Objective information about retirement, financial planning and investments

7 Tips to Become a 401(k) Millionaire

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According to Fidelity, the average balance of 401(k) plan participants stood at $103,700 at the end of the first quarter of 2019, just shy of the all-time high level of $104,300 at the end of 2017. This data is from plans using the Fidelity platform. This represents an 8% increase from the average balance of $95,600 at the end of the fourth quarter of 2018. This came on the heels of a drop in the stock market for that quarter and for the full year in 2018.

They indicate that about 180,000 participants had a balance of $1 million, which is about 35 percent higher than at the end of 2018. What is their secret? Here are 7 tips to become a 401(k) millionaire or to at least maximize the value of your 401(k) account.

Be consistent and persistent 

Investing in your 401(k) plan is more of a marathon than a sprint. Maintain and increase your salary deferrals in good markets and bad.

Contribute enough 

In an ideal world every 401(k) investor would max out their annual salary deferrals to their plan which are currently $19,000 and $25,000 for those who are 50 or over.

If you are just turning 50 this year or if you are older be sure to take advantage of the $6,000 catch-up contribution that is available to you. Even if your plan limits the amount that you can contribute because of testing or other issues, this catch-up amount is not impacted. It is also not automatic so be sure to let your plan administrator know that you want to contribute at that level. 

According to a Fidelity study several years ago, the average contribution rate for those with a $1 million balance was 16 percent of salary. The 16 percent contribution rate translated to a bit over $21,000 for the millionaire group.

As I’ve said in past 401(k) posts on this site, it is important to contribute as much as you can. If you can only afford to defer 3 percent this year, that’s a start. Next year try to hit 4 percent or more. As a general rule it is a good goal to contribute at least enough to earn the full match if your employer offers one.

Take appropriate risks 

As with any sort of investment account be sure that you are investing in accordance with your financial plan, your age and your risk tolerance. I can’t tell you how many times I’ve seen lists of plan participants and see participants in their 20s with all or a large percentage of their account in the plan’s money market or stable value option.

Your account can’t grow if you don’t take some risk.  

Don’t assume Target Date Funds are the answer 

Target Date Funds are big business for the mutual fund companies offering them. They also represent a “safe harbor” from liability for your employer. I’m not saying they are a bad option but I’m also not saying they are the best option for you. Everyone’s situation is different, be sure you make the best investing decisions for your situation.

I like TDFs for younger investors say those in their 20s who may not have other investments outside of the plan. The TDF offers an instant diversified portfolio for them.

Once you’ve been working for a while you should have some outside investments. By the time you are in your 30s or 40s you should consider a portfolio more tailored to your situation.

Additionally Target Date Funds all have a glide path into retirement. They are all a bit different, you need to understand if the glide path offered by the TDF family in your plan is right for you. 

Invest during a long bull market 

This is a bit sarcastic but the bull market for stocks that started in March of 2009 is in part why we’ve seen a surge in 401(k) millionaires and in 401(k) balances in general. The equity allocations of 401(k) portfolios have driven the values higher.

The flip side are those who swore off stocks at the depths of the 2008-2009 market downturn and have missed one of the better opportunities in history to increase their 401(k) balance and their overall retirement nest egg.

Don’t fumble the ball before crossing the goal line 

We’ve all seen those “hotdogs” running for a sure touchdown only to spike the ball in celebration before crossing the goal line.

The 401(k) equivalent of this is to just let your account run in a bull market like this one and not rebalance it back to your target allocation. If your target is 60 percent in stocks and it’s grown to 80 percent in equities due to the run up of the past few years you might well be a 401(k) millionaire.

It is just as likely that you may become a former 401(k) millionaire if you don’t rebalance. The stock market has a funny way of punishing investors who are too aggressive or who don’t manage their investments.

Pay attention to those old 401(k) accounts 

Whether becoming a 401(k) millionaire in your current 401(k) account or combined across several accounts, the points mentioned above still apply. In addition it is important to be proactive with your 401(k) account when you leave a job. Whether you roll the account over to an IRA, leave it in the old plan or roll it to a new employer’s plan, make a decision. Leaving an old 401(k) account unattended is wasting this money and can hinder your retirement savings efforts.

The Bottom Line 

Whether you actually amass $1 million in your 401(k) or not, the goal is to maximize the amount accumulated there for retirement. The steps outlined above can help you to do this. Are you ready to start down the path of becoming a 401(k) millionaire?

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 it’s right for you. Financial coaching focuses on providing education and mentoring on the financial transition to retirement.

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.

Annuities: The Wonder Drug for Your Retirement?

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Annuities: The Wonder Drug for Your Retirement?

Annuities are often touted as the “cure” for all that ails your retirement.  Baby Boomers and retirees are the prime target market for the annuity sales types. You’ve undoubtedly heard many of these pitches in person or as advertisements. The pitches frequently pander to the fears that many investors still feel after the last stock market decline. After all, what’s not to like about guaranteed income?

What is an annuity?

I’ll let the Securities and Exchange Commission (SEC) explain this in a quote from their website:

“An annuity is a contract between you and an insurance company that is designed to meet retirement and other long-range goals, under which you make a lump-sum payment or series of payments. In return, the insurer agrees to make periodic payments to you beginning immediately or at some future date.

Annuities typically offer tax-deferred growth of earnings and may include a death benefit that will pay your beneficiary a specified minimum amount, such as your total purchase payments. While tax is deferred on earnings growth, when withdrawals are taken from the annuity, gains are taxed at ordinary income rates, and not capital gains rates. If you withdraw your money early from an annuity, you may pay substantial surrender charges to the insurance company, as well as tax penalties.

There are generally three types of annuities — fixed, indexed, and variable. In a fixed annuity, the insurance company agrees to pay you no less than a specified rate of interest during the time that your account is growing. The insurance company also agrees that the periodic payments will be a specified amount per dollar in your account. These periodic payments may last for a definite period, such as 20 years, or an indefinite period, such as your lifetime or the lifetime of you and your spouse.

In an indexed annuity, the insurance company credits you with a return that is based on changes in an index, such as the S&P 500 Composite Stock Price Index. Indexed annuity contracts also provide that the contract value will be no less than a specified minimum, regardless of index performance.

In a variable annuity, you can choose to invest your purchase payments from among a range of different investment options, typically mutual funds. The rate of return on your purchase payments, and the amount of the periodic payments you eventually receive, will vary depending on the performance of the investment options you have selected.

Variable annuities are securities regulated by the SEC. An indexed annuity may or may not be a security; however, most indexed annuities are not registered with the SEC. Fixed annuities are not securities and are not regulated by the SEC. You can learn more about variable annuities by reading our publication, Variable Annuities: What You Should Know.”

What’s good about annuities?

In an uncertain world, an annuity can offer a degree of certainty to retirees in terms of receiving a fixed stream of payments over their lifetime or some other specified period of time. Once you annuitize there’s no guesswork about how much you will be receiving, assuming that the insurance company behind the product stays healthy.

Watch out for high and/or hidden fees 

The biggest beef about annuities are the fees, which are often hidden or least difficult to find. Many annuity products carry fees that are pretty darn high, others are much more reasonable. In general, the lack of transparency regarding the fees associated with most annuity contracts is appalling.

There are typically several layers of fees in an annuity:

Fees connected with the underlying investments In a variable annuity there are fees connected with the underlying sub-account (accounts that resemble mutual funds) similar to the expense ratio of a mutual fund. In a fixed annuity the underlying fees are typically the difference between the net interest rate you will receive vs. the gross interest rate earned.  In the case of an indexed annuity product the fees are just plain murky.

Mortality and expense charges are fees charged by the insurance company to cover their costs for guaranteeing a stream of income to you. While I get this and understand it, the wide variance in these and other fees across the universe of annuity contracts and the insurance companies that provide them makes me shake my head.

Surrender charges are fees that are designed to keep you from withdrawing your funds for a period of time.  From my point of view these charges are heinous whether in an annuity, a mutual fund, or anyplace else. If you are considering an annuity and the product has a surrender charge, avoid it. I’m not advocating withdrawing money early from an annuity, but surrender charges also restrict you from exchanging a high cost annuity into one with a lower fee structure. Essentially these fees serve to ensure that the agent or rep who sold you the high fee annuity (and the insurance company) continue to benefit by placing handcuffs on you in terms of sticking with the policy.

Who’s really guaranteeing your annuity? 

When you purchase an annuity, your stream of payments is guaranteed by the “full faith and credit” of the underlying insurance company.  This differs from a pension that is annuitized and backed by the PBGC, a governmental entity, up to certain limits.

Outside of the most notable failure, Executive Life in the early 1990s, there have not been a high number of insurance company failures. In the case of Executive Life, 1,000s of annuity recipients were impacted in the form of greatly reduced annuity payments which in many cases permanently impacted the quality of their retirement.

Insurance companies are regulated at the state level; state insurance departments are generally the backstop in the event of an insurance company failure. In most cases you will receive some portion of the payment amount that you expected, but there is often a delay in receiving these payments.

The point is not to scare anyone from buying an annuity but rather to remind you to perform your own due diligence on the underlying insurance company.

Should you buy an annuity? 

Annuities are not a bad product as long as you understand what they can and cannot do for you. Like anything else you need to shop for the right annuity. For example, an insurance agent or registered rep is not going to show you a product from someone like Vanguard that has ultra-low fees and no surrender charges because they receive no commissions.

An annuity can offer diversification in your retirement income stream. Perhaps you have investments in taxable and tax-deferred accounts from which you will withdraw money to fund your retirement. Adding Social Security to the mix provides a government-funded stream of payments. A commercial annuity can also be of value as part of your retirement income stream, again as long as you shop for the appropriate product.

Annuities are generally sold rather than bought by Baby Boomers and others. Be a smart consumer and understand what you are buying, why a particular annuity product (and the insurance company) are right for you, and the benefits that you expect to receive from the annuity. Properly used, an annuity can be a valuable component of your retirement planning efforts. Be sure to read ALL of the fine print and understand ALL of the expenses, terms, conditions and restrictions before writing a check.

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 it’s right for you. Financial coaching focuses on providing education and mentoring on the financial transition to retirement.

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:  Flickr

401(k) Fee Disclosure and the American Funds

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With the release and subsequent repeal of the Department of Labor’s fiduciary rules for financial advisors dealing with client retirement accounts, much of the focus in recent years has been on the impact on advisors who provide advice to clients for their IRA accounts. Long before these rules were unveiled and then repealed, financial advisors serving 401(k) plan sponsors have had a fiduciary responsibility to act in the best interests of the plan’s participants under the DOL’s ERISA rules.

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Starting in 2012, retirement plan sponsors have been required to disclose the costs associated with the investment options offered in 401(k) plans annually.

As an illustration, here’s how the various share classes offered by the American Funds for retirement plans stack up under the portion of the required disclosures that deal with the costs and performance of the plan’s investment options.

American Funds EuroPacific Growth

The one American Funds option that I’ve used most over the years in 401(k) plans is the EuroPacific Growth fund.  This fund is a core large cap foreign stock fund.  It generally has some emerging markets holdings, but most of the fund is comprised of foreign equities from developed countries. The R6 share class is the least expensive of the retirement plan share classes. Let’s look at how the various share classes stack up in the disclosure format:

Share Class Ticker Expense Ratio Expenses per $1,000 invested Trailing 1-year return Trailing 3-year return Trailing 5-year return
R1 RERAX 1.60% $16.00 0.79% 9.61% 3.30%
R2 RERBX 1.59% $15.90 0.80% 9.63% 3.32%
R3 RERCX 1.14% $11.40 1.24% 10.12% 3.78%
R4 REREX 0.84% $8.40 1.57% 10.45% 4.09%
R5 RERFX 0.53% $5.30 1.86% 10.78% 4.40%
R6 RERGX 0.49% $4.90 1.91% 10.84% 4.45%

3-and 5-year returns are annualized.  Source:  Morningstar   Data as of 6/30/2019

While the chart above pertains only to the EuroPacific Growth fund, looking at the six retirement plan share classes for any of the American Funds products would offer similar relative results.   

The underlying portfolios and the management team are identical for each share class. The difference lies in the expense ratio of each share class.  This is driven by the 12b-1 fees associated with the different share classes. This fee is part of the expense ratio and is generally used all or in part to compensate the advisor on the plan.  In this case these would generally be registered reps, brokers, and insurance agents. The 12b-1 fee can also revert to the plan to lower expenses. The 12b-1 fees by share class are:

R1                   1.00%

R2                   0.75%

R3                   0.50%

R4                   0.25%

R5 and R6 have no 12b-1 fees.

Growth of $10,000 invested

The real impact of expense differences can be seen by comparing the growth of $10,000 invested by a hypothetical invest on June 30, 2009 and held through June 30, 2019.

  • The $10,000 invested in the R1 shares would have grown to a value or $19,606.17.
  • The $10,000 invested in the R6 shares would have grown to a value of $21,900.40.

This is a difference of $2,294.23 or 11.7%. The portfolios of the two share classes of the fund are identical, the difference in performance is due to the difference in expenses for the two share classes.

This analysis assumes a one-time investment of $10,000 and the reinvestment of all distributions. Morningstar’s Advisor Workstation was used to perform this analysis.

Share classes matter

The R1 and R2 shares have traditionally been used in plans where the 12b-1 fees are used to compensate a financial salesperson. This is fine as long as that salesperson is providing a real service for their compensation and is not just being paid to place the business.

With all of the publicity generated by the new DOL fiduciary rules one has to wonder if the expensive R1 and R2 share classes might go by the wayside at some point

If you are a plan participant and you notice that your plan has one or more American Funds choices in the R1 or R2 share classes in my opinion you probably have a lousy plan due to the extremely high expenses charged by these share classes. It is incumbent upon you to ask your employer if the plan can move to lower cost shares or even a different provider. The R3 shares are a bit of an improvement but still quite pricey for a retirement plan in my opinion.

To be clear, I’m generally a fan of the American Funds. Overall however, their funds tend to offer a large number of share classes between their retirement, non-retirement and 529 plan shares. While the overall portfolios are generally the same, it’s critical for investors and retirement plan sponsors to understand the differing expense structures and the impact they have on potential returns.

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 it’s right for you. Financial coaching focuses on providing education and mentoring on the financial transition to retirement.

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:  Flickr

Stock Market Highs and Your Retirement

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After a rough year in 2018,  the S&P 500, the Dow and the NASDAQ closed at record highs today just ahead of the July 4th holiday. So far in 2019, stocks have staged a very nice recovery. These gains are in spite of the questions and issues surrounding the Trump administration, the threat of trade wars with a number of countries and uncertainty about what the Fed will do with interest rates.

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 review your situation and to get an up-to-date plan in place.. 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 it’s right for you. Financial coaching focuses on providing education and mentoring on the financial transition to retirement.

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

 

4 Steps to Make Your 401(k) Work as Hard as You Do

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Whether you work as an employee or you are self-employed you work hard for your money.  In spite of what was said on PBS Frontline The Retirement Gamble and elsewhere in the press, in my opinion 401(k) plans are one of the best retirement savings vehicles available. Here are 4 steps to make sure that your 401(k) plan is working hard for your retirement.

Get started 

This might seem basic, but you can’t benefit from your employer’s 401(k) plan unless you are participating. If you haven’t started deferring a portion of your salary into the plan this is great time to start. Look at your budget, determine how much you can afford to defer each pay period and get started. You may be able to do everything online, otherwise contact the plan administrator at your company.

Are you self-employed? There are a number of retirement plan options to consider. If you don’t have a retirement plan in place for yourself, do this today.  You work way too hard not to be putting something away for retirement.

Increase your contributions 

This is a great time to review the amount of your salary deferral and look to increase it if you are not already maxing out your contributions.  For 2019 the maximum contribution is $19,000 if you are under 50 and $25,000 if are 50 or over (and if you turn 50 before the end of the year). For those 50 and over you can still make the full $6,000 catch-up contribution even if your contributions are otherwise limited to an amount below the maximum due to your plan failing its testing. This situation can occur for highly compensated employees and usually occurs at smaller plans.

If you were enrolled into your employer’s plan under an automatic enrollment scenario the amount you are deferring is likely inadequate to meet your retirement needs, you need to revisit this and take affirmative action both in terms of the amount deferred and the investment options to which those salary deferrals are directed.

It’s often popular to urge 401(k) participants to contribute at least enough to receive the full amount of any company match. I agree that it makes sense to go for the full match, but the key words here are at least. The quality of each plan is different, but if your plan offers a solid investment menu and reasonable expenses, consider increasing your contributions beyond the minimum required to receive the full company match. Automatic salary deferrals are an easy, painless way to invest and simplicity in saving for your retirement should not be pooh-poohed.

Take charge of your investments, don’t just default 

Target Date Funds are offered by many 401(k) plans and are often the default option for those participants who do not make an investment election. While TDFs may be fine for younger participants, I’m not a huge fan for those of you within say 15-20 years of retirement. If you are in this situation, look at an allocation that is more tailored to your overall situation. At the very least if you are going to use the Target Date Fund option offered by your plan take a hard look at how the fund will invest your money, how this fits with investments you may have outside of the plan, and the fund’s expenses.

Plan for your retirement 

While contributing to your 401(k) plan is a great step, it is just that, a step. Your 401(k) is an important tool in planning for retirement, but the keyword is planning.  Many 401(k) plan providers offer retirement planning tools on their websites.  They may also offer advice in some format.  Consider taking advantage.

If you work with a financial advisor make sure that they consider your 401(k) and all investments when helping you plan for your retirement.  I find it amazing every time that I hear of some brokerage firm that forbids its registered reps from providing clients advice on investing their 401(k) account because the plan is not offered by their firm.

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 it’s right for you. Financial coaching focuses on providing education and mentoring on the financial transition to retirement.

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 source:  Annie Spratt via Upsplash

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 $17,640 for 2019. 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 2019 this increased limit is $46,920. The reduction is reduced to $1 for every $3 of earnings over the limit.

This chart shows the monthly reduction of benefits at three levels of earned income for 2019.

                                         Reduction of Benefits – 2019

Age $25,000 earned income $50,000 earned income $75,000 earned income
Younger than FRA $307 per month $1,348 per month reduction $2,390 per month reduction
Year in which you reach FRA No reduction $86 per month reduction $780 per month reduction
FRA or older No reduction No reduction No reduction

Source: Social Security

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 regarding the financial transition to retirement.

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 by Sharon McCutcheon on Unsplash

The Bull Market Turns 10 – Now What?

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On March 9, 2009 the market downturn fueled by the financial crisis bottomed out as measured by the S&P 500 Index. On that day the index closed at 677. As we approach the tenth anniversary of the ensuing bull market, the index closed at 2,749 on March 7, 2019. This is an increase of 406%.

Looking at this another way, an investor who invested $10,000 in the Vanguard 500 Index fund (ticker VFINX) at the end of February of 2009 and held it through the end of February 2019 would have seen their investment grow to $46,135 according to data from Morningstar.

As the bull market turns 10, now what? Here are some thoughts for investors.

How does this bull market stack up?

According to data from JP Morgan Asset Management, the average bull market following a bear market lasts for about 55 months and results in a gain of about 160%. By both measures this bull market is a long one.

Does this mean that investors should brace for an imminent market correction? Not necessarily but bull markets don’t last forever either.

There have been some speed bumps along the way, including 2011, a sharp decline in the third quarter of 2015 and the sharp declines we saw to start off 2016. Most notable was 2018, the first down year for the index since 2008. This was punctuated by a 13.52% decline for the fourth quarter and a 4.38% loss for the year.

What should investors do now? 

None of us knows what the future will hold. The bull market may be getting long of tooth. The threat of tariffs and trade wars could weigh on the market. There are factors such as potential actions by the Fed, the threat of terrorism and countless others that could impact the direction of the stock market. It seems there is always something to worry about in that regard.

That all said, my suggestions for investors are pretty much the same “boring” ones that I’ve offered since I started this blog in 2009.

The Bottom Line 

The now ten-year old bull market has provided some very robust returns for investors. Nobody knows what will happen next. In my opinion, investors are wise to control the factors that they can, have a plan in place, follow that plan and adjust as needed.

Approaching retirement and want another opinion on where you stand? Are your investments in line with your financial plan? 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 it’s right for you. Financial coaching focuses on providing education and mentoring on the financial transition to retirement.

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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SALT and Your Taxes

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One of the big topics this tax season is SALT. This is not a seasoning for food, but rather SALT stands for state and local taxes. The treatment of these expenses in terms of their deductibility for those who itemize is a major change for the 2018 tax year, arising out of the Tax Cut and Jobs Act passed at the end of 2017.

What is SALT?

As mentioned above this includes state and local taxes. In most cases the biggest components will be your state income tax, state and local sales taxes and the real estate taxes on your home.

The SALT cap 

Beginning with the 2018 tax year, SALT taxes have been capped at $10,000 as an itemized deduction. This could represent a significant reduction for many taxpayers compared to prior years. Those in states with high state income taxes and areas with high real estate taxes will likely feel the greatest impact.

Our latest real estate tax bill alone has put us over the cap limit. The state income tax rate for Illinois stands at 4.95%. This means that none of the state income taxes paid on income earned by my wife and I will be eligible as an itemized deduction for 2018 and beyond.

Fewer taxpayers can itemize 

One estimate indicates that the number of itemizers will drop from about 46.5 million in 2017 to about 18 million in 2018. The increase in the standard deduction is another major change impacting the ability to itemize along with the SALT cap.

  • For those filing married and joint the standard deduction increased from $12,740 to $24,000 for 2018.
  • For single filers the standard deduction increased from $6,350 to $12,000.

This means for those with itemized deductions less than these amounts it makes financial sense to just take the standard deduction.

What impact does the SALT cap have on your taxes? 

Beyond whether or not you can still itemize deductions, you will need to determine the effect of the SALT cap and other changes under the new rules on your overall tax situation.

For example, a married couple might have previously been able to claim $18,000 in itemized deductions. Now with the SALT cap, their itemized deductions will be lower, and they will be forced to claim the standard deduction. However, the $24,000 standard deduction likely provides a greater benefit than the amount they itemized in prior years.

Other factors to consider:

  • Tax rates are generally lower than in prior years starting with 2018.
  • Some businesses and the self-employed might be eligible for a pass-through deduction of 20% of their business income in some cases. In our case this will be helpful to our situation for 2018.
  • The income limits on the child-care credit have been increased allowing more parents to take advantage of this credit. Remember a direct credit on your taxes is worth more than a deduction in income.
  • The alternative minimum tax will impact fewer tax payers than in past years due to changes in the income limits.
  • Along with the increase in the standard deduction, the personal exemption has been repealed under the new rules. This was worth $4,050 per person in 2017.

The point is the SALT cap will impact each of us differently depending upon our situation.

The impact on real estate

Some have said that the SALT cap was retribution to those in “blue” states that didn’t support the president in the last election. I’ll leave that to you the reader to decide.

This cap disproportionately impacts states with high state income taxes and relatively high real estate values. According to one study, New York, New Jersey, Connecticut, California and Maryland were the top five states in terms of the deduction for SALT as a percentage of taxpayer’s AGI (adjusted gross income) in 2016.

The inability to fully deduct property taxes and mortgage interest will make the after-tax cost of buying a home in high cost areas more expensive. Some have speculated that the cap on the ability to deduct these taxes might influence decisions about where people live and potentially cause some people to relocate to lower tax, lower cost states. It could also have an impact on the level of housing starts in these high cost areas, and the fortunes of home builders and related industries.

Planning around the SALT cap

Most of the changes enacted as part of the Tax Cut and Jobs Act expire after the 2025 tax year, so the SALT cap will be around for a few years. Here are some planning considerations.

Bunch deductible expenses. This could involve deferring or accelerating expenses that are eligible for itemizing into one year to get you over the standard deduction threshold. A couple of examples:

  • Bunch your charitable contributions in to a single year. If you were going to make say $5,000 in contributions over several years, bunch all or as much of that amount as possible into a single year if it will help you to reach the level where you will be able to itemize.
  • Same thought process as above with elective medical expenses. If there is a procedure or other elective expense, plan to incur it in the year that is most beneficial tax-wise if possible.

Max out your retirement plan contributions. This has nothing to do with itemized deductions, but this can provide the double benefit of a larger tax break if you aren’t currently doing this along with the added savings for retirement. If your company offers a 401(k) or similar plan be sure that you are contributing as much as possible. If you are self-employed be sure that you have a retirement plan set-up and that you are contributing as much as possible as well.

Review your mortgage and real estate situation. It may behoove you to pay down your mortgage if you can, especially if you can no longer itemize. If you are looking at buying a new home, be sure to take the SALT cap into account when calculating the after-tax cost of ownership.

The Bottom Line 

Tax season is a good time to take a look at your tax situation not only for last year but also going forward. Be sure to consult with a qualified tax or financial professional to help you review your situation as needed.

Need help looking at your overall financial plan and want another opinion on where you stand? Not sure if your investments are right for your situation? Concerned about stock market volatility? 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 it’s right for you. Financial coaching focuses on providing education and mentoring on the financial transition to retirement.

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.