level of risk you’re comfortable with to better assess the different options that are available. Think of how much money you’ll have before you stop working and any other investments that you have to rely on. If you have a difficult time understanding or selecting investments, target date funds could be a great option. When you’re younger, the fund will be more growth-oriented but then as time goes by and you get closer to retirement, the investment automatically becomes more income oriented. It essentially acts as kind of a one-stop shop where you can just set it and forget it. Choosing a target date fund is simple – log into your 401k program or 403b program and use the calculator function. Enter the year you were born, add the number 65 (which is your retirement age) and then add those two numbers together and it provides a year for assumed retirement. For example, for someone born in 1981, they would have a 2045 fund which will likely be the closest to the year that they would retire.
As we take our journey through retirement, there are a few main points to consider. First, consider saving as soon as possible even if it feels stressful or difficult to do so. Make it a priority so if you start right away and save $200 a month for 40 years, for example, by the time you hit retirement, you can expect around $2,300 a month in income. But, if you wait another 10 years and start saving $400 for 30 years, even though you saved a lot more money, you’re only going to receive about $2,000 a month in income. Mathematically, if you save $200 each month for 40 years, that’s about $96,000 in savings. But, if you instead save $400 a month times 30 years, you have saved $120,000 compared to the person who saved less overall but actually had more money and income during retirement thanks to compounding interest.
If you watch the news or go on social media, we’re always hearing noise about concerns in the stock market, and many times, it’s often clickbait. However, if you’re a long-term investor, you do want to tune out that noise in order to stay focused for the long-term with day-to-day ups and downs in the market not mattering as much. If you do have that long-term approach, it will pay off in the end, i.e., for someone who invested $1,000 into the S&P 500 back in 1989, they would have had $18,000 saved up 30 years later in 2019, making it a fantastic rate of return even though throughout that time, we have seen drops in the market and great volatility.
It’s important to remember that the stock market is not a one-way elevator; it does not just go up. In the long term, investors typically are rewarded, however, we do want to take advantage of taxation as well, keeping in mind that any contributions that you make into a pre-tax 401k are there to help reduce your current taxable income and any gains are tax-deferred. Likewise, it’s also important to remember that there are a couple ways you can do this. Many plans will offer pre-tax and Roth (which is after tax) so it’s important to consult with a tax advisor to make this decision with added clarity because there are different tax ramifications for both. With that being said, if you are younger and don’t mind paying taxes today, a Roth might be the best option.
All in all, it’s important to remember a few things as you begin planning your journey to retirement, including:
• Contribute as early as you can and slowly increase that over time
• Make sure you choose those investments that match your risk and how much time you have until retirement
• Schedule a time to consult with your financial advisor to go through the different options
• Make a plan and stick with it
Oftentimes, it’s very easy to say that you’re comfortable taking a lot of risk because you want the reward, however, when the markets do have a downturn, it can be easier said than done. Make sure that you understand the risks going into it and hopefully, in the end, you will be rewarded by contributing as much as you can early on and by choosing those investments correctly and then sticking to that plan.
Visit the RWS Group website at www.rwsgroup.org for more tips and resources.
Michigan’s Largest Financial Educator is Now Providing Classes Statewide and in Ohio
DETROIT, Sept. 10, 2021 /PRNewswire/ — Whether working from home or in an office, one factor remains universal in today’s economy: financial stress. National statistics show that over half of all employees are stressed by their finances, translating into a loss of productivity and turnover within the workplace. Recognizing this, nationally trusted retirement and wealth strategies firm, RWS Financial Group, is partnering with the Association of Financial Educators (AFE) to offer free workshops throughout the state of Michigan and northwest Ohio to help employees get back on their best financial footing.
As the largest financial educator in the region with 13 locations including virtual, RWS Financial Group is hosting the classes in conjunction with AFE, a nonprofit organization that is focused on giving back to the community. AFE is also the top leader in providing free educational workshops to companies of all sizes throughout North America. Locally, the partnership provides attendees with the same trusted knowledge and tools that RWS has implemented in its over three decades in business. More than 150 different classes are offered that are designed to empower people to better manage their assets. Topics range from basic fundamentals like budgeting to more advanced including estate and wealth management.
The no-cost workshops are designed for all individuals including those living paycheck to paycheck to others looking to learn about market trends. Each course runs up to 45 minutes in length and can be conducted either on-site or virtually, at no cost to the company. For more information, visit www.rwsgroup.org/afe.
Registered Representative, Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and RWS Financial Group, LLC are not affiliated. This communication is strictly intended for individuals residing in the states of AL, AK, AR, AZ, CA, CO, CT, DE, DC, FL, GA, HI, IA, ID, IL, IN, KS, KY, LA, MA, MD, ME, MI, MN, MO, MS, MT, NC, ND, NE, NJ, NM, NV, NY, OH, OK, OR, PA, SC, TN, TX, UT, VA, VT, WA, WI, WV, WY. No offers may be made or accepted from any resident outside the specific states referenced.
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