As summer quickly approaches we all see the increased ads for getting that summer body bathing suit ready. Now, the target for these ads of course is to sell diet programs, gym memberships, and appeal to the psychology of self-image to make you act now! What if I told you there is a financial advantage to maintaining a healthy physique?
As the cost of a college education continues to climb, many grandparents are stepping in to help. Helping to pay for a grandchild's college education can bring great personal satisfaction and is a smart way to pass on wealth without having to pay gift and estate taxes. So what are some ways to accomplish this goal?
Tax planning for small-to-medium sized businesses is crucial, but often underutilized. We show business owners how to leverage tax planning opportunities to pay for their retirement.
The Tax Cuts and Jobs Act legislation was signed into law on December 22, 2017. The Act makes extensive changes that affect both individuals and businesses. Some key provisions of the Act are discussed below. Most provisions are effective for 2018. Many individual tax provisions sunset and revert to pre-existing law after 2025; the corporate tax rates provision is made permanent. Comparisons below are generally for 2018.
Individual income tax rates
Pre-existing law. There were seven regular income tax brackets: 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.
New law. There are seven tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. These provisions sunset and revert to pre-existing law after 2025.
If you are like most investors you probably have a long position in the stock market. Your portfolio goes up and down with the market. Your investment returns are relative to stock market returns and probably adjusted for some risk measurement like volatility based on your age and risk tolerance. If this is the case you have probably experienced some nice gains with your investments over the past few years. After all, we are technically in a 9-year bull market!
Today the markets are considered to be expensive and by most measurements, they are. For example, the S&P 500 has a cyclically adjusted price-earnings ratio of 30.05 as I write this. The long-term average is 16.77 and a year ago it was at 26.69. Only 3 times in market history has the S&P 500 been this expensive based on that measurement.
That doesn’t mean they won’t remain expensive for years to come, but many investors are looking for ways to minimize their losses if markets do “revert to the mean” and drop back to historical averages. There are several ways to do this like moving your investments to cash or selling short, but who wants to do that?
Luckily there are ways to protect your portfolio without having to sell your current investments. After-all, we want to keep our good investments for long periods of time and remove “timing” risk from our portfolios as much as possible. This is why I want to show you how buying “puts” on an index or an S&P exchange traded fund like SPY can reduce your portfolio losses when markets go down while allowing you to keep your favorite investments for the long run.
Exchange-traded funds (ETFs) have become increasingly popular since they were introduced in the United States in the mid-1990s. Their tax efficiencies and relatively low investing costs have attracted investors who like the idea of combining the diversification of mutual funds with the trading flexibility of stocks. ETFs can fill a unique role in your portfolio, but you need to understand just how they work and the differences among the dizzying variety of ETFs now available.
What is an ETF?
Like a mutual fund, an exchange-traded fund pools the money of many investors and purchases a group of securities. Like index mutual funds, most ETFs are passively managed. Instead of having a portfolio manager who uses his or her judgment to select specific stocks, bonds, or other securities to buy and sell, both index mutual funds and exchange-traded funds attempt to replicate the performance of a specific index.
However, a mutual fund is priced once a day, when the fund's net asset value is calculated after the market closes. If you buy after that, you will receive the next day's closing price. By contrast, an ETF is priced throughout the day and can be bought on margin or sold short--in other words, it's traded just as a stock is.
Myth: Social Security will provide most of the income you need in retirement.
Fact: It's likely that Social Security will provide a smaller portion of retirement income than you expect.
There's no doubt about it--Social Security is an important source of retirement income for most Americans. According to the Social Security Administration, more than nine out of ten individuals age 65 and older receive Social Security benefits.
When investing for retirement, you're likely to hear a lot of well-meaning guidance from family, friends, and others offering advice--even the media. As you weigh the potential benefits of any commonly cited investment rules, consider that most are designed for the average situation, which means they may be wrong as often as they're right. Although such guidance is usually based on sound principles and may indeed be a good starting point, be sure to think carefully about your own personal situation before taking any tips at face value.
Following are several general retirement investing rules and related points to consider.
Pay yourself first
It's hard to argue with this conventional wisdom, which helps make saving a habit. To determine how much you may be able to save and invest, develop a written budget. In this way, you can assess how much discretionary income is available after other necessary obligations are met.
If finding extra money to save is difficult, track every dollar you spend for a week or two to see where your money goes. You may surprise yourself by identifying several areas where you can cut spending.
Better yet, most employer-sponsored retirement savings plans help you pay yourself first through payroll deductions. This is perhaps the easiest way to save money. Having the money automatically deducted from your paycheck and invested in your plan eliminates the temptation to spend before you save.
Your stock allocation should equal 100 (or 120) minus your age
A widely accepted retirement savings principle states that the younger you are, the more money you should put in stocks. Though past performance is no guarantee of future results, stocks have typically provided higher returns over the long term than other commonly held securities. As you age, you have less time to recover from downturns in the stock market; therefore, the principle states, as you approach and enter retirement, you should invest some of your more volatile growth-oriented investments in fixed-income securities such as bonds.
If you've lost your job, or are changing jobs, you may be wondering what to do with your 401(k) plan account. You may even have an old 401(k) with a previous employer, either way It's important to understand your options.
What will I be entitled to?
If you leave your job (voluntarily or involuntarily), you'll be entitled to a distribution of your vested balance. Your vested balance always includes your own contributions (pretax, after-tax, and Roth) and typically any investment earnings on those amounts. It also includes employer contributions (and earnings) that have satisfied your plan's vesting schedule.
In general, you must be 100% vested in your employer's contributions after 3 years of service ("cliff vesting"), or you must vest gradually, 20% per year until you're fully vested after 6 years ("graded vesting"). Plans can have faster vesting schedules, and some even have 100% immediate vesting. You'll also be 100% vested once you've reached your plan's normal retirement age.
It's important for you to understand how your particular plan's vesting schedule works, because you'll forfeit any employer contributions that haven't vested by the time you leave your job. Your summary plan description (SPD) will spell out how the vesting schedule for your particular plan works. If you don't have one, ask your plan administrator for it. If you're on the cusp of vesting, it may make sense to wait a bit before leaving, if you have that luxury.
Even before your children can count, they already know something about money: it's what you have to give the ice cream man to get a cone, or put in the slot to ride the rocket ship at the grocery store. So, as soon as your children begin to handle money, start teaching them how to handle it wisely.
Giving children allowances is a good way to begin teaching them how to save money and budget for the things they want. How much you give them depends in part on what you expect them to buy with it and how much you want them to save.
Some parents expect children to earn their allowance by doing household chores, while others attach no strings to the purse and expect children to pitch in simply because they live in the household. A compromise might be to give children small allowances coupled with opportunities to earn extra money by doing chores that fall outside their normal household responsibilities.
When it comes to giving children allowances:
- Set parameters. Discuss with your children what they may use the money for and how much should be saved.
- Make allowance day a routine, like payday. Give the same amount on the same day each week.
- Consider "raises" for children who manage money well.
Owning a home outright is a dream that many Americans share. Having a mortgage can be a huge burden, and paying it off may be the first item on your financial to-do list. But competing with the desire to own your home free and clear is your need to invest for retirement, your child's college education, or some other goal. Putting extra cash toward one of these goals may mean sacrificing another. So how do you choose?
Evaluating the opportunity cost
Deciding between prepaying your mortgage and investing your extra cash isn't easy, because each option has advantages and disadvantages. But you can start by weighing what you'll gain financially by choosing one option against what you'll give up. In economic terms, this is known as evaluating the opportunity cost.
Here's an example. Let's assume that you have a $300,000 balance and 20 years remaining on your 30-year mortgage, and you're paying 6.25% interest. If you were to put an extra $400 toward your mortgage each month, you would save approximately $62,000 in interest, and pay off your loan almost 6 years early.
By making extra payments and saving all of that interest, you'll clearly be gaining a lot of financial ground. But before you opt to prepay your mortgage, you still have to consider what you might be giving up by doing so--the opportunity to potentially profit even more from investing.
To determine if you would come out ahead if you invested your extra cash, start by looking at the after-tax rate of return you can expect from prepaying your mortgage. This is generally less than the interest rate you're paying on your mortgage, once you take into account any tax deduction you receive for mortgage interest. Once you've calculated that figure, compare it to the after-tax return you could receive by investing your extra cash.
For example, the after-tax cost of a 6.25% mortgage would be approximately 4.5% if you were in the 28% tax bracket and were able to deduct mortgage interest on your federal income tax return (the after-tax cost might be even lower if you were also able to deduct mortgage interest on your state income tax return). Could you receive a higher after-tax rate of return if you invested your money instead of prepaying your mortgage?
Keep in mind that the rate of return you'll receive is directly related to the investments you choose. All investing involves risk, including the possible loss of principal, and there can be no assurance that any investment strategy will be successful. Investments with the potential for higher returns may expose you to more risk, so take this into account when making your decision.
Other points to consider
While evaluating the opportunity cost is important, you'll also need to weigh many other factors. The following list of questions may help you decide which option is best for you.
- What's your mortgage interest rate? The lower the rate on your mortgage, the greater the potential to receive a better return through investing.
- Does your mortgage have a prepayment penalty? Most mortgages don't, but check before making extra payments.
- How long do you plan to stay in your home? The main benefit of prepaying your mortgage is the amount of interest you save over the long term; if you plan to move soon, there's less value in putting more money toward your mortgage.
- Will you have the discipline to invest your extra cash rather than spend it? If not, you might be better off making extra mortgage payments.
- Do you have an emergency account to cover unexpected expenses? It doesn't make sense to make extra mortgage payments now if you'll be forced to borrow money at a higher interest rate later. And keep in mind that if your financial circumstances change--if you lose your job or suffer a disability, for example--you may have more trouble borrowing against your home equity.
- How comfortable are you with debt? If you worry endlessly about it, give the emotional benefits of paying off your mortgage extra consideration.
- Are you saddled with high balances on credit cards or personal loans? If so, it's often better to pay off those debts first. The interest rate on consumer debt isn't tax deductible, and is often far higher than either your mortgage interest rate or the rate of return you're likely to receive on your investments.
- Are you currently paying mortgage insurance? If you are, putting extra toward your mortgage until you've gained at least 20% equity in your home may make sense.
- How will prepaying your mortgage affect your overall tax situation? For example, prepaying your mortgage (thus reducing your mortgage interest) could affect your ability to itemize deductions (this is especially true in the early years of your mortgage, when you're likely to be paying more in interest).
- Have you saved enough for retirement? If you haven't, consider contributing the maximum allowable each year to tax-advantaged retirement accounts before prepaying your mortgage. This is especially important if you are receiving a generous employer match. For example, if you save 6% of your income, an employer match of 50% of what you contribute (i.e., 3% of your income) could potentially add thousands of extra dollars to your retirement account each year. Prepaying your mortgage may not be the savviest financial move if it means forgoing that match or shortchanging your retirement fund.
- How much time do you have before you reach retirement or until your children go off to college? The longer your timeframe, the more time you have to potentially grow your money by investing. Alternatively, if paying off your mortgage before reaching a financial goal will make you feel much more secure, factor that into your decision.
The middle ground
If you need to invest for an important goal, but you also want the satisfaction of paying down your mortgage, there's no reason you can't do both. It's as simple as allocating part of your available cash toward one goal, and putting the rest toward the other. Even small adjustments can make a difference. For example, you could potentially shave years off your mortgage by consistently making biweekly, instead of monthly, mortgage payments, or by putting any year-end bonuses or tax refunds toward your mortgage principal.
And remember, no matter what you decide now, you can always reprioritize your goals later to keep up with changes to your circumstances, market conditions, and interest rates.
On December 14, the Federal Open Market Committee (FOMC) voted unanimously to raise the federal funds rate by 0.25% — to a range of 0.50% to 0.75%. This was the second increase since December 2008, when the benchmark rate was lowered to a near-zero level (0% to 0.25%) during the Great Recession.
How much can I contribute to an IRA in 2017? How much can you make before capital gains become taxable? All those questions are answered in our cheat sheets available for download on our website.
Choosing the right financial planner requires some homework. You must be comfortable discussing the details of your finances, goals, lifestyle and financial status. The person you choose should be trustworthy, resourceful, knowledgeable and creative in mapping out the right strategies for your financial future.
Asking the following questions can indicate how well a financial planner will be able to serve your needs:
- In what area(s) of financial planning do you specialize, if any?
- What continuing education courses have you taken, or are you taking, in personal financial planning?
- Do you have any advanced degrees, certificates or financial planning credentials?
- How often have you performed similar services in the past?
- How long have you been providing financial planning services?
- How are you compensated for your services?
- What type of financial planning service do you think I need based on my concerns and goals?
- Can you provide the names of clients or colleagues I may contact?
- Are you able or willing to help me implement my financial plan?
- What is your process for monitoring my financial plan?
- Do I have to sign any agreements or engagement letters to define the scope of work?
- Are there any conflicts of interest?
The financial services industry is highly regulated in some areas and not at all in others. Many false professional titles are used to depict people as experts in fields they are not actually experts in. This is a tactic often used to help make sales. Make sure to choose someone that can prove a proper level of competency, ethics and integrity through licensing and accreditation.