January 7th, 2013
Should you get your investment advice from a couple of plumbers? I did and it turned into a wonderful career for me. Those plumbers were my grandpa and my dad.
Learn how I got introduced to investing at a very young age and how it has influenced my thinking about investing ever since by reading “Blogger Interview: Hourly Planner’s Michele Clark” at the Wealth Gathering website.
Michael Goldman at Wealth Gathering asked me some questions about;
- My professional background and why I didn’t stay in the traditional, commissioned-based brokerage firm environment. I have worked in a bank, bank brokerage firm, a full commission brokerage firm, and a full service discount brokerage firm.
- How does my family balance living in the moment vs. saving for the future. Such a great question, because it is the essence of financial planning.
- Who is your financial role model. I could have gone on and on with this one. I think I will do a future blog post of my own.
- And do I think everyone is capable of learning enough about personal finance to do it on their own. This answer may surprise you!
I know Michael through the Garrett Planning Network. He is like me, in that he owns his own financial planning firm. In addition he has the Wealth Gathering site which is so unique. It is designed to offer online tools, coaching, and peer support. It is structured like a financial fitness program. As you know, I am a fee-only financial advisor, so I do not receive any compensation from them, and am not affiliated with Wealth Gathering. If you have a chance to look at the interview, take a look around at the other information on the website. Especially considering this is the time of year that so many people are tackling financial To Do items.
December 12th, 2012
US News and World Report quoted me in their article “Your Retirement Benefits: What to Expect in 2013” on their website this week.
I shared my thoughts on 401(k) fee disclosures. 401(k) providers are required to disclose the fees for the plan. All things being equal, if two funds are simlar but one has lower fees than the other, choosing the fund with lower fees will allow the investor to keep more of their money invested for their future.
The article is full of information on a variety of topics. It covers information about changes to contribution limits, the Roth IRA income limit increase, the saver’s credit, the pension insurance limit for 2013, the increase in Social Security taxes (expiration of the tax cut), and Medicare premiums and coverage.
November 5th, 2012
What is so great about investing in an IRA or employer retirement plan? Tax deferral. You put money into the account and it grows, tax deferred, for many years. What does “tax deferred” mean? It means that the money is growing but you are not paying taxes on those earnings… yet. You have heard the saying “It takes money to make money.” The idea is that you can keep your money and use it to grow your portfolio, and later, when you take the money out of the account to use it, that is when you will pay the taxes. You “defer” the taxes until later.
Can I defer the taxes forever?
No. Uncle Sam thought he was being nice enough to let you defer the taxes, but he does want to get his hands on those taxes at some point. That is why there is a Required Minimum Distribution (RMD) starting at 70.5 years of age. Most people start taking money out before that, because they were saving their money for retirement after all. Even if you are taking money out of your IRAs, and other qualified accounts, make sure that you are taking at least the RMD, because there is a stiff penalty if you are not taking your Required Minimum Distribution or if you are not taking as much as you are supposed to take.
Required Minimum Distribution Penalty
The penalty for not taking your Required Minimum Distribution is 50% of the amount not taken or of the shortfall. Yes, you read that right, 50%. It is very important to take your RMD each year.
What if I made an honest mistake?
If, after the fact, you find that you have not taken your RMD and you correct the situation. Or you didn’t take enough, and you correct the situation, the IRS has a process for asking for the penalty to be waived, as long as it was “due to a reasonable error”, according to the IRS website. Keep in mind that does not mean that it will be waived. You can find information on www.irs.gov you will be filling out Form 5329 to try to qualify for the waiver, this is an instance where you might consider consulting a tax advisor.
Required Minimum Distribution (RMD) blog post series
Required Minimum Distributions generate many questions so I am creating a series of blog posts to address these questions:
June 29th, 2012
“We have a lot of cash in our savings account. Should we pay off our mortgage or invest the money for retirement?”
When you give financial advice “by the hour” you get asked questions like these. And the answer is… it depends.
It depends on;
* your attitude about owing money
* how much of a nest egg you have accumulated for your retirement because you will need cash to pay bills after you stop working and therefore stop getting paychecks
* what other financial goals you have and if you are on track to achieve them
* what interest rate you will pay on the mortgage and the assumed rate on the investments, and other assorted mathematical inputs
“Should we pay off our mortgage?” is a question that is more than a math calculation. After the math is figured, take it a step further and think about how you will feel during retirement with and without a mortgage payment.
No mortgage in retirement
I have never heard anyone say they regret paying off their mortgage. And there are ways to tap into a portion of the home equity if needed. However, many retired folks have shared with me that they wished they had been wiser in their approach to mortgage debt so they didn’t have a mortgage while retired. I have sometimes noticed during an initial meeting when I meet with a couple who have a mortgage, they seem more concerned about market fluctuation than other couples who do not have a mortgage.
Mortgage in retirement
There are a few couples that I can remember meeting with that have a mortgage in retirement and they were comfortable with it. They outlined the math in a logical way and how it made sense for them. They liked that it left them with more available cash in retirement. I agreed with them, that it seemed to work for them.
When to pay it off?
If your last mortgage payment is due after the day you would like to retire, jump on one of the many financial calculator websites and figure out the extra payment you would need to send each month in order to time your last mortgage payment with your retirement date. You might be surprised to find how little additional money needs to be sent in order to pay the loan off by your retirement date. How great would that feel? Be sure to call your mortgage servicer to be certain that you do not have a pre-payment penalty, pretty unlikely, but just in case. Make sure that you can still afford to make enough of a contribution to retirement accounts so that you can retire on time! And that you are able to save for any other financial goals that are important to you.
What not to do
What I think is unfortunate, is to see a young couple that has heard that it is good to pay off your mortgage sending every available dollar to the mortgage company – with no emergency fund! And they have not been saving in the company retirement plan, no savings for vacations or other goals. A balance is needed. Get the emergency fund created first! Then create a prioritized list of goals and send money to each based on your priority.
The mortgage problem
The mortgage problem of having a large mortgage when retirement time rolls around isn’t usually created with the starter home, it usually happens when people move up into a series of bigger and bigger homes or take out cash to remodel. That is when it is especially important to check to see if you can afford to pay the mortgage off by your target retirement date.
Write down the approximate date that you would like to retire.
Write down the date that your mortgage payment will be done.
If the mortgage will be done after you retire, satisfy your curiosity and find out how much extra you would need to send in to pay your mortgage off in time for retirement.
You could call your mortgage company and ask them. Or you could use an online mortgage payment calculator and the amount of principal left on your loan, how many months or years until retirement, the interest rate on your loan and find out for yourself. Just remember that the monthly payment it quotes you is just the principal and interest, if you have your taxes and insurance escrowed you would add that on top of the principal and interest.
Invest just a few minutes, and you could be on track to having your mortgage paid off in retirement.
June 8th, 2012
You might have heard that you need to keep your money in your retirement accounts until you are 59½ in order to avoid the 10% early withdrawal penalty tax, but did you know that if your money is in a work retirement plan, like a 401(k), that the you can take it out earlier and still avoid the penalty?
Exception to the rule
To quote directly from the IRS website explaining this exception to the 10% early withdrawal penalty tax:
“Distributions made to you after you separated from service with your employer if the separation occurred in or after the year you reached age 55, or distributions made from a qualified governmental defined benefit plan if you were a qualified public safety employee (State or local government) who separated from service on or after you reached age 50”
55 and separation from service
If you wait until the year you turn 55, then leave your employer, you can take money out of your 401(k) or 403(b) without the 10% early withdrawal penalty tax. You will still pay income taxes of course; Uncle Sam wants that part of your retirement account. And be careful, depending on the other income you have, the amount of income taxes you owe could be even more than has been withheld, so be sure to calculate quarterly estimated taxes so that you are not caught by surprise.
If you roll your 401(k) over to an IRA rollover account, you lose this “age 55 separation from service” exception, because it only pertains to employer plans, not IRA rollovers.
50 if you are a fireman or policeman
If you are a qualified public safety employee of the state or local government, such as a police or fireman, the age is even lower – 50 years old.
In general most folks need to work and continue saving their money until their mid to late 60s so that they can save enough to retire. But for those that have been strong savers and have learned to live well beneath their means, an early retirement is a possibility.
For a lot of folks who retire as early as 55, they have resources besides retirement accounts that they tap into, for example; from the sale of a business or money they have put into regular brokerage accounts over the years after they put the maximum contributions into their retirement accounts. If you don’t have money in non-retirement accounts that can get you through to age 59 ½, then the “age 55 separation from service” exception might be the solution for you.
Run the numbers
Only in a few situations would it make sense to tap into the retirement accounts as early as 55 years old. One situation that comes to mind, is in the case of someone who has maxed out their contributions in their work plan since the time they started working, and they have a balance in their current employer’s retirement plan that is large enough to live off of for a four or more years. They have run the numbers and have enough retirement assets to live off of, however they do not have enough in non-retirement accounts to live off of until they turn 59 ½, perhaps due to putting kids through college or paying off the mortgage.
Really check your numbers to make sure that you can afford to retire at 55, taking the impact of inflation into account. Inflation has a significant impact on retirement planning. Consider that starting to spend down your portfolio at such a young age, when you could easily live another 35 or 45 more years could jeopardize your financial future. However, if once you have done the analysis you can afford to retire early, then you deserve to enjoy what you have worked so hard for and this “age 55 separation from service” exception to the 10% early withdrawal penalty tax is one way to help you do that.
May 11th, 2012
So many new clients come to me already owning an annuity or several annuites, and they do not understand them or know what types of fees are in them. I went back through my e-mails to clients and looked through the types of questions I get about annuities and thought I would answer some of them here by explaining some of the concepts around annuities.
An annuity is a product offered through insurance companies. It is tax deferred, which means the income and earnings from the investment stay in the account and are not reported on your tax return each year. That is the good news. The bad news is that when you take the money out of the account, it is taxed at your income tax rate, which could actually be at a higher rate than the rate you would have paid if you hadn’t had your money invested in an annuity, depending on the type of annuity you have. However, the tax deferral is a nice benefit.
With a fixed annuity you get a specific interest rate for a specific time period. Sometimes you will get a higher rate for the first year and then a lower rate for the remaining years, but you know this when you make your initial purchase.
A variable annuity offers you the opportunity to invest in mutual funds. There are annuities that invest in multiple fund families, including index fund families.
This is an insurance product, so one feature, or “insurance rider” that some of these products have is something called a Death Benefit. Sometimes the Death Benefit value can be more than the Account Value. Each product’s Death Benefit works differently. Sometimes it is as simple as saying the Death Benefit is the greater of current market value or what you invest minus withdrawls. Or it might have a Step Up feature. For example each year on the anniversary of the purchase date the value is recorded and the highest annual value or current market value is the Death Benefit if you pass away.
One nice benefit to this type of product is that you are allowed to move from one insurance company to another without any tax consequences. Doing this is called a 1035 exchange (that is the IRS name for the procedure of moving the money, it seems like they put code numbers in the names of all of their procedures). If you cashed the money in you would have to pay taxes on the gains. If you just move it to another annuity, then you can continue to defer the taxes.
When looking at annuities be sure to compare fees. Fees are quoted in percentages. It is extremely important to convert the percentages to actual dollars based on the amount you are investing because when you do that you can sometimes see thousands of dollars of difference in fees between two annuities that when just looking at percentages seem to be pretty similar in fee structure. I would always rather see my clients with that money in their account rather than give it to an insurance company unnecessarily.
A surrender charge is a fee you pay the insurance company if you take your money out in the first few years after you have had the annuity. A seven year surrender charge schedule is very common, for example the first year surrender charge would be 6%, the second year would be 5%, and so on until the surrender charge went away. You might be surprised to know that there are annuities that do not have surrender charges! So if you have an annuity and you are in the position of having to decide what to do with it, you can 1035 exchange it to an annuity that does not have a surrender charge. Most people are not aware of that.
If you have an annuity that is an IRA, you can always move it directly to an IRA, and forgo the extra layer of fees that you find in an annuity. Things to consider before doing that: 1) are there surrender charges? 2) is the death benefit greater than the current value of the account?
Learn more about your annuity by reading the statement and the prospectus. If you don’t have the prospectus, many of them can be found online by Googleing the product name. If that does not work, give the customer service department a call, they will be happy to e-mail or mail you a copy of the prospectus which has the fee and investment information.
April 13th, 2012
The MOST – Missouri 529 College Savings Plan recently announced that they are offering a dollar-for-dollar match up to $500 per year per account up to a $2,500 lifetime maximum for qualified accounts. This is a privately funded grant, rather than funded by Missouri taxpayers.
Qualifying for the MOST – Missouri 529 College Savings Plan Matching Grant
In order to qualify for the matching grant, you must meet certain criteria. Quoting from the website www.most529grant.org :
* Applicant must be a parent or legal guardian of the beneficiary.
* Both you and the beneficiary must be Missouri residents.
* You must be the account owner of a MOST 529 account.
* The beneficiary must be 13 or younger (when you are first approved for the matching grant).
* Your household Missouri adjusted gross income must be $74,999 or less.
You must submit an application by June 30th. You will be notified by August 31st if you receive a matching grant. The matching funds will be applied to the account January 31st. You must reapply each year.
For details and to get the application, go to www.most529grant.org.
Saving for college
There is $125,000 available for the matching grant program per year over the next four years for a total of half a million dollars. With the high cost of college constantly in the news, and frequently on the minds of parents, this seems like a no brainer if you are a Missouri resident with a child under 13 and an income under $75,000.
College can be so expensive; it makes sense to create a nest egg to offset as much of that cost as you can. People are often surprised to learn how much small regular investments can grow to over time. If you save $40 a month (think of it as just $10 a week) for 18 years assuming 6% annual growth you would have $15,611 for college. Length of time invested is such a terrific boost to your investment, the longer you have the better. However – being invested is the most important factor. The key is to get started.
February 17th, 2012
As a financial advisor and the mother of two boys, making sure that kids understand real life money concepts is important to me. Habits around saving, investing, and philanthropy can be established when children are young. So I was pleased to share some ideas which were highlighted in two magazines recently. I was quoted in the January 2012 issue of Washington Family magazine in the article “Starting a Piggy Bank Teach Savings Early” and in the January/February 2012 issue of Calgary’s Child magazine in the article “Help Your Kids Be Money-Savvy.”
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