Objective information about financial planning, investments, and retirement plans

Stock Market Highs and Your Retirement

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Both the Dow Jones Industrial Average and the S&P 500 closed at record highs today. Perhaps this is due to the new tax laws passed at the end of last year. Perhaps this is a continuation of the very solid gains in the stock market that we saw in 2017. These gains are in spite of the questions and issues surrounding the Trump administration and the threat of trade wars with a number of countries.

Difference Between Stocks and Bonds

At some point we are bound to see a stock market correction of some magnitude, hopefully not on the order of the 2008-09 financial crisis. As someone saving for retirement what should you do now?

Review and rebalance 

During the last market decline there were many stories about how our 401(k) accounts had become “201(k)s.” The PBS Frontline special The Retirement Gamble put much of the blame on Wall Street and they are right to an extent, especially as it pertains to the overall market drop.

However, some of the folks who experienced losses well in excess of the market averages were victims of their own over-allocation to stocks. This might have been their own doing or the result of poor financial advice.

This is the time to review your portfolio allocation and rebalance if needed.  For example your plan might call for a 60% allocation to stocks but with the gains that stocks have experienced you might now be at 70% or more.  This is great as long as the market continues to rise, but you are at increased risk should the market head down.  It may be time to consider paring equities back and to implement a strategy for doing this.

Financial Planning is vital

If you don’t have a financial plan in place, or if the last one you’ve done is old and outdated, this is a great time to have one done. Do it yourself if you’re comfortable or hire a fee-only financial advisor to help you.

If you have a financial plan this is an ideal time to review it and see where you are relative to your goals. Has the market rally accelerated the amount you’ve accumulated for retirement relative to where you had thought you’d be at this point? If so this is a good time to revisit your asset allocation and perhaps reduce your overall risk.

Learn from the past 

It is said that fear and greed are the two main drivers of the stock market. Some of the experts on shows like CNBC seem to feel that the market still has some upside. Maybe they’re right. However don’t get carried away and let greed guide your investing decisions.

Manage your portfolio with an eye towards downside risk. This doesn’t mean the markets won’t keep going up or that you should sell everything and go to cash. What it does mean is that you need to use your good common sense and keep your portfolio allocated in a fashion that is consistent with your retirement goals, your time horizon and your risk tolerance.

Approaching retirement and want another opinion on where you stand? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if its right for you. Financial coaching focuses on providing education and mentoring in two areas: the financial transition to retirement and small business financial coaching.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

Photo credit:  Phillip Taylor PT

7 Things to Know About the New Tax Law

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The new tax law (Tax Cuts and Jobs Act) passed in December of 2017 marks the biggest overhaul in the tax code in many years. The impact of these changes is far reaching and will impact most of us in some way.

As we are now over half-way through 2018, this is a good time to look at your tax situation in light of the new tax law and make any necessary adjustments prior to year-end.

Here is a look at seven ways the new tax law may impact you.

1. Lower tax brackets

For most tax payers, the new federal income tax rates will be lower.

Single filers

Tax Rate Income range 2018 taxes Income range 2017 taxes
10% Up to $9,525 Up to $9,325
12% $9,526 to $38,700 NA
15% NA $9,326 to $37,950
22% $38,701 to $82,500 NA
24% $82,501 to $157,500 NA
25% NA $37,951 to $91,900
28% NA $91,901 to $191,650
32% $157,501 to $200,000 NA
33% NA $191,651 to $416,700
35% $200,001 to $500,000 $416,701 to $418,400
37% $500,001 or more NA
39.6% NA $418,401 or more

Source Bankrate.com

Married filing jointly

Tax Rate Income range 2018 taxes Income range 2017 taxes
10% Up to $19,050 Up to $18,650
12% $19,051 to $77,400 NA
15% NA $18,651 to $75,900
22% $77,401 to $165,000 NA
24% $165,001 to $315,000 NA
25% NA $75,901 to $153,100
28% NA $153,101 to $233,350
32% $315,001 to $400,000 NA
33% NA $233,351 to $416,700
35% $400,001 to $600,000 $416,701 to $470,000
37% $600,001 or more NA
39.6% NA $470,001 or more

Source Bankrate.com

As you can see from the bracket in almost every range, the top end of the bracket is a bit higher and generally most income levels are in lower brackets. This means tax savings for most of us starting with the 2018 tax year.

Suggestion – Check the level of taxes being withheld from your paycheck to ensure you don’t come up short and find yourself with a bigger tax bill than you had anticipated.

2. Increased standard deduction

Beginning in 2018, the standard deduction is drastically increased.

  • The standard deduction increases from $6,350 to $12,000 for single filers.
  • The standard deduction increases from $12,700 to $24,000 for those married filing jointly.

This means that fewer people will be able to itemize deductions. It also means that more taxpayers at lower income levels will not owe any taxes.

Partially offsetting the increased standard deduction is the repeal of the personal exemption for 2018. The 2017 amount was $4,050 per eligible dependent, including the tax payer(s). For a family of five, including three dependent children, this would amount to $20,250. The trade-off between the loss of the personal exemption and the increase standard deduction will vary with each person’s situation.

Strategy idea – If the new standard deduction is likely to prevent you from itemizing, it might make sense to bunch deductible expenses into a single tax year, either by accelerating or deferring expenses. Examples of expenses to consider bunching include charitable contributions and eligible medical expenses.

3. SALT reductions

This might be the most controversial provision of the new tax law. SALT stands for state and local taxes. These typically include state and local income taxes as well as property taxes and state sales taxes.

The big change for 2018 is that the deduction for all SALT taxes combined is limited to $10,000. With the higher level of standardized deductions, this limitation may prevent many folks who are used to itemizing deductions from doing so in 2018 and beyond.

For example, if your property taxes are $12,000 annually and your state income tax liability is $8,000, your total deduction for these items will be limited to $10,000. Combined with the higher standard deduction levels you may find yourself unable to itemize deductions going forward.

This provision will likely have the greatest impact in high cost states like California, New York, Illinois, Minnesota and much of the Northeastern part of the country. As many of these are “blue states,” some have speculated that this provision of the new tax law was politically motivated.

Regardless of the motivation, this change is functionally a drop in after-tax income for those impacted. This may be partially offset by the reduced tax brackets and the increase in the standard deduction, but you would be wise to look at your situation as soon as possible to get a true picture of the impact on you.

4. Child tax credit

For families with children, the Child Tax Credit has doubled from $1,000 to $2,000 per child for 2018. Additionally, up to $1,400 of the credit can be refundable if the credit results in a tax refund for you.

The income level at which the credit begins to phase-out has been increased to $400,000 for married couples in 2018, increasing the number of families that will be able to take advantage of this credit. Remember, a tax credit directly reduces the amount of taxes paid and is therefore more valuable than a tax deduction.

The new law also added a $500 credit for other dependent family members, including dependent parents.

As a practical matter, the loss of the personal exemption may offset a portion of the benefit of these increases. There are rules regarding earned income limits and the definition of an eligible child so be sure to understand all the rules and how they might apply to your situation.

5. Retirement plan contributions

Contrary to some earlier versions of the tax bill, the 2018 contribution rates for 401(k) plans, IRAs and other tax-deferred retirement plans was left unchanged. Contributing to a retirement plan provides a tax-break for many and is a great way to save for retirement while your money grows tax-deferred (or tax-free in the case of a Roth account). Be sure to contribute as much as you can for 2018.

6. Mortgage interest deduction

The new tax law limits the amount of mortgage debt against which an interest deduction can be taken. For 2018 and beyond, the ability to deduct mortgage interest is limited to the first $750,000 of mortgage debt. This limit does not apply to mortgages in place prior to 2018.

The ability to deduct interest on home equity lines of credit is now gone as of 2018, unlike with mortgages existing home equity lines were not grandfathered. The exception to this is for home equity debt that is specifically used for home improvement purposes.

7. Divorce 

For those couples contemplating divorce, the new tax law brings a huge change. For divorces finalized after 2018, the alimony payments will no longer receive a tax deduction for those making the payments. This will potentially make alimony payments more expensive for the paying spouse and could result in lower alimony payments for the spouse receiving them.

The implications are potentially huge for the spouse receiving the payments and could place many of them in an adverse financial situation going forward. For couples thinking about a divorce, they should consider finalizing the process in 2018 if possible.

The bottom line

These are just some of the changes contained in the new tax law. There are provisions impacting businesses large and small, as well as a number of other provisions impacting individuals in various situations. This is a good time to sit down with your tax or financial professional to see what impact the new rules will have on your taxes and your financial planning.

One thing to keep in mind. Most of the changes enacted by these new rules are set to expire after 2025, they aren’t permanent.

Not sure how the new tax rules will impact your financial planning? Approaching retirement and want another opinion on where you stand? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if its right for you. Financial coaching focuses on providing education and mentoring in two areas: the financial transition to retirement and small business financial coaching.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

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Social Security and Working – What You Need to Know

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In today’s world of early or semi-retirement, many people wonder when they should begin taking their Social Security benefits. The combination of Social Security and working can complicate matters a bit. You can begin taking your benefit as early as age 62, but that is not always the best choice for many retirees. If you are working either at a job where you are employed or some sort of self-employment, you need to analyze the pros and cons based on your situation.

Full retirement age

 Your full retirement age or FRA is the age at which you become eligible for a full, unreduced retirement benefit. FRA is an important piece in understanding the potential implications of working on your Social Security benefit.

Your FRA depends on when you born:

  • If you were born from 1943 -1954 your full retirement age is 66
  • If you were born in 1955 your FRA is 66 and two months
  • If you were born in 1956 your FRA is 66 and four months
  • If you were born in 1957 your FRA is 66 and six months
  • If you were born in 1958 your FRA is 66 and eight months
  • If you were born in 1959 your FRA is 66 and ten months
  • If you were born in 1960 or later your FRA is 67

Source: Social Security

Social Security and working

If you are working, collecting a Social Security benefit and younger than your FRA your benefits will be reduced by $1 for every $2 that your earned income exceeds the annual limit which is $17,040 for 2018. Earned income is defined as income from employment or self-employment.

During the year in which you reach your full retirement age the annual limit is increased. For 2018 this increased limit is $45,360. The reduction is reduced to $1 for every $3 of earnings over the limit.

This chart shows the month reduction of benefits at three levels of earned income for 2018.

                                         Reduction of Benefits – 2018

Age $25,000 earned income $50,000 earned income $75,000 earned income
Younger than FRA $332 per month $1,373 per month reduction $2,415 per month reduction
Year in which you reach FRA No reduction $129 per month reduction $823 per month reduction
FRA or older No reduction No reduction No reduction

Temporary loss of benefits

The loss of benefits is temporary versus permanent. Any benefit reduction due to earnings above the threshold will be recovered once you reach your FRA on a gradual basis over a number of years.

However, your benefit will be permanently reduced by having taken it prior to your FRA. This means that any future cost-of-living adjustments will be calculated on a lower base amount as well.

One other point to keep in mind, continuing to work can add to your Social Security wage base, somewhat offsetting the permanent benefit reduction from taking Social Security early.

A one-time do-over 

Everyone is allowed a one-time do-over to withdraw their benefit within one year of the start date of receiving their initial benefit. This is allowed once during your lifetime.

One reason you might consider this is going back to work and earning more than you had initially anticipated. This is a way to avoid having your benefit permanently reduced. You would reapply later when you’ve reached your FRA, or your earned income is under the limits. Your benefit would increase due to your age and any cost-of-living increases that might occur during this time.

When you do take advantage of this one-time do-over, you must pay back any benefits received. This includes not only any Social Security benefits that you received, but also:

  • Any benefits paid based upon your earnings record such as spousal or dependent benefits.
  • Any money that may have been withheld from your benefits such as taxes or Medicare premiums.

Social Security and income taxes 

Regardless of your age or the source of your income, Social Security benefits can be taxed based upon your income level. This could certainly be impacted from income earned from employment or self-employment, but it also includes other sources of taxable income such as a pension or investment income.

The amount of the benefit that is subject to taxes is based upon your combined income, which is defined as: adjusted gross income + non-taxable interest income (typically from municipal bonds) + ½ of your Social Security benefit.

The tax levels are:

Tax filing status Combined income % of your benefit that will be taxed
Single $25,000 – $34,000 Up to 50%
Single Over $34,000 Up to 85%
Married filing jointly $32,000 – $44,000 Up to 50%
Married filing jointly Over $44,000 Up to 85%

Source: Social Security

The Bottom Line 

The decision when to take your Social Security benefit depends on many factors. If you are working or self-employed you will want to consider, the impact that your earned income will have on your benefit.

You should also understand that your benefits can be subject to taxes at any age over certain levels of combined income, regardless of the source of that income.

Approaching retirement and want another opinion on where you stand? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if its right for you. Financial coaching focuses on providing education and mentoring in two areas: the financial transition to retirement and small business financial coaching.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

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4 Benefits of Portfolio Rebalancing

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Last year was a strong year for the markets, with the S&P 500 Index up almost 22% in 2017. The new year has started out a bit differently, though with the S&P 500 recording a gain of only 2.59% though the first half of 2018. It’s been a bumpy ride at times, with the markets experiencing some wild swings at times this year after peaking in late January.

The Russell 2000 index which tracks small cap stocks has hit new highs recently and many big tech stocks have done well so far in 2018. The uneven performance of the markets may have caused your portfolio to have strayed from its target asset allocation. You may be taking on more or less risk than is appropriate for your situation. If you haven’t done so, this is a good time to consider rebalancing your investments. Here are four benefits of portfolio rebalancing.

4 Benefits of Portfolio Rebalancing

Balancing risk and reward

Asset allocation is about balancing risk and reward. Invariably some asset classes will perform better than others. This can cause your portfolio to be skewed towards an allocation that takes too much risk or too little risk based on your financial objectives.

During robust periods in the stock market equities will outperform asset classes such as fixed income. Perhaps your target allocation was 65% stocks and 35% bonds and cash. A stock market rally might leave your portfolio at 75% stocks and 25% fixed income and cash. This is great if the market continues to rise but you would likely see a more pronounced decline in your portfolio should the market experience a sharp correction.

Portfolio rebalancing enforces a level of discipline

Rebalancing imposes a level of discipline in terms of selling a portion of your winners and putting that money back into asset classes that have underperformed.

This may seem counter intuitive but market leadership rotates over time. During the first decade of this century emerging markets equities were often among the top performing asset classes. Fast forward to today and they coming off of several years of losses.

Rebalancing can help save investors from their own worst instincts. It is often tempting to let top performing holdings and asset classes run when the markets seem to keep going up. Investors heavy in large caps, especially those with heavy tech holdings, found out the risk of this approach when the Dot Com bubble burst in early 2000.

Ideally investors should have a written investment policy that outlines their target asset allocation with upper and lower percentage ranges. Violating these ranges should trigger a review for potential portfolio rebalancing.

A good reason to review your portfolio

When considering portfolio rebalancing investors should also incorporate a full review of their portfolio that includes a review of their individual holdings and the continued validity of their investment strategy. Some questions you should ask yourself:

  • Have individual stock holdings hit my growth target for that stock?
  • How do my mutual funds and ETFs stack up compared to their peers?
    • Relative performance?
    • Expense ratios?
    • Style consistency?
  • Have my mutual funds or ETFs experienced significant inflows or outflows of dollars?
  • Have there been any recent changes in the key personnel managing the fund?

These are some of the factors that financial advisors (hopefully) consider as they review client portfolios.

This type of review should be done at least annually and I generally suggest that investors review their allocation no more often than quarterly.

Helps you stay on track with your financial plan 

Investing success is not a goal unto itself but rather a tool to help ensure that you meet your financial goals and objectives. Regular readers of The Chicago Financial Planner know that I am a big proponent of having a financial plan in place.

A properly constructed financial plan will contain a target asset allocation and an investment strategy tied to your goals, your timeframe for the money and your risk tolerance. Periodic portfolio rebalancing is vital to maintaining an appropriate asset allocation that is in line with your financial plan.

The Bottom Line 

Regular portfolio rebalancing helps reduce downside investment risk and ensures that your investments are allocated in line with your financial plan. It also can help investors impose an important level of discipline on themselves.

Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if its right for you. Financial coaching focuses on providing education and mentoring in two areas: the financial transition to retirement or small business financial coaching.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

Am I on Track for Retirement?

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Financial advisors are frequently asked some version of the question “Can I Retire?”  The Employee Benefit Research Institute (EBRI) recently released its 2018 Retirement Confidence Survey. The latest survey offered several key findings:

  • Only 32% of retirees surveyed felt confident that they will be able to live comfortably throughout their retirement.
  • Retiree confidence in their ability to over basic expenses and medical expenses in retirement dropped from 2017 levels.
  • Less than one-half of the retirees surveyed felt confident that Medicare and Social Security would be able to maintain benefits at current levels.

English: Scanned image of author's US Social S...

It is essential that Baby Boomers and others approaching retirement take a hard look at their retirement readiness to determine any gaps between the financial resources available to them and their desired lifestyle in retirement. Ask yourself a few questions to determine if you can retire.

What kind of lifestyle do you want in retirement?

You’ll find general rules of thumb indicating you need anywhere from 70% to more than 100% of your pre-retirement income during retirement. Look at your individual circumstances and what you plan to do in retirement.

  • Will your mortgage be paid off?
  • Do you plan to travel?
  • Will you live in an area with a relatively high or low cost of living?
  • What’s your plan to cover the cost of healthcare in retirement?

Remember spending during retirement is not uniform. You will likely be more active earlier in your retirement.  Though you may spend less on activities as you age, it is likely that your medical costs will increase as you age.

How much can you expect from Social Security?

Social Security benefits were never designed to be the sole source of retirement income, but they are still a valuable source of retirement income. Those with lower incomes will find that Social Security replaces a higher percentage of their pre-retirement income than those with higher incomes.

Recent news stories indicating that the Social Security trust fund is in trouble is not welcome news for those nearing retirement or for current retirees.

What other sources of retirement income will you have?

Other potential sources of retirement income might include a defined-benefit pension plan; individual retirement accounts (IRAs); your 401(k) plan, and your spouse’s employer-sponsored retirement plans. If you have other investments, it is important to have a strategy that maximizes these assets for your retirement.

If you are fortunate enough to be covered by a workplace pension, be sure to understand how much you will receive at various ages.  Look at your options in terms of survivor benefits should you predecease your spouse.  If you have the option to take a lump-sum distribution it might make sense to roll this over to an IRA.  Also determine if your employer offers any sort of insurance coverage for retirees. 

Where does this leave me? 

At this point let’s take a look at where you are.  We’ll assume that you’ve determined that you will need $100,000 per year to cover your retirement needs on a gross (before taxes are paid) basis.  Let’s also assume that your combined Social Security will be $30,000 per year and that there will be $20,000 in pension income.  The retirement gap is:

Amount Needed

$100,000

Social Security

30,000

Pension

20,000

Gap to be filled from other sources

$50,000

 

Where will this $50,000 come from?  The most likely source is your retirement savings.  This might include 401(k)s, IRAs, taxable accounts, self-employment retirement accounts, the sale of a business, and inheritance, earnings during retirement, or other sources. 

To generate $50,000 per year you would likely need a lump sum in the range of $1.25 – $1.67 million at retirement.

Everybody’s circumstances are different.  Many retirees do not have a pension plan available to them, some don’t have a 401(k) either.

Look at where you stand and take action 

Some steps to consider if you feel you are behind in your retirement savings:

  • Save as much as possible in your 401(k) or other workplace retirement plan while you are still employed
  • Contribute to an IRA
  • If you are self-employed start a retirement plan for yourself
  • Keep your spending in check
  • Scale back on your retirement lifestyle if needed
  • Plan to delay your retirement or to work part-time during retirement

Providing for a comfortable retirement takes planning. Don’t be lulled into thinking your 401(k) plan alone will be enough. If you haven’t put together a financial plan, don’t be afraid to enlist the aid of a professional if you need help.

Approaching retirement and want another opinion on where you stand? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for more detailed advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if its right for you. Financial coaching focuses on providing education and mentoring in two areas: the financial transition to retirement or small business financial coaching.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

Photo credit:  Wikipedia

Review Your 401(k) Account

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For many of us, our 401(k) plan is our main retirement savings vehicle. The days of a defined benefit pension plan are a thing of the past for most workers and we are responsible for the amount we save for retirement and how we invest that money.

Managed properly, your 401(k) plan can play a significant role in providing a solid retirement nest egg. Like any investment account, you need to ensure that your investments are properly allocated in line with your goals, time horizon and tolerance for risk.

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You should thoroughly review your 401(k) plan at least annually. Some items to consider while doing this review include:

Have your goals or objectives changed?

Take time to review your retirement goals and objectives. Calculate how much you’ll need at retirement as well as how much you need to save annually to meet that goal. Review the investments offered by the plan and be sure that your asset allocation and the investments selected dovetail with your retirement goals and fit with your overall investment strategy including assets held outside of the plan.

Are you contributing as much as you can to the plan?

Look for ways to increase your contribution rate. One strategy is to allocate any salary increases to your 401(k) plan immediately, before you get used to the money and find ways to spend it. At a minimum, make sure you are contributing enough to take full advantage of any matching contributions made by your employer. For 2018 the maximum contribution to a 401(k) plan is $18,500 plus an additional $6,000 catch-up contribution for individuals who are age 50 and older at any point during the year.

Are the assets in your 401(k) plan properly allocated?

Some of the more common mistakes made when investing 401(k) assets include allocating too much to conservative investments, not diversifying among several investment vehicles, and investing too much in an employer’s stock. Saving for retirement typically encompasses a long time frame, so make investment choices that reflect your time horizon and risk tolerance. Many plans offer Target Date Funds or other pre-allocated choices. One of these may be a good choice for you, however, you need to ensure that you understand how these funds work, the level of risk inherent in the investment approach and the expenses.

Review your asset allocation as part of your overall asset allocation

Often 401(k) plan participants do not take other investments outside of their 401(k) plan, such as IRAs, a spouse’s 401(k) plan, or holdings in taxable accounts into consideration when allocating their 401(k) account.

Your 401(k) investments should be allocated as part of your overall financial plan. Failing to take these other investment assets into account may result in an overall asset allocation that is not in line with your financial goals.

Review the performance of individual investments, comparing the performance to appropriate benchmarks. You shouldn’t just select your investments once and then ignore them. Review your allocation at least annually to make sure it is correct. If not, adjust your holdings to get your allocation back in line. Selling investments within your 401(k) plan does not generate tax liabilities, so you can make these changes without any tax ramifications.

Do your investments need to be rebalanced?

Use this review to determine if your account needs to be rebalanced back to your desired allocation. Many plans offer a feature that allows for periodic automatic rebalancing back to your target allocation. You might consider setting the auto rebalance feature to trigger every six or twelve months.

Are you satisfied with the features of your 401(k) plan?

If there are aspects of your plan you’re not happy with, such as too few or poor investment choices take this opportunity to let your employer know. Obviously do this in a constructive and tactful fashion. Given the recent volume of successful 401(k) lawsuits employers are more conscious of their fiduciary duties and yours may be receptive to your suggestions.

The Bottom Line

Your 401(k) plan is a significant employee benefit and is likely your major retirement savings vehicle. It is important that you monitor your account and be proactive in managing it as part of your overall financial and retirement planning efforts.

NEW SERVICE – Do you have questions about retirement planning and making the financial transition to retirement? Schedule a coaching call with me to get answers to your questions.

Approaching retirement and want another opinion on where you stand? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for more detailed advice about your situation.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out the Hire Me tab to learn more about my freelance financial writing and financial consulting services. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

Five Things to do During a Stock Market Correction

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The stock market had a brutal week, with the Dow Jones Industrial Average dropping over 1,100 points in the past two days alone. For the week the index was off over 1,400 points or approximately 5.7 percent. The S&P 500 experienced similar losses.

Facebook shares suffered a significant decline in the wake of revelations about the company’s failure to protect user data. Facebook shares fell 13.9 percent last week, leading social media and technology stocks lower for the week.

Add to this the likelihood of the administration imposing tariffs on imports from China and the Fed’s announcement of an interest rate hike and the markets reacted to a number of pressures last week.

Nobody can predict if this is the start of a major correction or just a normal blip on the radar. None the less, here are five things you should do during a stock market correction.

Do nothing

Assuming that you have a financial plan with an investment strategy in place there is really nothing to do at this point. Ideally you’ve been rebalancing your portfolio along the way and your asset allocation is largely in line with your plan and your risk tolerance.  Making moves in reaction to a stock market correction (official or otherwise) is rarely a good idea.  At the very least wait until the dust settles.  As Aaron Rodgers told the fans in Green Bay after the Packers bad start in 2016, relax. They went on to win their division before losing in the NFC title game.  Sound advice for fans of the greatest team on the planet and investors as well.

Review your mutual fund holdings

I always look at rough market periods as a good time to take a look at the various mutual funds and ETFs in a portfolio. What I’m looking for is how did they hold up compared to their peers during the market downturn. For example during the 2008-2009 market debacle I looked at funds to see how they did in both the down market of 2008 and the up market of 2009. If a fund did worse than the majority of its peers in 2008 I would expect to see better than average performance in the up market of 2009. If there was under performance during both periods to me this was a huge red flag.

Don’t get caught up in the media hype

If you watch CNBC long enough you will find some expert to support just about any opinion about the stock market during any type of market situation. This can be especially dangerous for investors who might already feel a sense of fear when the markets are tanking.  I’m not discounting the great information the media provides, but you need to take much of this with a grain of salt. This is a good time to lean on your financial plan and your investment strategy and use these tools as a guide.

Focus on risk

Use stock market corrections and downturns to assess your portfolio’s risk and more importantly your risk tolerance. Assess whether your portfolio has held up in line with your expectations. If not perhaps you are taking more risk than you had planned.  Also assess your feelings about your portfolio’s performance. If you find yourself feeling unduly fearful about what is going on perhaps it is time to revisit your allocation and your financial plan once things settle down.

Look for bargains

If you had your eye on a particular stock, ETF, or mutual fund before the market dropped perhaps this is the time to make an investment. I don’t advocate market timing but buying a good long-term investment is even more attractive when it’s on sale so to speak.

Markets will always correct at some point.  Smart investors factor this into their plans and don’t overreact. Be a smart investor.

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Tax Reform and Divorce

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The tax reform legislation passed in late 2017 provides the most sweeping changes in the tax code in years. While there are a number of changes that will impact many of us in various ways, the changes in the tax treatment of alimony payments could have a profound impact on couples contemplating divorce.

Tax Reform and Divorce

Divorce is an emotional issue that can have a significant and lasting impact on the couple involved and their families. Divorce is also a significant financial event as well.

Alimony payments 

Under the current tax rules, alimony payments are a deductible expense by the ex-spouse making the payments. Generally, alimony payments are made by the ex-spouse with the higher income. The current rules shift the tax burden of these payments to the ex-spouse receiving the payments, who is often in a lower tax bracket.

The new rules that go into effect for divorces that are finalized after 2018 eliminates the tax deduction for alimony payments.

Under the current rules here’s how the alimony deduction would work at the federal level.

Income of ex-spouse paying alimony            $500,000

Federal tax bracket                                                 35%

Annual alimony payment                               $100,000

Tax deduction                                                   $35,000

After-tax cost of alimony                                 $65,000

Without the tax deduction the after-tax cost of the alimony increases to the full $100,000.

These changes could result in lower alimony payments going forward. The attorney for the alimony-paying ex-spouse could argue that the amount of alimony their client can now afford to pay will be reduced due to the loss of the tax deduction. If the argument is successful in reducing the amount of alimony, the ex-spouse receiving the payments will suffer financially on an ongoing basis as a result.

Boomers impacted

In a recent study, the Pew Research Center found that the rate of divorce among couples 50 and older more than doubled from 1990-2015. Many in this demographic are in high tax brackets and this change comes at a bad time for this group as they head into retirement. This is especially true if one spouse, often the wife in this age group, has been out of the workforce for a number of years raising children and/or serving as a caregiver to older family members.

Focus on divorce financial planning 

This change due to tax reform doesn’t change the fact that divorce is a major financial event that requires careful financial planning during the process by both spouses.

It is important the couple seek sound, unbiased financial guidance from a fee-only financial advisor to ensure that a settlement that is as fair and equitable for both spouses is reached. Moreover, decisions need to be made with as little emotion as possible. For example, keeping the family home may be a poor financial choice if the costs of ownership will be a strain on the ex-spouse receiving this asset. It is important that all marital assets be considered as part of this process.

For couples nearer to retirement it’s important to understand the rules governing Social Security benefits from ex-spouses. These rules remain intact and both spouses need to incorporate them in their retirement planning.

Summary

Overall the loss of this tax deduction is an incentive for couples looking to divorce to get things finalized in 2018 if possible. Delaying things until 2019 or beyond might result in a lower alimony payment and will result in less money for one or both ex-spouses. Pre-divorce financial planning remains a critical part of the divorce process.

Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

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Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.